Adam Rosenkranz is the chief investment officer for Christina, a Malibu-based real estate developer, manager, and sponsor founded in 1977. He got his start managing real estate assets for high-net-worth individuals at Wells Fargo in San Francisco.
Today, Adam is responsible for Christina’s acquisition due diligence, financial management of their in-house property management team, and implementation of the business plan. In this episode, he discusses how his company’s 45-year track record influences their acquisitions, how they structure their deals, and his thoughts on short-term debt.
For the last seven to eight years, property has gone up in value and there has been an abundance of buyers. However, Adam says the tide will inevitably change. “When there’s an abundance of capital and availability of capital out there, anybody can be a buyer,” he says. “But the west side of LA is a supply-constrained region.”
Because Christina has gone 45 years without ever losing a dollar, they’ve developed a consistent investor base. Sellers that value certainty of performance know they can always count on Christina to come through, and that has established them as a preferred buyer in their chosen market.
Adam advises other real estate investors never to finance a long-term investment product with short-term debt. “I think that that is one of the main ways in which you can go broke,” he says, “And I think if you have multiple monetization strategies, and you buy the best locations, and you forget the rest — that’s probably my best advice.”
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TRANSCRIPT
Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I'm Asha Patel and I'm with today's guest, Adam Rosenkrantz. Adam is joining us from Malibu, California. He's the chief investment officer of Christina Development Corporation, which is a real estate developer, manager and sponsor founded in 1977. Adam is GP on about 20 properties that range from mixed-use, retail, office and multifamily. Adam, thank you so much for joining us today, and how are you?
Adam Rosenkranz: Ash, I'm doing fantastic. I appreciate the opportunity, I look forward to speaking with you, and happy to be here.
Ash Patel: It's our pleasure. Adam, 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?
Adam Rosenkranz: Absolutely. So I'm the Chief Investment Officer for Christina Development Corporation, which we just call Christina now. I've been with the company now for four years, and prior to that I worked for Wells Fargo's private bank up in San Francisco. So I managed real estate assets for high net worth individuals, some family offices, and trust business as well. So if you were a wealthy individual and had a portfolio of let's say $50 million of equity with the bank, and you wanted to go out and diversify your portfolio and gain access to direct investment in real estate, we had an arm of the bank that would go out, acquire properties, work with local property managers to manage them as well. So that was a little bit more bureaucratic; it was a real estate company within the confines of a rigid financial institution.
So I enjoyed that, I got a broad experience with a lot of different great properties... My geographic region was based from basically Monterey, to Humble, to parts of Southern Nevada as well, but primarily based out of the San Francisco Bay Area. I wanted to find some a little bit more entrepreneurial, so the opportunity with Christina came up, and it was one that I just could not pass up, because the investment outlook was exactly aligned with how I look at real estate investing, being geographically focused, multiple paths to monetization.
So today, I'm responsible for acquisition due diligence, management of our in-house property management, team development, implementation of the business plan, and I work very closely with Larry, who's the CEO and the founder of company, on sourcing these opportunities. And we have a unique acquisition strategy that I'd be thrilled to talk a little bit more about in depth. But it's myself, our CFO, Vincent Chan, and also Larry, who is our CEO and founder, who are the managing members of all of these investment opportunities, that are all held within the confines of Christina Real Estate Investors.
Ash Patel: Adam, when you were with Wells Fargo, I'm assuming it was all institutional-grade assets.
Adam Rosenkranz: Primarily, that's correct. A lot of class A product.
Ash Patel: And with Christina, is that still the case?
Adam Rosenkranz: It's not. There's not a lot of compelling acquisition opportunities in the class A space in the West side of L.A. So Christina is primarily focused on event-driven acquisition opportunities, right? If it's not a death, divorce, bankruptcy or partnership dispute, we're probably not interested in. And that may sound cliché though, of course, Ash; of course, anybody would love to buy in those instances. But for us, being geographically focused for 45 years, we have a unique access to brokers, lenders, trustees, financial advisors, CPAs, that kind of give us the opportunity to acquire properties before they become available to the broader market.
