Deidre Woollard: As I just mentioned, we're very excited to have Elliot Bencuya. I hope I'm pronouncing that right. Who's the partner and co-founder.
Jason Hall: Is that Bencuya? Elliot is that right?
Eliot Bencuya: Bencuya, yeah. I could go onto some more details. Then the C is actually pronounced like a J because it's Turkish. If you want to get esoteric, so Bencuya. But Bencuya works too.
Deidre Woollard: Bencuya. Awesome. Well, thank you so much. You are partner and co-founder of Streitwise, but also Tryperion Partners. I wanted to just read a little bit about you before we get started here because I think it's really interesting. You source and execute new real estate investments and you direct Streitwise's investment strategy. You've also had a great real estate background being a VP of acquisitions for Canyon Capital, Realty Advisors and the Canyon jobs and Urban fund. One of the reasons we wanted to talk to Elliot today is because he's got such great experience in real estate and specifically in office commercial. So welcome.
Eliot Bencuya: Thank you. I appreciate the opportunity to be here and thank you very much for having me on.
Deidre Woollard: Well, let's get into it because I want us to start with talking about what Streitwise is. People will know it as a real estate crowdfunding platform, but it's also different from some of the others. I was wondering if you could go into that a little bit.
Eliot Bencuya: I'd be happy to. Before I get into Streitwise, I think it's helpful for me to explain the genesis of how we ended up with Streitwise. My partners and I we started a company called Tryperion Partners back in 2013. We were all working together previously at a larger private equity fund here in Los Angeles, and we had an opportunity to go deploy sub-institutional size capital into sub-institutional markets. At the time, this is back in 2013, our thesis at the time and which has since evolved with the market. But our thesis at the time was, hey, look, we can go buy high cash flowing stabilized assets and smaller secondary markets that are currently unloved by the capital markets. But the debt markets don't differentiate between them. At the time you're borrowing at, call it L plus 215 or L plus 225. The same bank loan that you're getting on an office building in San Francisco, you're getting on an office building in Minneapolis, or St. Louis, or another smaller market. The cap rates were significantly higher in the smaller markets. When we first started in 2013, our foray was going and buying quality stabilized buildings across asset classes. It just happened to be that there were a lot of office properties available that were interesting at the time. We went and we acquired a fairly sizable portfolio of office, and retail, and other asset classes, industrial as well. All of them with the idea basically that you're buying higher in-place cash flow because of the spread between cap rates and debt was incredibly high in those markets. That opportunity lasted for a handful of years. But of course everything gets discovered. The capital markets are increasingly efficient, and the cap rates started to compress. Over time, we found that A, it was a fund format so we were going to sell those assets. But come 2016, 2017 after we had realized quite a bit of value, we went to sell. Even back then the markets had improved, the capital flows to those markets had certainly improved. But even on exit, we still saw an opportunity that sure, maybe you couldn't earn the 20 percent plus IRRs that you were able to achieve in 2013 because the tailwinds were at your back. But there was still a very interesting higher yielding cash flow opportunity. This happened to coincide with the boom in Reg-A in about 2016, 2017, and so we said, you know what? Why not? Let's just give it a shot. We considered it and we decided that it was really just an extension of the business. We had Tryperion, the funds, they were targeting higher risk but higher return properties, and we thought look, let's have a more core plus stabilized cash flowing bucket that may not have the same upside, but it's still on a risk adjusted and the cash flowing base is still pretty interesting. That's how we entered into the Reg-A space, and that's when we started Streitwise in 2017. That's the genesis of Streitwise. We're not a technology company, we're not a platform, fundamentally, we are just real estate investors looking at different ways of capitalizing the deals and bringing more people into those opportunities. The genesis of Streitwise was let's open up these more stabilized deals that we think are less risky but are offerings some more interesting, the yields at the time and still now. Then the public markets are, let's open it up to everybody, but let's not start our own tech stack. We don't have any engineers in-house. We don't have our own technology site. We are entirely third party with respect to the technology, and everything that we have in-house is exclusively focused on the real estate.
Jason Hall: I think it's really interesting. Elliot, I did the initial review of Streitwise, I guess it was back in 2019, third quarter of 2019 when we first were taking a real deep dive into as many of these established platforms as we could. One of the things that really stood out to me, I'm going to share our most recent updated review. I'm going to put it here on the chat if you want to grab it and see. Your platform is consistently one of our higher scoring ones. The thing that is a differentiator that I've seen you talk about that core plus cash flowing model. One of the things that's really different between the Streitwise offering and just about everybody else, is that the strategy seems to be focused on buying great properties, paying off those debts with the intention to continue to hold those properties and not necessarily having a target date set to exit those properties. No, it just seems like the focus is owning great properties and then enjoying the cash flows over time.
