The Private Equity Real Estate Podcast – Show 13

   

   

Summary

On today’s episode, we have the co-founders of First National Realty Partners, Tony Grosso and Chris Palermo, discussing how they consistently source commercial real estate deal flow.

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Speaker 1:
You’re listening to the Private Equity Real Estate Podcast brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real-world experiences so you can know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Nick Cucci:
Hey, everybody. Welcome back to another episode of the Private Equity Real Estate Podcast brought to you by First National Realty Partners. This is the ultimate resource for passive real estate investors. I’m your host, Nick Cucci. On today’s show, we have the cofounders of First National Realty Partners, Tony Grosso and Chris Palermo. They are going to be talking about sourcing deal flows, an extremely important part of commercial real estate and any real estate investment. Let’s jump right in with them and talk about sourcing deal flow.

Tony Grosso:
When you’re sourcing deals, it’s like any other marketing business. You have to do 20 different things to get results in one area because it’s such a huge ticket item. I mean, with the amount of deals that we’re doing per year, getting one deal moves the needle so tremendously that you have to put a lot of time, resources, human and technology into getting in there and ultimately sourcing deal flow. To answer your question directly, there is no magic bullet. There is no secret sauce. You do 20 different things and well, I’m sure we’re going to touch on what those things are, but you just work hard and you put out a lot of different things. You might get a result in one area that you’re never going to get again. You might get four deals off of going on-market. You might get six deals off-market. The bottom line is you don’t know where the deal flow is going to come from so you have to attack a bunch of different angles to get one deal. It’s that important.

Nick Cucci:
Yeah. Sure. It’s persistence, right? I want to hammer in specifically here because a lot of guys find deals in different ways. Chris, when we’re looking for deals, our acquisition team is on the phone with brokers, what measures are we taking? Are we just looking online or is it just a matter of having the right relationships?

Chris Palermo:
Well, I mean, you run the gamut. When one of our acquisition guys calls a broker, he’ll ask, “Who do you know that has a good deal? What deal is coming out? Give us your three best deals.” It’s almost a branch off. We look at all the deals on LoopNet. We talk to all the brokers. We talk to the brokers that they know and by doing all of those things, you find deal flow.

Nick Cucci:
Would you say that relationships is an important-

Chris Palermo:
Absolutely.

Nick Cucci:
… aspect to it?

Chris Palermo:
Yeah, absolutely.

Tony Grosso:
I was just going to jump in there and say that. It’s all about your network and who you know and who you’ve transacted with in the past. That’s why one of the intangibles about being successful at finding deals is the fact that you’re in the marketplace doing deals. The fact that you’ve closed transactions, the fact that when you bring an offer on a deal, you’re not Joe Blow the one-off dentist who has some capital work, but you’re a real guy who’s constantly in the marketplace. The more active you are, the more capital you have behind you, the more aggressive you can be.

Tony Grosso:
Ultimately, what’s going to happen is you’re going to surface as a real buyer and you’re going to get access to the best deals on-market, off-market. Just like Chris was talking about, networking with the brokers and the property owners that we know. That’s one of the biggest value adds, is just being credible, being active, I would say.

Chris Palermo:
I mean, look, we’re at the point now where we’re getting calls from brokers telling us about deals that they might get to market. Imagine-

Tony Grosso:
Sure.

Chris Palermo:
… times 30, 40. We’re getting deals that aren’t even on-market yet that might be on-market, and that’s what happens. The deals start to come to you.

Nick Cucci:
Someone who’s not necessarily as active in the market may not get the same opportunities as, say, a firm like ours, who’s on the phone with brokers all day long talking to owners. We get more of an exclusive look at things you would say sometimes.

Chris Palermo:
Yeah. Well, it’s just like anything in life. The more work you put into it, the more work you get out of it. The more noise you make, the more responses you get. It’s very simple.

Tony Grosso:
And what you really need to do is you need to understand who controls a transaction-

Chris Palermo:
That’s a good point.

Tony Grosso:
… and then incentivize that individual or that group, whether it’s a broker, a property owner, a disposition guy [inaudible 00:04:10]. You need to know who controls that transaction, and then you need to incentivize that individual to bring you the deal. Whether it’s a guy who’s getting a commission or a pat on the back from his … Whatever you need to do to make sure that the guy who controls the deal is in your corner is one of the biggest things that you want to do when you’re sourcing deals or making offers.