So it could be a property built in 1960, or it could be a property built in 2017. If they have some sort of stress characteristics or a need to sell, versus a want to sell, that's kind of where we look to capitalize on. We're product-agnostic. I don't care if it's office, if it's multifamily, if it's retail... We're just location-specific. So we focus on exploiting and extracting value from the 100 square miles on the West side of LA, where we really understand what gives value to real estate in this area, and we can capitalize on those underlying demand drivers. So the company, through its 45-year history, has got extensive experience, and holdings; over 120 properties, retail, office, multifamily. So we're just more focused on the uniqueness of the opportunity, versus the specific product type.
Ash Patel: You mentioned earlier your acquisition strategy. How do you effectively get all of these people to call you first, when there's an opportunity?
Adam Rosenkranz: Assurety, of close. 45 years of a track record of that. So in a good market, like the last seven to eight years, everything has gone up in value, there has been an abundance of buyers, but the tide will change, and real estate is cyclical, and I think there's a lot of people who think that we're probably at the top of the cycle, heading on the way down... When there's an abundance of capital and availability of capital out there, anybody can be a buyer; but the West side of LA is a supply-constrained region, right? There's high barriers to entry; it's tough to just kind of blow into town and think that you're going to be able to make your mark and find good deals, because there's so many unique elements of this particular area. And I think that's in a lot of ways what has given us success, is there's a track record. 45 consistent years without ever losing a dollar, and always having a consistent investor base that we've been fortunate to come along with us for such a long period of time.
Sellers - when you need to sell due to, say there's a death, you need to pay estate taxes, sometimes sellers value certainty of performance over price. And if you can show for 45 years you've performed in every single market cycle, you may be the preferred buyer for something.
Ash Patel: I would hate to compete against you guys on a deal. I've got a 10-year track record. You guys have 45 years. I would imagine what that can do for you. You mentioned location-specific, 100 miles west of LA. Let's dive into that. What is it about a location that would make you not want to do a deal?
Adam Rosenkranz: That's a good question. So it's 100 square miles that we kind of collectively call the West Side region of Los Angeles. It's Santa Monica, Beverly Hills, Brentwood, Century City, West Hollywood, Westwood, Silicon Beach and Venice. So those are the areas that we know, and really, Larry Taylor, our founder, actually, when he was growing up, he was fortunate enough to be mentored by Jerry Buss. The Jerry Buss... Who said, "Larry, the only way that you can guarantee your investors will never lose money is buy Brentwood and Westwood. If you buy Brentwood and Westwood, you'll never lose a dollar. And if you lose a dollar, an investor will sue you. If you don't make them money, they'll never invest with you again. And when you make them money, they won't say thank you." Fortunately, that hasn't all rang true. We've been fortunate to have a lot of investors for a long period of time, we've never lost money, so we've never had that issue... But the undertone there is that when you buy in supply-constrained markets, where there's not infinite vacant land; you're never concerned about an oversupply.
So that for us is a big thing. We want to find micro kind of locations within these broader geographic areas that are severely supply constrained, because that will help propel consistent upward rent growth and property values. And for us, when you look at the kind of uniqueness and the resiliency of the West side of LA, number one, you've got arguably the best whether, you've got significant job opportunities, and you have very stringent zoning laws. So those things have all kind of helped stifle supply, which you never get into a concern of -- there's a lot of other great markets out there, but if you're in Plano, Texas, you could build an industrial facility and then the developer down the road could buy a plot of land and he could build 30,000 square feet of space and take your tenant from you. So these supply-constrained regions for us are really what we find to be paramount when looking at good investment opportunities. So a bad market for me would be one that doesn't have sufficient demand, and has an oversupply or availability of oversupply.
Ash Patel: Adam, you mentioned you don't look for institutional-quality assets anymore. How far down in the weeds will you go?
I will go down anywhere for the right deal, in the right location, for the right price. Look, at the end of the day, we're stewards of investor capital. That's ultimately what we are. So we want to make sure that we're making decisions that are in the best interest of our investors, and offers a dual path to monetization. We believe that that's been the cornerstone of our successful last 45 years; if you have more than one way to make money, you're not at the whim of a changing market. And Larry has always impressed that upon us, is if you can't find a reason or another way in which you can make money, then it's probably not a property for us.
