Circle of Competence Issue #42

Quote of the week: "If you don't know where you're going, you'll end up some place else." - Yogi Berra

FOOD FOR THOUGHT

Investor discussion - John Ackiss & Opportunity Zone Development

This week, Neil and I had the opportunity to speak with John Ackiss about his career in real estate and the most valuable lessons he's learned thus far. John is an experienced real estate investor and developer from North Carolina and is currently developing a $18M multifamily project in Asheville, NC in an Opportunity Zone. The project is open to new investors, so please reach out if you have someone in mind who may be interested! Disclaimer - neither Neil nor I have any investments with John, nor do we plan on initiating one at this time. Each potential investor should do their own research and consult their own counsel.

Lessons learned

1. Pick your partners well. Your business partners might become long term partners when things get tough. Tough times bring out the true character in people. Make sure you’re partnered with good ones. Be careful accepting equity partners as well. Draft good operating agreements and always stay transparent. While this sounds banal, in raising private capital, you can only be active as long as your partners are willing to invest in you. Ideally, you should pick partners that are patient, capable of withstanding cycles, and are aligned with your vision for the investment. Break ups are often painful and sometimes can cause forced selling.

2. Know where you are in the cycle. Over and over again, we heard John say that overleveraging is what gets many real estate investors in trouble Just because you can leverage up on a property doesn't mean that is the best move going forward. This remains true for operating businesses as well (see Retail Private Equity deep dive series below!).

3. Don't accept capital, debt or equity, and invest it, just because you can. Just as before - just because capital is there for deployment, whether in the form of debt or equity, doesn't mean that it is the right decision at the time. Just because you can, doesn't mean you should. Chasing returns and fees is often a recipe for disaster.

4. Be slow to hire, but quick to fire. Run as lean as possible for as long as you can. Cycles happen, and it is hard to part ways when business slows down. Only bring on people you really like that are flexible and have potential to grow. There’s a saying that is easy to hire average people but very hard to let them go. This goes hand in hand with #1 of being picky with partners. The corollary is to be picky with your managers as well, which leads to the final point - which was our favorite.

5. The importance of management becomes more evident in downturns than when times are good. You find out who the star players are in the tougher times. The blocking and tackling of managing a property through downturns is far more important than when times are good. Everyone looks like a genius in good economic times.

Asheville Development

When we asked John about the Asheville development, here are a few themes that jumped out at us:

1. There is a housing gap in Asheville. Home prices have skyrocketed and rents have left the middle class behind. The unfortunate byproduct there is that everyday people are getting priced out of the core downtown area.

2. Most people who are building, are building Class A facilities with super amenitized spaces because the cost of land is so prohibitively expensive that they have to be able to charge high rents to achieve returns. This leaves a big gap for workforce housing.

3. He has gone through the rigorous process of attaining 40 year HUD debt financing for the project. As John told us, this is often seen as an excellent litmus test for investability by equity partners since the HUD approval process requires such thorough underwriting and third party validation.

4. Most notably, because this property is in a qualified opportunity zone, investors who contribute previously realized capital gains will benefit from favorable tax treatment and may eliminate future capital gains tax from the sale of the property if held for ten years or more. The ability to shelter and/or defer a serious amount of capital gains taxes in the future makes the investment that much more attractive to equity partners.

John mentioned that most of these lessons learned could also be found (among many more) in his favorite Trammell Crow memo circulated in a 1989 about lessons learned from a down cycle (read: failures). Here is the link.

Quick personal note

In addition to John, I've had the opportunity to connect with several other investors through the Circle of Competence blog. This has been a wonderful side effect of sharing ideas and content over the blog, and I hope that others will drop me a line as well. I enjoy taking the time to get to know investors from various industries and backgrounds and just this week I was able to connect with a founder of a credit driven hedge fund and an analyst at a large absolute return fund. Our conversations ranged from background to investment ideas to current research and reading. One's circle of competence is limited only by her knowledge... and her connections' knowledge :) Drop me a line and let's chat!

Have a great week!

- Benton

ARTICLES

- Alice Schroeder was a sell side analyst with Paine Webber when she wrote an in depth sell side research piece on Berkshire Hathaway in 1999 (well worth the read). Interestingly, this lead to Buffett allowing her to document his life meticulously in The Snowball: Warren Buffett and the Business of Life. Thanks to Neil for bringing this gem to my attention!

- Trammell Crow 1989 Partner Memo on failures in a real estate down cycle - excellent resource from our friend John Ackiss!

- More on Trammell Crow - a history

- Is retail dying? Or just changing face? (The Atlantic)

- Elon Musk's interview on CBS 60 minutes

- Eddie Lampert shattered Sears, sullied his reputation, and lost billions. Or did he? (Institutional Investor)

- Eddie Lampert's fund will make a bid for Sears' stores and assets (WSJ)

- George H. W. Bush and the price of politics (New York Times Op-Ed)

- Signal in the noise: yield curves, economic growth, and stock prices (Aswath Damodaran, Musings on Markets)

- The art of defaulting and memo on debt cycles - Absolute Return Partners letter

- Lower oil prices haves positive and negative effects on the economy (WSJ)

- Harvard spent $100M on vineyards and got sour grapes (Bloomberg)

- How podcasts became a seductive - and sometimes slippery - mode of storytelling (The New Yorker)