Nick Cucci:
Sure. It’s important to be speaking to the right person too, right? You want to be on the phone with a decision maker at the end of the day. I mean, not to waste time.

Tony Grosso:
Well, yeah. But what I’m really saying more than anything is that when the big brokerage groups who have the deals that you’re specifically looking at bring out a deal, you want to be the first phone call. You don’t want to be the 10th man on the deal team, the last to know-

Chris Palermo:
And you don’t want to talk to the junior associate. You want to talk to the guy who’s actually running the deal.

Tony Grosso:
And to be honest, when we get into a transaction we want to mitigate brokers when at all possible. We want to get chest to chest with the principal and start talking terms, because ultimately that’s the best way to get deals done. I’m just saying that when a guy … when a broker controls a deal or the deal flow, you want to have them in your camp so that you get first crack at stuff as it starts to come out.

Nick Cucci:
Sure.

Tony Grosso:
Could be a disposition man at a [inaudible 00:05:17], it could be a broker, could be whatever, but you want to have that guy in your corner.

Chris Palermo:
And, you also want to make sure that when you get this person on the phone, that you have all the right questions because remember, some of these deals, they go on a bid process. If they don’t think you’re serious, if they don’t think you’ve done your due diligence, you won’t get the second call. So make sure you’re prepared.

Tony Grosso:
To piggyback on that, a lot of these bozos out there, they don’t even… You call them up. Our acquisitions guys, they cold call these guys 10, 15 times. You can’t get it back on the phone. You could be a guy who has cash ready to go. We’ll give them asking price, and for some reason, these guys don’t get back to you. So like what Chris just said, is you got to be ready to go with the questions, all [inaudible 00:05:57] holes, understand the problems. What are your questions before? Try to look at DLM if there’s an OM and formulate everything so that when you get, you can be the first guy to swing at it, so to speak.

Chris Palermo:
And if you’re a guy that’s trying to do this business, make sure you follow up. If a broker calls you back, you follow up because if you don’t get involved in this deal, if the guy thinks that you’re a down and a with-it guy, guess what? You’re going to get the first call on the next deal, and that’s very important. So make sure that you do what you’re going to do, say you’re going to do, make sure you follow up, and eventually things will start to happen.

Nick Cucci:
Fantastic points. So basically, just to kind of summarize that, good relationships with brokers and owners and lenders, maybe, perhaps what have you…

Tony Grosso:
Anybody who can control a deal or touch real estate. You want to have a good relationship with those people because they’re going to feed you deal, and you want to incentivize them to bring it to you for whatever, usually it’s monetary compensation.

Nick Cucci:
Okay. So then kind of piggybacking off of that, I mean, how many deals are we looking at? How many offers are we putting in?

Chris Palermo:
Thousands.

Nick Cucci:
Okay.

Chris Palermo:
Thousands throughout a year. [crosstalk 00:06:58]

Tony Grosso:
As many as humanly possible. As many. That’s the answer to that question. How many deals do you look at? What are the metrics? I mean, we have our own internal metrics, but ultimately, you want to look at as many deals as humanly possible.

Nick Cucci:
Are you putting offers in on every deal you look at? How do you… Talk me through a little bit, how you decide which deals you offer on.

Chris Palermo:
Absolutely not.

Tony Grosso:
There’s a couple of different schools of thought, and I know Chris is going to jump in, but what I’ll tell you is I’d rather make an offer and make it low than not make an offer. At the same time, there’s a certain art to it. You don’t want to be low balling everybody and their brother when you have a deal that’s potentially doable because you’re going to turn off these guys that control deals, whether it’s a broker or a disposition man or direct owner. So you don’t want to do the speed limit, maybe you want to do 75 or 76.

Tony Grosso:
So you want to come in low, but more importantly, just finding the right mindset from the seller in our opinion.

Chris Palermo:
And what I’ll say to that point is on a daily basis, I probably get 70 emails a day of properties. Some of them are single tenant owner, user type deals. There’s a certain type of a deal that, let’s say, Tony and I, in our private equity organization that we look for, but as far as deal flow, you see so much of it. As far as making an offer, maybe you make an offer on the top 1% because…

Tony Grosso:
We have something called the 5% rule. So we look at a thousand deals. We make 50 offers, and then we want to be able to try to get 5% of those 50 offers. That’s kind of how it’s penciled out for us. So you got to look at a lot of deals. You’ve got to analyze a lot of deals, and when you get close to it, you start running your financial model. You start looking at all of the issues potentially in a lease or fine print. We call our analysts our compliance men, and they kind of run through it, but that’s it. You got to look at a tremendous amount of deals to ultimately get one.

