J.C. Clemens Jr. spent seven years working for Holliday Fenoglio on the mortgage side and in multifamily sales before landing at Flagship Capital Partners. Flagship is a direct lender and equity investor for commercial real estate transactions with a compelling value-add story. J.C. serves as its managing director and chief production officer while investing in separate general partnerships and limited partnerships on the side. In this episode, he discusses how he qualifies sponsors he chooses to work with, what an ideal sponsor looks like, and the biggest indicator that a sponsor isn’t going to be a good fit.
“I think we catch a lot of people between kind of deals two and deals 20,” J.C. says. “We’re not going to do somebody’s first deal, we’re going to want the individual to have gone round trip on a couple of transactions, but we’ll do somebody’s third, fourth, or fifth transaction, and then we typically do repeat deals with sponsors.” By the twelfth transaction, he says most sponsors tend to move on to bigger and better things.
Today, most sponsors aren’t willing to spend much time on site, J.C. says. He sees investors from New York that visit their properties in Dallas once per quarter, which isn’t nearly enough attention multifamily deals require in order to “keep the toilets flowing, keep the leasing managers happy, and keep the units filled.”
A major problem J.C. has seen is individuals from one market trying to buy deals in similar markets, assuming things will be exactly the same. He looks for “... somebody who really understands the market, having owned in that market before, or having been a passive investor of that market before.”
J.C. says an ideal sponsor is someone who has interacted with the management company that will be operating their deal.
Many people in the current market aren’t budgeting adequately for labor or supply chain issues, according to J.C. “They’re really thinking that they’re just going to throw some numbers on a piece of paper and that’s how the contract work is going to go, when in fact it’s drastically different.”
J.C. says he prefers to work with sponsors that came up in the apartment industry as a vendor, who have turned units before moving on to acquiring deals.
Flagship Capital Partners requires all of its sponsors to have 10% in the deal, net of all fees. “It’s really easy to not be as focused on a transaction if you’re net zero in the deal,” J.C. says. “So we want somebody who’s either got their last dollar or a lot of their family’s dollars in the deal riding along with us because that tends to keep people’s eyes on the ball.”
J.C. expects sponsors to be able to answer questions about their transaction without having to look up the answers and get back to him. “If there’s any fumbling as far as when they’re pitching the business to me, and they’re saying ‘I have to get back to you, I have to get back to you,’ then that’s essentially dead in the water for me,” he says.
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I'm Ash Patel, and I'm with today's guest, J.C. Clemens, Jr. J.C. is joining us from Houston, Texas. He is the managing director and chief production officer at Flagship Capital Partners, which provides capital for value-add real estate investments across the country. J.C. is a GP and LP investor on a number of properties as well. J.C., thank you for joining us and how are you today?
J.C. Clemens: Doing good. Happy to be here.
Ash Patel: It's our pleasure. J.C., before we get started, can you give the Best Ever listeners a little bit more about your background and what you're focused on now?
J.C. Clemens: Yeah, for sure. So J.C. Clemens here, as mentioned by Ash, based here in Houston, Texas. Born and raised in North Texas, up in Amarillo. Went to school, University of Texas in Austin. After graduating, went and worked for, at the time, Holliday Fenoglio, which was recently acquired, I guess not that recently, acquired by JLL.
Was there for seven years. Half my time was on the mortgage banking side. The other half of my time was as a multifamily sales team member, where I sold multifamily deals all over Texas. And then I came over to the Flagship about five years ago, and I head up all of our production efforts for both our debt and our equity funds, as well as investing in separate general partnerships and limited partnerships on the side.
J.C. Clemens: J.C., managing director and chief production officer - what does that mean? What's your day-to-day function?
J.C. Clemens: My job is managing a team of people that work for me here in Houston. I've got a couple of producers and some analysts, and really what I do is I manage the volume for all of our deals. So I'm typically on a plane a week, going to different markets all across the country to meet with sponsors who are looking to invest in new transactions, or going and doing business development with existing sponsors who are trying to get in front of new sponsors.
