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You Will Learn:
In about 30 days, I will be releasing my first book called “Capital Attraction: The Small Balance Real Estate Entrepreneur’s Essential Guide to Raising Capital”. The next few blogs will be excerpts (or very close to excerpts) from that book. I hope you find them valuable.
Since it is for these people that this book has been written, I think a good place to start our discussion is to attempt to define exactly what we mean by a “small balance real estate entrepreneur”.
Stated simply, my definition of an SBRE entrepreneur is anyone running a business whose basic function is to make and manage non-institutional grade and sized investments in one or more real estate asset based strategies that requires the operator to regularly and consistently raise capital in order to make those investments.
This definition eliminates a lot of “real estate” people from it by its nature, including real estate agents, homeowners, appraisers, property managers, as well anyone I would categorize as “institutional” such as large hedge fund managers, REITs, pension funds, banks, and other market participants who play in more institutional and less entrepreneurial space.
To further clarify, let’s put some additional parameters around “Small Balance Real Estate” generally. Broadly speaking, and this is not a hard and fast definition but rather a somewhat loose guideline as there are always folks around the edges that can be considered part of more than one camp, SBRE would be considered anything where the average deal size is $5,000,000 or less, and in the vast majority of cases, $2,000,000 or less. In fact, in a very large percentage of SBRE businesses, the average deal size is less than $1,000,000 or even $250,000. I know many of what I would consider to be full-fledged SBRE entrepreneurs running SBRE businesses with average deal sizes below $100,000.
When it comes to a pooled investment fund, about which I will talk a great deal in this book and is a focus of our capital raising efforts, I would loosely define an SBRE fund as one with assets under management (“AUM”) below $500,000,000, more frequently below $200,000,000 and the vast majority of the time below $100,000,000. There are many perfectly good, well-run and profitable (for both the investor and our SBRE entrepreneur) funds that have total AUM of $10,000,000 or $20,000,000 or $50,000,000. In fact, I know and work with many SBRE entrepreneurs starting SBRE funds literally from zero and, in many ways, this is the person for whom this book will likely be most helpful.
The total volume of real estate transactions in the United States is very difficult to estimate, even when just limiting the criteria to actual sales of real property. The volume of real estate transactions when one includes in the criteria not only real property sales of both residential and commercial property, but also the financing and refinancing of such property, the sale and trading of real estate secured debt instruments (trust deeds, contracts, tax liens, and others), and other transactions that fundamentally have real estate as the underlying asset is almost impossible to calculate. I believe it is safe to say that this figure is well into the trillions of dollars.
If we remove all of the owner-occupied single family residential sales and refis from the total, and we remove all of the institutional sized deals, such as the sales and refis of Manhattan (or other major metropolitan area) office towers, regional shopping malls, large industrial complexes, and other properties that are outside the scope of my definition, we start to narrow down our universe to the SBRE realm, and it is still a gigantic market by any measure. For example, Boxwood Means’ monthly report, the SmallBalance Advocate, estimates a total sales transaction volume in the United States of what they call “small cap commercial real estate” of more than $58 billion year to date through August 2015. This does not include ANY single family residential investment property transactions which, by most cursory research I have done, is another multi-billion dollar market. This also does not include ANY private or hard money lending volume on both residential investment and commercial income producing property, another multi-billion dollar market. This does not include ANY buying, selling and trading of distressed or discounted real estate secured notes in the private markets, another multi-billion dollar market. And this also does not include ANY other strategy involving real estate as the core collateral or asset of that strategy, of which I am personally familiar with many (since I speak with them every day of my business life and many are our clients).
The point I making here is that the Small Balance Real Estate industry, although difficult to obtain precise data around exact volume and size, is by any measure a gargantuan market. It is also highly fragmented and highly regionalized, even localized, making it even more difficult to quantify and characterize. The vast majority of the media attention in the real estate field is on the institutional players – multi-billion dollar companies, institutions and funds. Yet most of these institutions want little to nothing to do with small balance real estate unless they can deploy a minimum of $50,000,000 or $100,000,000 at a whack, and that usually is just a starting point. There are many reasons for this, some of which I will touch upon later in this book, but the net effect is that the SBRE industry functions much like a parallel universe to the institutional real estate world and what works well in one world, especially as it pertains to the way in which capital is accessed, often does not work at all in the other. More on this dynamic and the reasons for it later, but for now it is important just to understand and accept that this reality exists.
The distinguishing factor to me about an “SBRE entrepreneur” versus other people who make their living in the real estate field is not the particular strategy they are pursuing, but rather whether or not their business requires them to raise capital from others on an ongoing basis in order to execute that business strategy. If it does, then you are an SBRE entrepreneur. If you run a business operation, some portion of which must be dedicated to systematically raising capital to support the development and growth of that enterprise, you are an SBRE entrepreneur. The significance and importance of developing systems, processes and expertise in this capital raising component of an SBRE entrepreneur’s business is, unfortunately, very often underestimated, misunderstood, and/or overlooked by most of them and thus their ability to execute in this area is generally far less developed than the “real estate” or “deal” side of their enterprise. This becomes a fundamentally limiting factor in their growth and development unless and until it is effectively dealt with, and many never master it. Understanding and methodically improving this capacity is the focus of this book.