Eliot Bencuya: That's very much the idea. The reason that we structured it as such is the reality is that different markets have different liquidity attached to them. Despite the fact that the large urban markets right now maybe going through some difficult times, the reality is, is that there is still liquidity in those markets. You can still put an apartment building in San Francisco or New Oregon and it will clear. Liquidity comes and goes in the smaller markets, which is one of the reasons that the cash flow is higher. We wanted to pair up the right capital with the right opportunities. For these opportunities, long-term capital was the right fit. So much of real estate is not just acquiring good properties, or doing the right things to the properties, but you really have to match the business plan and the type of capital with the opportunity. If you have expectations that you're going to exit 3-7 years, a deal that ought to be held longer, that mismatch is going to hurt what's best for the property and her returns. The goal was to put those two things together and make that appropriate match.
Deidre Woollard: That's a really great point. I wanted to talk to you about the future of office real estate in general. Obviously, you Streitwise invest in and Tryperion invest in office space. I'm sure you have some opinions about what's happening with remote work, and the hybrid environment, and things like that.
Eliot Bencuya: Yeah, I have a lot of opinions about a lot of things and some of them turn out to be wildly inaccurate.
Jason Hall: Exact same. [LAUGHTER]
Eliot Bencuya: With respect to office, I think it is very much still influx. I don't think anybody knows what the new equilibrium will look like. Other than that, there will be some new equilibrium. Having said that, I think it is clear that there is a very strong pull to remote work. People really do appreciate the flexibility of not having to go into the office every day. Every week, there is a new company that says, "Look, this was a requirement that we were looking for 100,000 square feet, now we can make it a 40,000 square for requirement, or this was an office lease that was coming due next year and we can just let that lease expire and absorb that space into some existing office facility that we have somewhere else. I think the pressure is very clearly downward, at least in the next couple of years in terms of how companies view their real estate needs and their office space needs. Think about it from within the company. If you're the facilities manager or the real estate manager for a large company, five years ago, six years ago, it may have been going to your CFO and saying, "Look, we need the space and there wasn't that much discussion around it." I can assure you that when those discussions are happening today, there is a lot more scrutiny being attached to the discussion as to whether or not a lease should be signed. That extra hurdle is going to create additional pressure on new absorption. You are seeing in a lot of markets, it's affecting the technology in the large markets more than it's affecting the less technology markets and just the slower-growth markets. The higher-growth tech markets have certainly been affected by it more so than other markets. That said, I don't believe that people are going to stop going to the offices. I still think that there is a need and companies that are going to want to have that gathering place. Even if it's less space, I still think that people are going to want to do it. What I do think happens though is that to the extent that there is reduced demand, I think you're going to find it unevenly distributed, like so many things are unevenly distributed today. A lot of haves and have-nots and barbells exist throughout the economy, throughout asset markets, throughout all of capital markets, and I think that you're going to see that in the office space too. If there is a reduction in total office usage, I think you're going to find that the lower-quality, less well-located office buildings are going to absorb the brunt of that reduction in demand, whereas the best office buildings in the best locations are going to be able to maintain their attractiveness to the office users. I don't think that it's going to be shared in terms of how the reduction in office demand. I think you're going to find that the good office building is maintained and the weaker office buildings are really going to suffer. What that means for them, I don't know. Some of them will get redeveloped, some of them can't get redeveloped, but that's the bifurcation that I see emerging.
Jason: Thinking about that within the context of secondary markets where you guys have been very successful, do you see areas that maybe are better setup as being the best opportunities in commercial over the next decade as this plays out?
Eliot: With respect to office buildings in particular, and I think this applies to both secondary markets but also primary markets. I think the winners are going to be those office properties that are easy to get to, but also have workable and other amenities around the office building. One of the reasons that the cities have been so attractive to people for so long is because of what is around the office building, not so much the office building itself. Interestingly, I think that you have found developers have really taken to this suburban, urban model throughout the country and have been developing retail amenities, restaurant amenities, and other attractive things to do around suburban office parks and really activating those suburban campuses. Some places have done it better than others, but to those places that find the real good balance between suburban office and urban amenities, I think are really positioned to outperform those buildings that are a commodity office building where you tour five or six office buildings and they're all the same essentially, and everything is just offering space for buts and seats, I think those are going to have a harder time. What happens to the price of rents in those office buildings is anybody's guess.
Deidre: I think that's definitely true and it makes me think about the fact that office leases tend to be multiyear, so making that decision that has long-term ramifications.