But really, my job is to help get the deals in the door and then get negotiated and get them signed up. And then, I've got several team members that end up getting everything done, from the closing aspect and then into the asset management phase into our portfolio.
Ash Patel: So your company will raise the capital as well.
J.C. Clemens: We already have it raised. So we've got two separate funds, we have our debt funds that issue senior loans, and then we have our equity funds. Currently, we've got a quarter billion in equity under management, and right now we're investing in our equity fund too, which is a $75 million facility that issues checks of $2-$8 million per transaction for value-add multifamily deals.
Ash Patel: How do you qualify the sponsors that you choose to work with?
J.C. Clemens: That's a great question. There's really no specific answer to that. I think we catch people that, by some standards, would qualify as emerging. I think we catch a lot of people between deals 2 and deals 20. We're not going to do somebody's first deal, we're going to want the individual to have gone round trip on a couple of transactions. But we'll do somebody's third, fourth, fifth transaction, and then we typically do repeat deals with sponsors. So I think we do a deal three, deal seven, deal 12. And then once you get past your 12th full-cycle deal, people tend to forget about you and go to bigger and better things.
But I think it's somebody who understands the real estate industry, somebody who is willing to really be on site a lot more than a lot of people are doing nowadays. Very often, we hear somebody in New York buying a deal in Dallas, and they're like, "Oh yeah, we're going to be there all the time. We're going to be there once a quarter." And just the attention that these multifamily deals need is a lot higher, and we know that at Flagship Capital, because we used to own 35,000 units all over the south. So we know what it takes to keep the toilets flowing and keep the leasing managers happy and keeping the units filled.
So I think it's really somebody who's maybe coming out of the friends and family syndication world and looking to get more onto the institutional side, and really would like to have a single check writer in that $5 million, $6 million space as opposed to having to nickel and dime it, $5 million clips here and there.
Ash Patel: When you say "$5 million, $6 million", is that your investment or is that the total raise?
J.C. Clemens: That's our investment.
Ash Patel: Okay. So that's good to know that there's people like you out there that will take somebody, help groom them from their second deal on. Is there a minimum investment amount that you would do?
J.C. Clemens: For sure. So the smallest investment that we're willing to make I believe now is probably $2.5 million on a deal. The largest, like I said, would be $8 million. But I think it's also important to note that we don't need to be the entire equity. So, say somebody needs $10 million, it's the total equity, they're bringing $1 million for their 10% and they need $9 million, if they have already raised $3 million from their people, we can come with that additional $6 million. So we don't need to be the entire stack, which I think is different from a lot of other institutional equity providers. And also, if it's a $30 million raise, we can be a $2 million part of that. So we can be as small as 10%, or we can be as much as 90% of the equity.
Ash Patel: J.C., is there a typical cut that you get? Let's say you raise all of the capital. What's your expectation, and is that a percentage of GP?
J.C. Clemens: No. Typically, we're just straight pari passu LP investor. So the analogy or scenario that I tell everybody is that, say there's a $5 million or a $10 million equity commitment for a deal. The sponsor, we're going to need them to come with $1 million, we're going to come with $9 million, and then that entire $10 million is getting to earn that eight to 10 pref is what we usually get. Then that entire $10 million is going to get all their money back. And then thereafter, the general partner will have put $1 into a bucket. That $1 bucket will get the 20% or 30% promote on the waterfall. So all of our money earns the same as what the general partners are contributing, and we're not in any special class and don't get any special treatment.
Ash Patel: That's very interesting; you know you could probably get a lot more, right?
J.C. Clemens: We understand that. But having been in this business, for me personally over a decade, and then principals of the firm, 40+ years each... Really, we've understood that the best way for us to make money is for the general partners to make a lot of money. So if the incentive is there for the general partner to do really well, then we're going to do really well; because if they're making a lot of money, then we're making a lot of money. And so we really like it to be in a scenario to where the general partners can do very well if they end up getting us a great return on.
Ash Patel: I'm still a little taken back. You know that there's capital raisers out there that will get 30%-40% of the GP share for strictly raising capital.