Nick Cucci:
You mentioned something that brought up a good point. It’s actually allowing me to segue to the next thing. So in terms of what you’re looking for in a deal, characteristics or what you like to see, what would you say is the number, let’s just go with number one. What’s the number one thing you’re looking for in a deal? Is it lease term? Is it the tenants?

Tony Grosso:
It’s tough to make a blanket statement on a podcast like this because one guy is a single tenant bank and fast food investor. Another guy is a land banker. Another guy does office deals in central business district. So to make a blanket statement is dumb because what makes a good deal? I mean, that’s why there’s a marketplace. One guy thinks is a good deal. Another guy’s selling things is a right time to exit. But for us, if I’m going to make a blanket statement, what I’ll say is this, the last half a dozen deals that we’ve done have all been motivated sellers, and they have an issue for whatever reason. They’re winding down. They’re breaking up a partnership. They’ve had it up to here with the property, whatever. Those are the guys that we’re looking for, and the way you uncover motivated sellers is you don’t go buy an ad in the New York times and say, I’m looking for motivated sellers.

Tony Grosso:
Everybody’s looking for a motivated seller. What you do, though, is you look at a lot of deals. You find out the story where a deal can get done, and that’s how you kind of uncover who these guys are. So what we’ve been doing, as a private equity group and as investors, is we’ve been looking for great core properties, maybe a little bit outside of core ed situation, but we’re buying it from guys that are incredibly motivated. And that’s why the last couple of deals that we’ve brought out have really been nice situations from an evaluation standpoint because the guys that are selling them, they want to rid themselves. And it’s not like guys you’d think where it’s a mom and pop [inaudible 00:00:10:40]. We’ve done deals like that. A lot of times, these are sophisticated institutions that are well capitalized. For whatever reason in the cycle, they’ve got to move on, and we’re generally on the spot.

Chris Palermo:
I want to press on something that Tony said that I don’t want to be breezed over to the listeners on the podcast. One of the most important things in deciding if you actually have a shot at getting a deal is getting the story.

Tony Grosso:
The real story.

Chris Palermo:
The real story of why the seller selling. You need to understand or put yourself in the psychology of the seller’s shoes to understand his motivation level.

Nick Cucci:
Phenomenal point.

Chris Palermo:
And because of that, most of the deals that we do, like Tony said, are excellent deals with distressed sellers. You get there by getting the story.

Tony Grosso:
Yeah. And one guy might be out there, he’s looking for 50% occupied value add deals. One guy is out there looking for land. So what we’re giving you is we think our model’s the best because if there was a better model, we would be out there doing it.

Tony Grosso:
What we basically do is we find choice, grade-A properties and great secondary markets, middle market deals between 15 and $80 million that a lot of time are heavily financeable, long term leases, the best of the best tenants, but we’re able to separate ourselves because we’re buying what motivated us. That being said, if you’re out there sourcing deals where you want to value add where you’re buying stuff that’s 20 or 30% occupied lease up. That may be your bread and butter, but the fundamentals of sourcing deals remain the same no matter what you look at. Look at as many as humanly possible, get the story and get your bids out there.

Chris Palermo:
And I’ll just cut it. I know that we’re getting a little off topic, but there’s nothing better than buying something that’s worth a dollar and being able to get it for 60, 65 cents.

Nick Cucci:
Absolutely. Right. So you want to be able to make money on the buy, right? I mean, that’s what we say that all the time, right? You want to make money in the buy.

Chris Palermo:
Rule number one.

Tony Grosso:
It’s almost cliche, but I say it every single day. So, wow, you want to be able to buy something that’s worth a dollar 60 cents. You’re a great genius. Obviously, everybody and their brother wants to do it, but you actually are able to execute on that, make your money on the buy when you’re very active, and you turn over a lot of stone, so to speak.

Chris Palermo:
You always want to start something on the right foot, and being able to buy right is starting with the wind at your back.

Tony Grosso:
It is the single best value add component to a deal. It’s just buying it for less than what it’s actually worth. It’s the number one thing that we love to do.