Eliot: Actually, sorry. I'll stop you right there because that is actually another very interesting point, which is that office leases have tended to be longer, 5-10 years. But I think given how fluid people's use of office space is, co-working has struggled from the corporate level, but co-working didn't struggle from a user space angle. People really liked the co-working model from using it. It just didn't translate into a business model that was successful for a company like WeWork, but there are many iterations of co-working and shorter lease terms that are, I believe, able to be successful. What I think you're going to find is people are less willing to commit going forward to office buildings for 5-10 years, and existing landlords are basically going to have to start to compete with the co-working models themselves and start to offer more flexible and shorter lease terms too. I think that's another aspect in which offices are going to change, and I think they're going to have shorter and more flexible lease terms and I think the landlords are going to have to do it themselves directly with the tenants as opposed to bringing in the co-working in-house.
Deidre: How much shorter are you thinking, is it the difference between a five-year lease and a three-year lease, or is it the difference between a five-year lease and a six-month lease or something like that?
Eliot: My suspicion is, I think, you're going to find some landlords who are very successful at building out spaces that are plug-and-play ready and they are able to offer tenants space from six months to three years, a space that they say, "Listen, this is the space that you get." You may not reconfigure it, you may not read and mise it. If you do want to have your own read and mising , and your own design, and your own flair to the office building, then here is a different suite I have for you, and we will put money into it just the way that you want it, but the lease term is going to be 5-7 years, but if you want something more plug and play that's ready, here's another space that we have ready to go for you and it's just going to be a blurring of the world between these outside third-party co-working companies and existing office owners.
Jason: It's interesting you say that because thinking about the retail space, I see a similar thing going forward where you have a Tanger Factory Outlet with these outdoor areas that are pretty uniform in size, versus the big regional malls that have the big anchor spaces that are 10 times larger than everything else. The flexibility of those more uniform, consistent size spaces seems the way retail is going to go. It's interesting that the same technology driver and the power of the Internet. It seems it's going to have some implications there for our office space is used.
Eliot: I think that technology is having an effect on how all real estate is used. Technology accelerates the way that we interact with the built environment at such a fast pace, and real estate and buildings are such large capital expenditure investments at the beginning that unless you are preparing, all owners of real estate essentially have to be prepared that they are going to need to be more fluid in the way that they approach the market because people's desires and demands of buildings change very quickly, because technology allows their use of the world to change very quickly.
Jason: It's an interesting dynamic for sure. Speaking, I mentioned it at the open about the difference between the streetwise strategy in terms of that buy-and-hold model. One of the things I wanted to talk about, and I think it'd be interesting to talk a little more about the broader crowd funded environments, is one of the things that appeal to me about streetwise. As I was reviewing our platform, there seemed to be better alignment of incentives in terms of how streetwise, and yourself, and Tryperion as having involvement there is incentivized versus a lot of other platforms that they tend to create lots of related party deals where the sponsor also owns a contracting company and the contractor has access to all of the deals, they deal with all of the property management. So there's no an arm's length negotiations on anything plus they have lots of incentives tied around to transaction trends. They immediately take a percentage every time a property is acquired, they take a percentage every time a property is disposed. It seems like those incentives create a scenario where the platform is rewarded whether the investor is or not. At times it creates a conflict where, as you were mentioning, if you have a property that you've targeted exiting in three years, maybe the best thing to do is hold it for two or three years more, the incentives are no longer aligned. Can you talk about maybe your view about the industry in general, if you think there needs to be more alignment of incentives or maybe even just the thought process of how streetwise arrived at the way that you incentivize all of your stakeholders?
Eliot: Let me talk about everything in generalities. I think it's an interesting term, crowdfunding, because crowdfunding, it was a term that was applied originally to non-investment. It was applied to kickstarters or rather consumer goods, and it was crowdfunding, these charge gains or little inventions or whatnot. Then it transitioned to raising money online for different investment vehicles, but the monitor crowdfunding stuck. But the reality is that crowd funding for investment vehicles online is fundamentally no different than offline syndications other than the medium through which somebody makes investment. It's not as if real estate sponsors and operators haven't been raising money for decades from accredited investors, they've just been doing it more paper-oriented, more manual, not reaching a lot of people through a wide platform. It's been a less efficient process. What people call the crowdfunding, I essentially just call it online syndication. I think it's a better way to view what is actually going on and with respect to it because it lets people frame it the same way that it was done historically. It's just online. The reason I'm going into that is because there have been syndicators for years, and there has been a syndicator economy for decades. You have sponsors who raise money from credit investors. Those sponsors hire offline equity brokers to go raise capital for them. This method exists. The difference now is that the equity brokers are essentially online platforms. You have platforms online that raise money for many real estate sponsors. In those cases, they take a card and their business is the volume. Their online syndication model is based on the volume of transactions that they do, but that's no different than a brokerage who is paid on commission. It's the exact same idea.