J.C. Clemens: For sure. We know the market well, and for us, we know our lane, and we've had a very successful track record, nd that's also why a lot of people like to do business with us.
Ash Patel: And I applaud you for that, because I'm sure you can get a lot more meat off the bone, but you choose to do things in a certain way, and it's obviously worked very well. If you were to groom a sponsor, one that would be your ideal scenario to invest in, what would your advice be to them? How would you have them set up their systems? What is the ideal sponsor in your world?
J.C. Clemens: That's a great question. So I think the ideal sponsor for us is somebody with intimate knowledge of the area that they're buying in. One of the biggest problems that we've seen historically is individuals from Kansas City coming in and trying to buy a deal in Oklahoma City, and them saying, "Oh, the demographics are the exact same. We know how to do it in Kansas City. It's going to be the same thing here."
So I think somebody who really understands their market, having owned in that market before or having been a passive investor in that market before and seeing how deals have gone well or not gone so well; so I think that's really important.
Somebody who has a good tie with the management on the ground, somebody who's going to have had interacted with the management company who's going to be operating their deal, and then also somebody who really understands the construction side of things. I think where most people are missing in the market right now is they're not budgeting adequately for labor, they're not budging adequately for supply chain issues, and they're really thinking that they're just going to throw some numbers on a piece of paper, and that's how the contract work is going to go, when in fact, it's drastically different. So if somebody's never been through that process of hiring a general contractor and dealing with subs and getting all that done, I think that's hard.
So I'd rather have somebody that came up in the apartment industry, that was a vendor. Somebody who's actually turned units and then became somebody who was acquiring deals, as opposed to somebody who had a bunch of money in New York and decided they were going to go buy apartment complexes, because they're not going to know how porters work and how maintenance teams work and how all of that goes. So we really like somebody who understands the business from the ground-up.
And then lastly, I think it's really somebody who's got aligned interest in the deal. We require all of our sponsors to have 10% in the deal, and that's net of all fees. So I think that's why it's really easy to not be as focused on a transaction if you're net zero in the deal. So we want somebody who's either got their last dollar or got a lot of their family's dollars in the deal running along with us, because that tends to keep people's eyes on the ball.
Ash Patel: Net of all fees is very important; so you can't charge 10% of the deal in different fees and put that into the deal.
J.C. Clemens: Right.
Ash Patel: You've got to bring your own money to the game. Do you prefer to work with sponsors that are individuals or that have a team?
J.C. Clemens: That's another really good question. Some of these deals that we look at, there's 15 KPs and all these different people on the deal... And that's great, but when that happens, it's hard for us to understand who's really doing what. So if we have six different sponsors that are all sharing the deal, we really have to dive into who's doing what and in what capacity, and also how spread out they are. There's sometimes too whenever there's this key person who's signing on this deal are going to be in the sponsorship team and then we never hear from them again for the next three years that we're invested in the transaction.
So I think there should be a team, but I think it should be a small, focused team. And I don't think it should just be a bunch of people that have put their names on the paper or on the loan, that are contributing a couple $100,000 that are really not going to contribute much more time to the deal. I'd rather have less people putting in more time, than more people putting in more money and less time, if that makes sense.
Break: [00:11:27] - [00:13:14]
Ash Patel: J.C., when you're qualifying sponsors, is there one go-to question that separates the people that are going to be successful from the ones that are not? Is there a question that usually kills the deal that you ask?
J.C. Clemens: Not one specific question, but I think it's a series of questions about the deal. So my biggest tell if somebody isn't going to be someone who's going to be a fit for Flagship is if they don't know their transaction. I don't need somebody looking up on a computer, I don't need somebody trying to find a sheet or talk to somebody else on their team asking how many units, what are the rents...
If I can talk to somebody and they know the square footage, they know the rents, they know the rehab, they don't have to look at a single piece of paper, that's probably the biggest tell for me. If there's any fumbling as far as when they're pitching the business to me, and they're saying, "I have to get back to you, I have to get back to you," then that's essentially dead in the water for me.