Chris Palermo:
And you know we’re value hounds. Sorry for getting off topic.

Nick Cucci:
Yeah. No, it’s great insight. I’ll tell you. And you both said something. Actually, that made me want to touch on this aspect to it because, Chris, you just mentioned from the beginning you want to put yourself in the best position from the start. So let’s talk about the bidding process, right? I mean, when you’re looking at a deal and you decide, “All right, I want to make an offer on this.” What’s your psychology? Do you have a bottom line or, I should say, a top line number that you have in mind that you’re willing to go up to? Are you throwing out your best offer first? What’s kind of your mindset with the bidding process?

Chris Palermo:
The thing is this. Okay. In some of these deals, you might have, in the properties that we look for, a bunch of sophisticated buyers. It’s not a blanket answer because each area, each specific deal based on terms, based on location each deal is a metrics on where it’s located, but being in the business, you get a sense.

Tony Grosso:
Well, the sense that he’s about to describe is what we call the art of commercial real estate is what he’s about to describe.

Tony Grosso:
No deal. It’s not scientific your deal sourcing efforts can be scientific, but what goes into the deal? I’ll let you collaborate.

Chris Palermo:
As Tony said, it almost becomes an art form. Within half an hour of looking at an OM, looking at the tenants, looking at the breakdown of the tenants and the term that they’re there, I get a basic understanding of where the value is, and then from that point, we want to able to bring a first offering large enough for the other side to bite, but small enough for us to be able to get a good deal. It’s a very fine balance. You don’t want to start offending people, and believe it or not, you’ll see when, once you start bidding on properties, you might offend a couple of people, but with that being said, you also might find a couple of cherries. So it’s an art form.

Nick Cucci:
It’s like Tony said, right? You don’t want to insult anybody with an offer. Right? [crosstalk 00:14:58]

Nick Cucci:
Why don’t you don’t want to the guy low balling, right?

Tony Grosso:
Look, I personally, I don’t mind insulting everybody. It’s not a matter of insulting. It’s a matter of getting the deal.

Chris Palermo:
Yeah, or getting a response back.

Tony Grosso:
I’ll go out there and yell at… Yeah. It’s about getting a response back. We don’t care about other people’s feelings when we’re bidding. I mean, we’re investors here buying commercial real estate. I would insult everybody and their brother to get one deal. What we’re concerned with is coming in so low that you turn them off that they don’t even respond, and then they think that you’re a bunch of humps and you’re not real.

Chris Palermo:
That’s why you have to do the research beforehand. You have to get the story.

Tony Grosso:
The story is key.

Nick Cucci:
Getting the story is one of your main priorities.

Chris Palermo:
As you go down the line, it’s like peeling back an onion. As you peel back the onion, you get the story. You get an understanding of the way you think relatively a deal can be had. Then you want to place offers that are again, large enough to get a response, but small enough to make sure that you get a good deal.

Tony Grosso:
And off of that story that we’re talking about, they might be asking the seven cap for a property, but you uncover. This guy drops his drawers and lets you know everything that’s going on. You might be able to get the property at a nine and a half cap based on what the guy’s telling you. So the most important thing is talking to the person who has the story controls the transaction because you got to remember, I mean, there’s all these laws for brokers and stuff. These guys are commission salesman. They want to get a listing. They want to find somebody that can buy it. They don’t care if it’s done at a nine cap or an eight and a half cap.

Tony Grosso:
Of course, they make more. If it’s done at a higher price, but they’re in the business to get transactions done. The people that control deals, do everything in your power to make their life as easy as humanly possible, and they won’t even sell you the deal. They will award you the deal.

Chris Palermo:
Well, you said another good thing. You said control the transaction. Sometimes we’ll get a story and we’ll hear, “Okay, a roof needs a replace. This needs to replaced. This tenants on shaky ground. There’s an LOI out.” We might get a property on the contract, let’s say for an example, at a seven and a half cap rate, and while we uncover some of these things that we’re controlling the transaction, we’ll go in and we’ll retrade for, let’s say on a $10 million deal, a quarter million or a half a million dollars. So now all of a sudden we’re buying this deal that let’s say was at a seven or an eight cap at an eight or nine cap, respectively.

Chris Palermo:
So, you have to be able to get the story, to be able to figure out what it is that you can and cannot do. It all starts from doing the research and bringing it down the line.