Jason Hall: The biggest difference being that online platform can pay Google and be in front of hundreds of thousands of investors versus a small broker that has a smaller broker that they're working with. I think that's maybe the biggest thing.
Eliot Bencuya: Absolutely. That's a very big difference. The other difference though, is that the small broker who is just working just for themselves in a smaller book, doesn't have an entire tech and engineering company to feed. A lot of these online platforms that came with venture capital money, some have succeeded, some have not. But fundamentally, they all have to achieve growth. Once you raise VC money, you have to get onto a path that achieves quick growth, otherwise, it's not fit for the money that you've raised to grow the company. What that incentivizes, it's not even incentive, you have to do volume for the company to live because you have VC money ticking away right behind you. That's a tough spot. Because look, if you're a broker and you have a small book and it's a tough year, you know it's a tough year. But if you are a company that is having a tough year or is not putting up enough volume, then that's the end of the company. It's a tricky spot to be in. I think that what's good is that there's always an opportunity in the market somewhere, and volumes can be sustained. They just have to be in different opportunities at different times. What I think that people need to understand when they're looking at investing on online syndications, whether it's with us or with some other platform, is first of all, step 1, are you investing on a website that is a platform for other sponsors or are you investing directly with the sponsor? That's step 1. Step 2 is once you understand exactly what you're investing in, you really have to understand the vehicle into which you're investing. For example, a lot of places can make the claim, "Listen, we charge no fees." But what does that mean? It doesn't mean that they charge no fees. It means that the fees may be buried in a joint venture that they are investing with. For example, if I invest with company A, company A says, "Look, I'm not charging you any fees." But company A takes my capital and invests it in a joint venture with company B, now you've got this AB joint venture. That joint venture may very well be charging two percent acquisition fees, 50 percent incentive fee after, and eight percent preferred return hurdle. You really have to dive into it and know what questions to ask. That's where a lot of the retail investing goes wrong, is that they don't even know what questions they should be asking, let alone the answers they should be looking for. Look, the way that we've done it is we're everything. We don't raise money for outside investors, we're just raising money for our own account, for our own investments. There's plenty of good sponsors that have raised all over other platforms. You just have to know the right questions to ask and whether that sponsor is investing alongside you, whether they have their own skin in the game, for how long they have their own skin in the game. If their fees are taking their skin in the game out of the deal through fees only, how much upside you're giving up to the sponsor? Another element of incentive alignment is a lot of deals come with very traditional real estate waterfalls. What does that mean? That means that up to a certain percent return, you are not sharing in the profits with the sponsor, but after a certain profit hurdle is met, you're sharing in that profit with the sponsor. A very typical structure which I alluded to is 50 percent over a certain return. Well, if you're cutting off 50 percent of the upside after a certain return, are you sharing in the downside with the sponsor or is the structure such that you are giving the sponsor 50 percent of the upside but you are taking all of the downside, and the sponsor, if the deal goes sideways, it doesn't matter to them? That is the fundamental crux of how people should be thinking about it through the lens of a distribution of potential outcomes. Frankly, the online syndication model over time allows people to get educated in that regard. Unfortunately, I think that the education is going to come with some monetary pain.
Jason Hall: It can be an expensive tuition, that's for sure. To distill that a little bit, follow the money, so understand the incentives. Whether it's the sponsor, or whether it's the platform, if somebody is telling you, we don't charge fees, understanding that somebody is paying fees to somebody and figuring out where those fees are, and then understand who owns the downside risks, and then how was the upside shared. I think that's exactly a good dissolution dosage.
Eliot Bencuya: That's exactly right. Hopefully, over time, there's more transparency in that space and people like the Fool, like other websites, can go on and understand what questions they should be asking before they go ahead and make these investments.
Jason Hall: Actually, speaking of questions, just real quick, I want to make sure to remind our viewers about our Slido, sli.do in your web browser, event code MFLive, and we'll go through those. We're about half an hour in here, so we'll have a little bit of time for some Q&A if we get some good questions in. Deidre, go ahead.
Deidre Woollard: Great. I wanted to talk a little bit now about deal flow in general and what you're seeing. Because we've seen some distressed asset funds start to be built up, things like hotels. I know office is starting to be a little bit of a sector where people are starting to look for deals. It doesn't look like there have been a lot of deals yet. What are you thinking about deal flow right now?