Ash Patel: That's a good piece of advice. Right now, a lot of multifamily operators are moving into RV parks, mobile home parks. Have you taken an interest in that yet?
J.C. Clemens: So we've looked at some manufactured housing deals, because we are a lender. The RV park space is very different just because the laws are so different as far as what is collateral and what is not collateral. So for us as equity investors, we really like deals that can't drive away. So we like more of the manufactured housing aspect of those types of deals.
We've been successful in a couple of round trip transactions where it was anywhere from 150-250 roll-off homes that were actually plugged into the plumbing and the electrical and stayed there and become fixated on the property. And it wasn't quite SFR or BTR but it wasn't quite RV. So I think yes, we're interested in that space, but the SFR and BTR space is really I think overheated in our opinion and not something we would look at. And the RV space we would look at, but to be honest, we're really not that experienced. We're more brick-and-mortar, multifamily people.
Ash Patel: SFR, single-family. What is BTR?
J.C. Clemens: Build to rent.
Ash Patel: Okay. Well, I got to ask you this. So I'm in commercial real estate. I do strip malls, retail, office, industrial. You guys are not going to loan me money, are you?
J.C. Clemens: We actually are.
Ash Patel: Really? Now we're talking.
J.C. Clemens: On the debt side, yeah. On our equity funds, we're 75% multifamily, 25% commercial, and then in debt fund four I think we were 80% commercial, split between office and retail. In our current debt fund, I think we're probably going to end up being 75% multi, 25% commercial, but no, we absolutely will lend on commercial properties out of our bridge fund. But on the equity side, we're primarily multifamily.
Ash Patel: Is it the same deal? You're just coming in as an LP?
J.C. Clemens: No, we're coming in as a first [unintelligible 00:15:50].
Ash Patel: Just debt.
J.C. Clemens: Yeah, so we're just straight debt. We can't do both on the same transaction, because it's hard to foreclose on yourself. So we're either doing senior bridge loans, 80% loan to cost, and that's all balance sheet money. So we don't sell those loans like a lot of groups out of New York do. We do asset manage everything in-house, then the equity line is just straight LP money. No pref, no GP money, really just pari passu LPF.
Ash Patel: What kind of a term would you offer?
J.C. Clemens: Typically, we're two to three-year term. We need to be in and out of the loans within four years is typically what we like to do. So I think a deal that we've got quoted right now, or one that we closed last week in Houston, which is about a $12 million loan on a 160-unit multifamily deal here, I think the going-in rate - we base it over Wall Street Journal prime. So today, that's at 3.75, so we're 200 over that. So the rate on that deal was 5.75 and we got up to 80% loan to cost, non-recourse, interest-only for the full term.
Ash Patel: Got it. What is your best real estate investing advice ever?
J.C. Clemens: That's a tough question. I think, for me, the best real estate investing advice ever is really to stay in your lane. Know what you're good at. For me, every time in my career, whenever I've tried to get creative and do something that I'm not essentially what I would say a specialist in, is where I've gotten burned. So I think for people that are trying to grow business, that's great; but if you feel like you're stretching, it might be time to slow down.
So for me, every time that I try and think I'm going to create some new box is whenever things don't go as planned, but I've got a formula and I've got a playbook, and every time that I've stuck to that playbook and not made exceptions, I've done really well. So I think the best advice I could give somebody on the deal front is that, and then just globally, in real estate, I think it's just finding a mentor that you trust.
I've had some really good mentors and some really bad mentors in my career. And luckily, I've worked for a couple of now that have been through multiple cycles and done things the right way through some really hard times, and I would foresee some pretty difficult times ahead for a lot of people in the real estate industry, so I think buddying up with somebody who is ethical, has been through a lot of cycles, and has what you want from a monetary or from a business standpoint and really trusting them, I think that would probably be my biggest advice outside of the deal side.
Ash Patel: J.C., we're heading into an inflationary period where debt's becoming more expensive, cap rates are rising... What do you see ahead for multifamily?