Nick Cucci:
Gotcha. So looking at a ton of deals and getting the story on the deal that you’re putting an offer in are the two most important things thus far. [crosstalk 00:17:24]

Tony Grosso:
It’s a sales funnel. It’s just like any other business, right? You got to get leads and you’ve got to qualify those leads, and you’ve got to find out what’s in play, what’s LSD where you’re never going to get a deal done? What’s something else deal might be had there? It’s just a sales funnel. It’s like any other business. It’s a marketing business. It’s…

Chris Palermo:
It’s psychology.

Tony Grosso:
Fills a hopper. Fill the hopper with as many leads as humanly possible. Bring those leads in from 20, 30 different avenues off-market, on-market, direct, brokers, email blasts, tax record look up, find out the CEO who took over to read who’s starting to wind down now or some guy, or if you’re doing it at a smaller level, maybe it’s a guy who got sick and he owned a bunch of stuff, and it’s in his estate, and it’s been willed to the idiot sons and they’re looking to wind down. So bring them into the funnel, run them through your process, get your stories, and then hit your grits.

Chris Palermo:
And you have to be prepared. Look, when we get on the calls, most of the deals that we do, we’re talking directly with the owners of the building. We demand to speak with the principals and find out why they sell, why they’re selling, find out what their pain points are and try to remedy those pain points in the form of us buying their property.

Chris Palermo:
And when we get them on the phone, they’re leaving with a sense like, “Hey, you know what? These guys did their research. These guys are real guys. These guys are going to be able to hold the baton and run this property and be successful with it, and we better not lose that opportunity.” With that being said, these guys know what they’re doing. They’re going to get a deal. That’s the psychology that we want to bring across. These guys are passing the baton. They’re giving us a good deal, but they know the deal is going to be closed. That’s what we try to articulate and bring to the table.

Tony Grosso:
And that’s really what it comes down to is when you’re presenting your offer, you’re not so much presenting… You’re presenting your image, not just on the deal and the terms, which is important, obviously, but surety of clothes is so important, especially on these larger deals.

Tony Grosso:
So when you bring your offer, you better have your proof of funds lined up. You better have your… We were bidding on one, and we’ve made our company package better, but I remember one of the first deals we were doing when I was a young man, guys were bringing leather bounded dossiers with 110 pages, and we had our little LOI. It might have been written on the back of the thing, right? So you learn what you have to do to bring it every single time. You got your funds squared away. You got your bank references. You have your references that you’ve closed deals with, your current portfolio, what your model. Is this a fit for you? You’ve got to be able to answer every single one of these questions like it’s a job interview, and then you get awarded the deal.

Tony Grosso:
You do not want to come off half-cocked or like you’re an amateur because guys aren’t going to give you the deal. We’ve bought deals because we’ve come off correctly at less of a price than monkey men who bid it higher because they know that’s never going to happen. It’s pie in the sky.

Chris Palermo:
And the objective is, for the listeners in the podcast, is to learn from guys that have done it the past. Believe me when I tell you, early in our career, we went through our lumps. We came in half-cocked. We’ve made those mistakes. The goal for you guys, the listeners, is to leverage off of our mistakes and don’t make them yourselves. Make sure you’re prepared.

Nick Cucci:
I love that you bring that up. So really when you’re thinking about the bidding process, you kind of almost have to put yourself in the seller’s shoes, right?

Chris Palermo:
One hundred percent.

Nick Cucci:
What would you look for in a buyer? You want someone who has the ability to close, who has all his eggs in a row, in a sense, has all the information, knows what he wants, what questions to ask, and you want a buyer who comes to the table who’s prepared to actually purchase the asset.

Chris Palermo:
Let me explain this. Okay? A typical transaction is anywhere between 75 and 90 calendar days. The seller is selling for a reason. He wants his money out. He wants to make sure that he’s going to contract with a real guy. There are so many guys out there that aren’t real. They have to sift through, and you have to be on the ball.

Tony Grosso:
And it comes down to what we’re talking about here to be cheesy, the art of commercial real estate, the intangibles to getting a deal are more important. I mean, look, I think that I’m a good enough salesman. I know Chris is a good enough salesman. We can write up our LOI on a sheet of line paper, out of a marble notebook, rip it off, scan it and send it to somebody, but when I get on the phone with that guy, I’m going to take him down.