Eliot Bencuya: The market is in a fascinating spot right now where, outside of a handful of very loved sectors, which include industrial, which include multi-family, which include long-term credit leased assets, whether it's retail or office, but you're really betting on the credit of the tenant and the duration of that tenant versus necessarily the real estate itself. Outside of those categories, the market has been extremely slow, if not frozen. There's a variety of reasons for that. The banks have been a lot more accommodating. There was a lot more government support that came in very quickly, and it's put owners of the less loved assets in a position where they are not forced to transact. Whether that means they're not forced to give properties back, and set aside them all, its own animal, but outside of that, owners have really been able to hold on to assets for I think a lot longer than people thought they were going to be able to hold onto them. You have a tremendous amount of liquidity and capital that has been raised to chase what amounts to nearly zero deal flow, other than a quick little blip in March and April to deploy capital. After that, on the private real estate side, it's been very difficult to find opportunities. Eventually, that capital is going to get antsy because, capital always gets antsy, and it'll start to flow into other things. It's just a very interesting market. Going back to the haves and have-nots of office buildings, it's the haves and have-nots of capital markets as well. That's why you have seen all-time low cap rates in certain asset classes, while other asset classes, such as hotels and retail, essentially don't transact. Now, I think that over time that will thaw. Eventually, hotels will get less of a break from the banks or they will start to produce revenue again, sufficient to be able to at least support their debt or refinance with more expensive debt. I think one of the interesting things about the market is that not only has a lot of equity capital being raised, a lot of debt fund, non-banking lending capital has been raised. The result of that is that, in a situation where 10 years ago an equity fund may have been able to jump on a forced sale of a distressed asset because they couldn't find a loan to refinance with, you have so much pent up debt fund capital that can refinance, that can jump in. Maybe the cost of capital for a tougher asset goes from a loan that costs four or five percent to a loan that costs eight or nine percent. You are still able to live to see another day as the equity owner and as the owner of that asset as opposed to being forced to transfer it to a new equity owner. So I think a lot of the "distress" may be captured by this debt fund capital as opposed to the distressed equity capital that has been raised. I don't know what the outcome of that is. Eventually, it means that some equity funds will likely have some style drift and start to invest into things that they didn't necessarily raise the capital for. It could also mean that it's just longer to get to the distressed, but it eventually comes. In 2009, the distressed assets traded until 2012 or 2013. There was a pretty long tail. It has been a year now since the distress began. We'll see if, over the next year or so, there are assets where people start to throw in the towel. But if I had to guess, I still tend to see more capital chasing fewer distressed opportunities than the capital thought they were raising for, and it's being scooped up by tweener returning debt fund capital.
Jason Hall: I'm going to share a comment from one of our viewers here, her saying thank you and good afternoon, but then points out that they have realized last year what you were describing in terms of that cost of the education. Says they're now engaged in private placement opportunities that have been rewarding. I think that actually brings us to one of the questions that we wanted to ask you about. It sounds like you folks are getting ready to launch an accredited-only deal. Anything you can share with us about that?
Eliot Bencuya: I can't share anything specifically, but what I can say is what we have done so far through the Streitwise platform so far has been Reg-A only. But we obviously have the history as Tryperion investing in other opportunities on behalf of high networths and family office. Streitwise was raised as a Reg-A, but that doesn't necessarily mean that all of our investors are accredited or non-accredited, they're still a mix there. There is a vision in the future to opening up more deal-by-deal opportunities for accredited investors through the Streitwise platform.
Jason Hall: One of the things I've noticed about the difference between the Reg-A, so again, just to be clear for everybody to understand, the Reg-A deals, the Regulation A deals or investments instruments, these are things that have a higher level of regulatory scrutiny. So you have SEC filings, a semi-annual and annual report that are filed, anytime there's a material event, you have to file that. It's very similar to what people get when they invest in publicly traded companies. Whereas, with these accredited deals, far less, the regulatory threshold is lower. But the flip side, I think, Elliot, and I'd like to hear you talk about this, is that my experience is that a lot of the Reg-A operators tend to bury things [laughs] in their SEC filings. Whereas, when you have these deals that are put in front of accredited investors and you have the offering sheets and all of those placement documents, they tend to be a little easier to find the information, maybe a little, I don't want to say above board necessarily, but they just seem to be a little bit easier to consume. Can you share the difference in your thoughts on that and whether you think that this is just going to be a test for you in the accredited space? If you were to project, say, five years from now, do you think you would be doing more of it? I guess, is what I'm asking.
Eliot Bencuya: Yes. It's definitely not a test for us because we already operate in that space. It's really just an expansion of Streitwise to allow for more accredited investors to come into a deal-by-deal opportunity. That was our bread-and-butter, historically. It's the Reg-A that we expanded into. This is just allowing more people to participate in the single property opportunities that we may do going forward versus the more portfolio opportunities, and likely will be more value-add and opportunistic in nature as well.
Jason Hall: It's more of what we're talking about earlier with leveraging versus that broker who has a smaller book, versus being able to leverage the power of the Internet to find a larger adjustable market of potential investors.
Eliot Bencuya: Right, and I think it'll be a different opportunity set as well.
Jason Hall: Absolutely.