J.C. Clemens: Multifamily - I think going forward, I think there is going to be some price adjustment that's going to come through. I don't think it's going to be as drastic as it has been historically when interest rates have risen. Traditionally, when interest rates rise, cap rates rise almost point for point. I don't think that's going to be the case for multifamily this time, because of how much capital is flooded into the multifamily space, and how many investors are really putting money into multifamily as an inflation hedge and as the recession hedge.
After seeing what's gone on in the stock market for the past five days, it makes sense to why a lot of real estate investors are investing in real estate; and, sure they're interested in making returns on their money, but I'm telling you, a lot of people are just making sure that they're going to get a return of their money over the term of these investments. So I think that there's going to be some pricing adjustment on the multifamily side, I believe, but not as bad as what has happened historically.
And I think multifamily was really tested hard during COVID, and I think it did very well. There was obviously assistance from the government. But I think it's a very safe place to be going forward if you're looking for tangible assets to invest in, and it's a great inflation hedge. And as long as you're being smart and not over-levering, not overpaying for stuff... There's a lot of crazy pricing that's going on out there.
So again, I think, if you have a gut check and your underwriting is very sound and you're not over-levering, I think it's going to be not anything like we've seen in the past five years, and I think some people are going to get taken out to slaughter, if you will. But I think the people that are smart and have done well will survive whatever headwinds are forthcoming and are going to end up in a good spot on the tail end.
Ash Patel: When you evaluate a deal, is there a certain cap rate that you won't go below?
J.C. Clemens: On the front end, that's a tough question to answer, because you're doing value-add deals, you can have down units, you can have all kinds of stuff. So your T12 cap rate could be a one or two. If it's a relatively stabilized deal, we're not going below 4% and 4.25% caps, and then we're underwriting nothing below 5% cap on exits, and most likely 5.25% and 5.5% cap.
Ash Patel: Okay, and that's important for our Best Ever listeners... You can't underwrite cap rates at the same or lower than what you're going in at. A lot of people are still doing that, where they're buying it a 4.5% and underwriting their exit at a 4%. It doesn't work anymore.
J.C. Clemens: No, it did. It did for a while. The rule of thumb for us here is 20 bids a year, is really what we're looking to do on the expansion. If you average it out over the past 20 or 30 years, that's going to be probably about right.
Ash Patel: Got it. J.C., are you ready for the Best Ever lightning round?
J.C. Clemens: I'm ready.
Ash Patel: Alright, J.C., what is the Best Ever book you recently read?
J.C. Clemens: The Best Ever book I've recently read has been one that I read often, which is How to Win Friends and Influence People by Dale Carnegie. A classic written in the - it had to have been in the '70s, and it's really if you're in sales or in any type of business that is heavily weighted on relationships, it's a must-read.
Ash Patel: J.C., what's the Best Ever way you like to give back?
J.C. Clemens: I sit on a handful of nonprofit boards. I think, what I do for our fund as well, whenever I find deals to invest in, I also raise money for our firm. And it's something that I think I'm pretty good at it, so I take pride in being able to raise money for nonprofit organizations that I believe in. Mostly tailored towards veterans and people that suffer from mental health and addiction.
Ash Patel: J.C., how can the Best Ever listeners reach out to you?
J.C. Clemens: You can contact me via email. Our website is www.flagshipsco.com. And my email is just jcclemens@flagshipco.com, and feel free to pop me an email. And you can also get all of my information and phone number on our website.
Ash Patel: J.C., thank you for joining us today, sharing what you look for when you're looking for top-notch sponsors. It's an incredible service that you offer. I know you're going to get flooded with calls and emails from this conversation because people are dying for LP investors. So again, I think this is a great conversation that we had, and thank you for sharing your story.
J.C. Clemens: Thank you for having me and I look forward to hearing from people.
Ash Patel: Best Ever listeners, thank you so much for joining us. If you enjoyed this episode, please leave us a five-star review. Share the podcast with someone you think can benefit from it. Also, follow, subscribe, and have a Best Ever day.
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