Tony Grosso:
I’m going to make sure… I’m not saying you should do that. I’m just trying to make a point. The intangibles are key. When you get on the phone with that guy and you put your pitch on why you’re going to buy, we close every time, we don’t pull out on deals, all this nonsense that you’ve got to say to sell this guy on why you’re the buyer on the deal. I mean, that’s huge. It’s not just about what goes into your package when you’re making an offer, which is so important and so huge, but the art of commercial real estate is getting on the phone and articulating your point of view, why you’re going close to making that guy feel comfortable. It’s a sales game. It’s life guys. It’s negotiating, and it’s…

Chris Palermo:
It’s human psychology.

Tony Grosso:
Psychology! That’s it.

Chris Palermo:
I tried to shoot it in before. It’s human psychology. It’s being able to figure out why exactly is this guy selling and why you’re going to be able to bring a solution, and believe it or not, you will get better deals because you come to the table more prepared.

Tony Grosso:
And your reputation is key because if you Mickey Mouse around on a deal and you don’t have your financing lined up and the brokerage community gets wind, or whoever you’re looking to buy from, they get wind that you’re not real, you’re going to put yourself in a position where you’re compromised. You want to know that when you go to contract, you’re going to close. Even if it’s not the case sometimes, you want people to know that when you go to contract…

Chris Palermo:
The commercial real estate business is a very, very small business. Make sure when you engage in this business, you become prepared.

Nick Cucci:
You guys both said something that, kind of made me raise an eyebrow in a sense because it’s really interesting. I don’t think most people think of the bidding process and commercial real estate in this light because, Tony, you said earlier that we’ve won deals in the past where we weren’t the highest bidder. And Chris, you mentioned that it’s really about the psychology, understanding the motivation of a seller and representing yourself as the best buyer, even if you don’t have the best price. And I think both of those are important to note because it’s not just a matter of having the highest offer sometimes, right? Sometimes the highest offer doesn’t necessarily win the deal. It could be a lower offer.

Tony Grosso:
Yeah. You could have a bunch of contingencies. I need a financing contingency. If the seller doesn’t like my mother-in-law’s breadth on Sunday at three o’clock in the afternoon, we can pull out. So the terms of your offer also important. We’re not really touching on that. I mean, how fast is your due diligence period? What are the terms on your finance?

Chris Palermo:
Do you have a financing contingency?

Tony Grosso:
Is it all cash or you got to go ask Joe Blow, the banker, for money and you haven’t even talked to him about the deal yet. So there’s a lot of things that go into the structuring, your offer to make sure that it gets accepted, as well, which we can’t overlook either. So all these things, it’s a hundred different things that you’ve got to kind of bring correct. And if you’re real, it works. If you’re not real, then you need to figure out a way to portray that you’re going to close to ultimately get the deal.

Chris Palermo:
I want to mention one thing, one little pointer, and I don’t know if we’re going to touch on it today or not because of the time, but one tip I’ll give is never put an offer contingent on financing. Figure out beforehand the financing before you put an offer. You turn the… Because remember, the number one goal for the seller, believe it or not, is not so much price, it’s surety of close. It’s surety of close.

Tony Grosso:
Yeah. And while you’re on the due diligence, you can go in and try to get your financing lined up, but worst case scenario, if it doesn’t happen, you took a shot, but at least get the deal. Like Chris was mentioning earlier, we’re talking about controlling the deal, not just from the individual that controls the transaction, but shift control from the seller’s favor to yours. Get the thing tied up. Bring it in your wheelhouse. Now you take control of the transaction and you can kind of steer the ship, so to speak. You got this issue, got that issue. It’s a game of chicken. Who’s going to blink when you go to retrade.

Chris Palermo:
It’s a game of hand. Here’s the deal. If you have a mortgage, a financing contingency, you’re giving the other side leverage over you. Sure, we’ll take a financing contingency. You pay an extra $150,000, and we’ll do that. You see, you have to use the tools that you have there. We have, let’s say 30 days due diligence, 45 due diligence. That right there spells out or gives you enough time to be able to get your financing contingency in which you could walk away if something happened. So you ought to always make sure that you position yourself to have that, and don’t add unnecessary barriers, especially when you’re covered with different language, if that makes sense.