Eliot Bencuya: I think what we have right now on the Reg-A side is more of a core plus strategy. I think that, in the credit space, it's more appropriate to do the value-add and opportunistic investing. It's really just an expansion of the risk-return strategies, essentially, for Streitwise. With respect to transparency, I think that my short answer to that is that if the sponsor that you're working with wants to be communicative and forthcoming, they will be communicative and forthcoming however they raise the money, and if you're working with a sponsor who wants to be less aboveboard, they will find ways to be less aboveboard. It really just comes down to vetting the personality and the culture of the people and the human beings that you are investing with. Going back to your incentive alignment, because this dovetails into that you can structure economically and legally whatever it is that you want to structure. But the reality at the end of the day comes down to the fact that you are interesting your money to somebody else. The question that everybody needs to ask themselves is, do I trust that person? It's hard when you're not looking at partnership opportunities day-in, day-out as we do to really get a sense for who someone is and who a group is, and what their track record is. I'm a new investor into the online syndication world. I am not jumping into the first handful of deals. I'm going to go join 10 webinars. I'm going to get my questions answered and start to get a feel for who I think is being more forthcoming, who I think is a more ethical sponsor. That qualitative underwriting of the sponsor, as opposed to the legal and the structuring, has to be as anything of deciding where you're going to allocate your capital. You can't document your way into turning somebody who wants to be more fraudulent, into not being fraudulent. It doesn't work that way. You can work with sponsors who even though the documents said one thing, do something entirely different and beneficial to you, because there are a good sponsor who want to treat their investors like partners. That qualitative aspect I think just exclusively comes with experience.
Deidre Woollard: I like that. I think that's a really important thing for people to understand is that the idea that the homework in real estate crowdfunding it's a little different than the homework you put in as a stock investor. You don't have earnings reports to look at or things like that. Instead, you have the documents that are associated with the deal. Wondering if you can explain just a little bit more about that and what investors should really be looking at when they see one of these deals come up.
Eliot Bencuya: I think investors should be very focused on reaching out to the sponsors themselves and seeing how generous they are with their time and seeing whether they are able to answer their questions, ask for additional information that wasn't provided and see if they can provide it to you. I think just the responsiveness and their thoroughness in responding to questions, I think helps a lot. I also think that you can ask for references and they should be able to provide references from historical deals and you are not looking for, hey, how did this deal perform? You're looking for, hey, how did this sponsor communicate with me for both the bad news and good news? The goal being that you want to find the sponsors who are willing to communicate the bad news as much as they are willing to communicate the good news. You are looking for the sponsors that have presented you with an initial set of information. But if you ask for follow-up information, they have it. They've been thoughtful about it. They have thought through the risks. They have thought through the impact of those potential risks on the outcome of the deal. It's not so much this risk. You ask a sponsor, "Hey, what's the risk of this tenant leaving?" The response is, "No, that tenant's never leaving. They've been there forever. They've invested a lot of money in that space when that may all be well and good." But the question is, what if you're wrong? If you are wrong and they leave, does that demolish your return? How have you thought about what happens if you are wrong? It's not simply just, well, we're going to lower rent growth a little bit, we're going to do this or we're going to do that. It's a thorough thinking through what the ramifications are of being wrong and how that affects any potential principal loss versus if you're right, are you getting paid enough to be right? I think that you can ask these questions of the sponsors. If you ask these same questions over enough sponsors before you invest in a deal, you will get a sense as to which sponsors have in fact thought about it and which sponsors are simply overlooking those more nuanced questions as to the distribution of outcomes.
Deidre Woollard: Well, thank you. Just a follow-up on that about the bad news because we have a question in the comments that I think is really interesting. Ken asked, "When it comes to capital calls when you have a choice, should you contribute. Usually, the comment that you'll lose your ownership doesn't seem to be motivating because putting money into a troubled asset doesn't seem to make sense. Can you explain a little bit about what a capital call is and what it means when it happens in an investment?"
Eliot Bencuya: Sure. A capital call is when let's say you have 100 investors in a specific deal. There's an initial capital call where everybody sends their capital at the beginning in order to acquire the property and likely for the capital necessary to make any potential renovations or any changes that you're going to make to the property upfront. A capital call in the future and this has happened across a lot of hotel assets over the last eight months, nine months. A capital call that happens in the middle of the deal is a capital call that is required because for some reason the property needs an additional infusion of capital. Whether or not that additional capital call is throwing good money after bad is extremely opportunity and property-specific. It's impossible to answer as a blanket answer whether or not it makes sense. It doesn't always make sense. Sometimes you decide, look, you know what, we're never going to work out of the initial basis. We paid way too much for the property upfront. There is no chance that we should be putting more money into these deals. For example, malls. A lot of the large investors have been handing malls back to the lenders because they don't want to put any more money into the property because it doesn't make sense. But today there is a lot of hotels that with a little bit of additional capital infusion can tie them over for a year. If you look out 2, 3, 4, 5 years and you envision a scenario where the hospitality market is at least partially back, if not all the way back, then it would be foolish not to put additional capital into the property today, to carry it for a year versus give everything back. So when the capital call makes sense? The capital call makes sense to fund when you believe that it's a temporary issue, it will be solved with additional capital and three, four, five years out you still want to own that property. If that property is going to be a defunct property or for some reason just totally obsolete in three, four, five years then it probably doesn't make sense, but it's really opportunity in project-specific.
Jason Hall: When you're thinking, looking out over the next couple of years to five years plus, and you're thinking about some of these standalone deals that you're looking to bring into the crowdfunding arena, are you thinking broadly in terms of different types of assets or do you anticipate you guys will stay pretty concentrated in the sorts of properties you've done business in before?
Eliot Bencuya: We'll be flexible. We have experience. We have a broad range of experience in real estate. We have experience in joint ventures, with local operating partners across all asset classes, industrial hospitality, multi-family, etc. We have experience within the capital stock, so providing preferred equity or providing mezzanine loans. There are a lot of sponsors who are incredibly successful focusing on one niche. They're just department sponsors, they're just senior housing, they're just hospitality. That's a fantastic thing to do also because you get incredible operational experience. We are more fluid in the way that we allocate capital. We're not focused on one particular niche or one particular segment of the market. But we move as the capital markets move. When we were buying a lot of the suburban office buildings in the Midwest in 2013 and '14, that opportunity eventually pricing came up, and then opportunity disappeared and we went into more value-add space where we were acquiring properties that weren't stabilized, that weren't at 90 percent occupancy. We were buying them at 60 or 70 percent occupancy. We were buying shopping centers with empty boxes. We were buying flecks industrial at 60 percent occupancy and we were leasing them up. Then the value-add market got really heated to the point where a lot of the value add was being priced into the initial purchase price, and we started to find ourselves doing more preferred equity in mezzanine loan investing, where we were providing some additional preferred equity for a condo construction project or we were providing a mezzanine loan for a hospitality conversion where we were sitting a little bit lower than the equity in the capital stock, but we were still earning a return that we felt it was appropriate for going lower in the capital stock, but giving up the upside by not owning the equity. Our thesis changes over time as the markets change. What that does is we're able to move throughout the capital markets and the property markets as capital flows and demand for different types of investments moves.
Jason Hall: The way I think about that for folks who don't necessarily follow real estate as closely as different parts of the real estate market can be going through different cycles in different periods of time. This is a way that you can avoid if you benefit like say if you specialized, you get that operational knowledge and you can get better returns and people that don't focus on it. But you are more at risk if the market turns in terms of maybe going through a period of time where you can't capture the returns you might be aiming to do. So your focus allows you to cut out some of that choppiness and generate better returns over time, I guess is the goal?
Eliot Bencuya: Yes, it's to find the places that we think there is a capital market inefficiency, essentially.
Jason Hall: Right. Deidre.
Deidre Woollard: I wanted to touch quickly on geography and what your thoughts are right now around where you're investing. Obviously, you've been in the past focused in Midwest and office spaces. Are there other markets that you are looking at right now?
Eliot Bencuya: We look nationally. The size of the investments that we make tends to lead us to the markets that are not the biggest urban markets just because we don't have an edge. For example, in city like New York or San Francisco, or even here in Los Angeles where we're based. There is no edge for us in the size range of the capital that we're deploying. We have tended to invest in smaller markets like Charlotte and Phoenix and San Antonio and places like that over time. We're national but we tend to focus on the smaller MSAs. That said, I think that there may very well be interesting opportunities in the larger MSAs. We will see how that plays out. I think that the discussion of where people think demand is headed is an interesting one, but it's rarely paired with a discussion of price and how much people are paying for those expectations. You'll find the Internet talking about how Houston is booming and Denver and Charlotte and Nashville and all these places, and that's all accurate. Demand can absolutely surprise the upside, but if you look at the prices that people are paying, that expectation then has to come through. A lot of the expectations are already built into that price so while it is true that an area might be booming, it may not be true that it makes very good investment if that expected demand is already baked into the price. I think that discussion of where is a good place to invest? There are markets that have definite tailwinds for the next decade. The next level of thinking is, have I paid for that expectation or not?
Jason Hall: It's interesting because that points out something we try to talk about a lot with investors, with Motley Fool thinking about stocks as even the best businesses, you still have to find a price that makes sense to buyer and that's doubly true with real estate, which is a capital-intensive business, and often are you using substantially more leverage than you would apply to that you'd see, say Coca-Cola using for example. Thanks for sharing that. With that in mind, I'd like to hear how you describe to people why they should consider crowdfunding and crowdfunding investing into real estate in addition to investing into the stock market?