Nick Cucci:
Yeah. That makes a ton of sense. I mean, from a buyer, or excuse me, from a seller’s perspective, if you have two offers that, let’s say they’re identical, one has a finance contingency, the other one doesn’t, it’s, it’s clear which offer you’re going to go with. And 10 times out of 10, it’s going to be the non-finance contingency. So I’m glad you guys brought that up.

Nick Cucci:
When you send in a letter of intent, LOI, to purchase and it’s accepted. So you got your offer in. You had your contingencies. We already said we’re not going to put a finance contingency in there, but you had your offer accepted. What’s the next step? I mean, what are we looking to do next? Does the due diligence start from that day?

Tony Grosso:
Sometimes you’ll get an access agreement where once you sign the LOI, the due diligence period begins, but in a traditional contract, what will happen is the letter of intent will be given to both sides’ legal counsel, they’ll draft a contract to either the buyer or the seller. The minds will meet. The attorneys will talk. They’ll get an executable contract. Everybody signs it. Boom. Now you go to contract.

Chris Palermo:
You wire all the money for the contract, and then they have to share all of the due diligence, I would say, within 48 hours after the money was received.

Tony Grosso:
So the LOI is basically a framework of the key business and deal points of how the ultimate purchase and sale agreement is going to be constructed.

Chris Palermo:
And then it gets a little bit more fine tuned with both of the attorneys. Then we start sending cash over. Then we do due diligence. Let’s say we, depending on the size, the scope of the project between 30 and 45 days. Then we wire another down payment, and then we go into the close. That’s usually…

Tony Grosso:
Yeah. A lot of times, sometimes when we’re bidding, we’re bidding with 14 days due diligence. I mean, there’s a deal we did once, it was a 10 day due diligence period. So how are they going to look? When you’re an institution, you have proof of funds. You have proof of execution. You own property, and I bring a 10 or 14 day due diligence, let’s say, a 30 day closing thereafter, how are you going to compete with that? So, that’s why you need to do everything in your power to stack the odds in your favor, to get the deals and all of these different things we’re talking about are all ways that you can manipulate the transaction and put stuff in your favor.

Nick Cucci:
Chris, can you think, offhand of any contract killers, in a sense? Like, you see something in an LOI, maybe an attorney from the seller side drafts a document, and sent it back. Can you think of anything that would be something to look out for as a red flag?

Chris Palermo:
Well, of course. As is where sometimes you have to look at environmental issues. We had a property up in New York that we purchased, where they wanted us just to purchase it as is. They didn’t want us to do a phase one or phase two for environmental. What do you think happened? We disagreed. We said we wanted to do it, and what did we find?

Tony Grosso:
An issue.

Chris Palermo:
An underground oil tank.

Tony Grosso:
I think the big one is environmental Chris is talking about. You got to kind of nip that in the bud. Are there environmental issues? Are there not environmental issues? That’s one thing that if you go in… A lot of times the deals being misrepresented. “No it’s clean. The site is fine. There’s no issues at all.” If you uncover that, there’s going to be a negotiation, it doesn’t kill the deal.

Tony Grosso:
There’s environmental insurances. There’s remediation. There’s ways that you can close in a reasonable timeframe, but that’s huge. Another thing that happens sometimes you’re not going to really know is major capital expenditures. Does the pavement need to be completely resurfaced? The roof, the big capital issues, stuff like that, and then another huge thing is really the leases. You’re bidding on a property, and if there’s no footnotes in an OM or if you don’t have a general understanding upfront about some clause and a lease, that’s another huge deal breaker, too.

Tony Grosso:
I wouldn’t say it’s actually in the contract, but you got to be able to review those three things, the physical, the leases, and then the environmental. And if those pass muster, it’s usually all systems go.

Chris Palermo:
If an owner won’t allow us to do any tenant interviews, if an owner won’t allow us to see any leases or anything, look at the end of the day, if we can’t make a 100% basis on why we want to buy a property, what I would suggest you do is walk away.

Chris Palermo:
So, number one, if you feel uncomfortable, if you think the numbers that you’re seeing are inaccurate, if you’re unsure of tenants are happy or unhappy, if they’re uncovering physical issues that were not presented to you, and the owner is not willing to either a fix, remediate or give you a credit for it, you walk away. At the end of the day, money is exchanging hands. You’re buying an income stream. There has to be more reasons of why you’re going to walk away, then why you’re going to stay, and if anything is out of line, A, you have to retrade or B, you have to walk away. Very simple. You have to play a game where you’re right a hundred percent of the time.