Eliot Bencuya: I think that both of them offer a place in somebody's portfolio, and I think if somebody is going to make the decision that they want to invest in an online crowdfunding or an online syndication, versus a public stock exchange. I think they really need to understand why they're doing that. Are they doing that because their friends are doing it? Are they doing it because the online website says that this project is going projected to be at 20 percent IRR without looking into the details? Or are they doing it because they already have an allocation to core stable companies or REITs in the public market and they are looking for something very specifically different. I think that's the biggest thing is that if they both hold a place in somebody's portfolio, I don't think it should be, should I invest in the public stock market? Should I invest in public REITs or should I invest elsewhere, online into more private syndications? I think it has to be okay, my portfolio, I'm going to divvy up between a variety of strategies. Some of it I want here some of it I want online. I need x amount of dollars for the next year or two in liquidity. I probably shouldn't put that into an online syndication where I can't get the money out if I need the liquidity today or on a moment's notice. If I'm investing into online REITs, what am I investing in? If I'm investing in an online multifamily REIT, am I getting something different by investing in an online multifamily syndication? Or am I only investing in the online multifamily syndication because it's different? I think people really need to consider what it is that they're looking to get out of it. Are they looking to get a higher return on it? Have they considered whether there may be an alternative? I think that the first step should always be to compare to something in the public markets to see if you're actually getting something different and worth tying your money up for a longer period of time. I think they both hold a place in people's portfolios, I think they just need to ask themselves, what they are looking to get out of each allocation.
Jason Hall: Deidre.
Deidre Woollard: I was just going to say that I think that's really smart for people to consider that there is that factor where the crowd-funding is you are tying up your money for a period of time, but you usually get better returns and so that's part of it as well.
Jason Hall: One thing I want to just add there too Eliot maybe you can touch on with streetwise and other REITs is that the crown for the REITs they can further complicate your ability to access capital because if you invest in a standalone deal, that's set to run for a specific period of time, you have a pretty good target of when the deal is going to end and you're going to get capital return to you. But if you invest in one of these like the streetwise REITs, your capital is somewhat held in perpetuity and there are abilities to sell a small portion over time. Maybe you can explain that how there's gaps that are built-in because you're still investing in real estate and you need that predictable access to capital as an entity. Can you explain that a little bit?
Eliot Bencuya: Different vehicles are structured different ways with different redemption rights and different gates on those redemptions. Every investor should absolutely be aware of what limitations there are on redemptions. But I think fundamentally, everybody who is investing in an online real estate deal, whether it's in the REIT or whether it's in a deal that is projected to be sold in three to seven years just needs to get comfortable with the fact that it's a longer-term investment period, end of story, and everything else in terms of liquidity is gravy. If you go into that thinking, I am going to be able to get out of this because such and such offers a redemption and this many years you may wake up to find that you are one of millions of people who are redeeming at the same time and you may not actually have that opportunity. I think people should look into these things. They should absolutely understand what the baseline liquidity model is for any online syndication and REIT or not. But I just think that people should understand that they are parting with their money with limited control over it and they need to be comfortable with that. Period end of story.
Jason Hall: That mindset as a starting point is fantastic. Deidre, we've got about two minutes left. Deidre, I'll let you slide on the last question and maybe Eliot can give us some closing words.
Deidre Woollard: Great. My last question would just be about lessons you learned during the pandemic and what long-range impact of it are you looking to see in the future?
Eliot Bencuya: I think lessons from the pandemic are that people love to talk about how quality outperforms during times of distress and I just think that that was on display throughout and that the stronger, the better properties, the more well-located, the better tenants that you had they all performed so much better than we got, that it really that you can see what the trading sardine and what's a holdings sardine. I think that the difference between those two types of sardines came really to the forefront. I think I can say that it's a lesson learned, but what I would say is that it's a lesson relearned, that everybody learns every so often. Going forward I think it's going to be a really interesting market because as I said earlier, real estate is in a really interesting position now where technology is moving so quickly and the real estate needs to be there to match the needs of human beings, and it needs to be adaptable and flexible and move quickly to adapt to the technology and I think owners of real estate are just now going to start to grapple with what that means in terms of operations going forward.
Jason Hall: That's fantastic, I appreciate that. We're right up against the hour. Eliot, really appreciate you coming on onboard and Deidre, I appreciate you've given us the space in your special weekly hour here to spend with Eliot.
Deidre Woollard: This was fantastic. Thank you, Eliot.
Eliot Bencuya: Thank you, both. I appreciate it.