Nick Cucci:
Well, that ties into what you said on one of the early episodes, when we look at a deal, the first thing we look at are the negative components to it.

Chris Palermo:
A hundred percent.

Nick Cucci:
Right? Because we want to see how can we lose on this deal, as opposed to what areas are we going to win in?

Tony Grosso:
Exactly.

Chris Palermo:
Well, look, there’s enough risk buying real estate and investing when you ultimate… And that’s just… The tenants leave, markets fall off, all those different things, but ultimately, what you want to remove is the contractual or the environmental, physical stuff that can be prevented just through doing thorough due diligence. You got to be able to mitigate that. When you get all the boxes checked, you’ve got enough risk in the deal itself. You make an investment, you put in capital where you want to earn a superior risk adjusted return. So when that kind of comes into play, you got to get the stuff that you can control out of the way, and that’s why you got to be thorough. And you got to have a good team of people working due diligence.

Tony Grosso:
And you have to look at the, how can I say this? You have to look at the coin the right way. If you see physical issues, if you see problems, you have to use that as opportunities to retrade the deal. It’s not necessarily a deal killer. It becomes a deal killer if they’re not willing to remediate or address the issue that you uncovered while you were doing your inspections.

Nick Cucci:
Okay. So, ultimately, there’s really just a handful of things. The process itself is really a lot simpler than what guys maybe think it would be.

Chris Palermo:
It’s a lot of common sense. You have to be able to make sure that what you were originally buying and what you thought was exactly as is, and if it’s not, you have to get yourself in an uncomfortable situation and make sure it’s addressed. It’s just the way it goes.

Tony Grosso:
Tony, did you want to kind of just summarize then? I mean, from the start to end. Hit again on the main points that we covered.

Tony Grosso:
Yeah, I’ll do my best. What I’ll say is you want to give yourself a chance to be as successful as humanly possible. So what does that mean? You need to look at as many deals as possible. That’s it. That’s the best remedy. If the deal doesn’t make sense, don’t get married. Get as many deals in your hopper, in your pipeline. Start vetting as many deals as humanly possible. Then that really comes down to you got to get offers out there, too. So we’re not saying go out there and start low balling everybody and their brother, but you have to get offers out there. So look at a lot of deals, make a lot of offers, get active in the marketplace.

Tony Grosso:
I think the second thing is you want to present yourself as a capable buyer. You’re somebody real. You have the ability to close. You’re not a fly by night. You’re not a guy that went to Ron Legrand coaching, and it’s your first deal, and you had someone. There’s nothing wrong with that. Everybody’s got to do their first deal, but you have to present yourself as somebody who’s credible. Like, just like when we did our first deal.

Tony Grosso:
And then the next thing that you want to be able to do is know exactly what questions, what are the Gar holes? Of gar is fish that swims in shallow water, you drop in the hole, it bites you, right? What could potentially throw the deal out of bed? What could upset the Apple cart? Like some of the environmental lease issue. Where are the Gar holes going into the deal? Comb through the due diligence, have your staff, or make sure you underwrite everything correctly, and then don’t be afraid to walk away.

Tony Grosso:
In business in life, he who has hand always wins, whether it’s a relationship with your spouse. Put yourself in a position where you have the hand, the upper hand that is, on every single transaction, and I think it’s a recipe of having a good life. Try to always come from a position of power. Don’t be weak.

Nick Cucci:
Chris, did you want to add anything to that?

Chris Palermo:
Yeah, sure. It’s just like anything in life. Number one, you have to work hard. Number two, you have to come prepared, and number three, you have to be prepared to walk away. You can’t get emotional with any piece of property or any situation, and trying to have fun doing it. That would be my final suggestion.

Nick Cucci:
That was Tony and Chris talking about sourcing deal flow and the best practices that they have to continually have great deals coming into their business. I hope their insights were able to add value to everybody listening, and thank you again to everybody for listening to the Private Equity Real Estate podcast. This show is brought to you by First National Realty Partners, one of the top syndicates of private institutional quality commercial real estate in the country. If you’re interested in learning more about FNRP or would like to get access to our private offerings, please click the link in the show notes or visit FNRPUSA.com. Please remember that this show is for educational purposes only and should not be considered a solicitation to purchase securities or be construed as tax, legal, investment or accounting advice. Thanks again for listening, and we’ll see everyone again real soon.

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