So class A, Class B, institutional quality... A lot of the West side is under-maintained and under-managed. A lot of it was post World War II, there's 15,000 seismically-impaired apartment buildings in the West side of LA that have to be upgraded, so from a condition and a quality perspective, you may not find the best-looking properties, but they're in the best location. And if you can upgrade them and restore them in a way that's consistent with the tenant demand, and you can strengthen them, and you can make them better for the future, I think those are where opportunities lie as well. But yeah, we don't get as focused on Class A, Class B institutional quality. It's more of just the right property at the right location, and the right price for somebody that needs to sell, not wants to sell.
Ash Patel: What is the metric that you use? Is it cash on cash returns?
Adam Rosenkranz: That's a great question. So actually, what we have going on right now is we have two different offerings that are available; I won't digress too much, but one of which is an income-builder opportunity, where it's a non-levered portfolio. And that's something that we've kind of had a growing investor base call for, is they want more consistent quarterly cash distributions without the risk of any leverage. So we've kind of taken from a big bond pool of investors, and we're seeking out more current income with the tax benefits of real estate; we're very focused on that. So for that model, it's absolutely going to be a cash on cash return metric.
But for the Wealth Builder, which is a traditionally levered portfolio, [unintelligible 00:11:41.21] 40%-50% loan to purchase price, go buy a property - that's going to be more towards long-term wealth preservation and capital appreciation.
So we're not really IRR, cap rate investors; we believe more in multiples invested capital. Holding the real estate for long-term, mining it for all of its tax benefits, pulling your money out through refinancing, and continue to own the cash-flowing assets forever. So we have properties the company has still owned since 1985, not because there wasn't a willing or interested buyer out there, but we've returned our capital to our investors four or five times over, and we still own it, and we don't want to pay the tax.
Ash Patel: Adam, is this a fun that investors can get in and out of?
Adam Rosenkranz: It's not. It's a private equity company. So we don't love the word fund, because we think it has this kind of negative connotation, where it's very opaque, and it's high fees, and it's all of these kind of -- the Wall Street elements that investors have come to know. So these are companies that own multiple properties within a portfolio, and we do that to optimize the tax benefits, primarily through depreciation and amortization deductions. So it's a private equity company that investors can commit capital to, and depending on the strategies [unintelligible 00:12:52.21] you're gonna have quarterly distributions; there's a degree of liquidity there, but unlike a REIT, where you can buy in and out. Real estate is illiquid. In the West side of LA it's more liquid than it is in other areas, because there's always going to be demand for the product; it may not be at the price you want, but there will always be a degree of liquidity that you may not be able to get in other markets. So it's not a traditional kind of in and out vehicle, which we don't really believe is consistent with the fundamentals of real estate investing anyway; that's just our opinion, not that there's not a good strategy out there for everybody else.
Break: [00:13:26.22] to [00:15:13.20]
Ash Patel: Why do you have investors that want unlevered opportunities? Why not use bank debt, that's really cheap, and increase the returns?
Adam Rosenkranz: Well, we have both. For 45 years, we've pretty much had the same strategy and structure with respect to using conservative leverage to enhance returns and to optimize your investment metrics. So I completely agree with you; we've got almost 400 individual investors now, and we had a lot of people who are interested primarily just in consistent cash flow without interest rate risk, who are not as concerned about maximizing their IRR and want to be able to create a kind of tax sheltered vehicle, which you can do in our structure and strategy. So you can use the accumulation of passive losses for the portfolio investments to offset the quarterly cash distributions that are made. And if you continue to invest in our offerings, there's an opportunity to provide a tax-insulated vehicle, if done right in concept, in perpetuity, as kind of an alternative to a 1031 Exchange. We actually don't believe in utilizing 1031 exchanges, because if you've spent all that time, effort and energy to monetize an investment and you were fortunate enough to sell it for a profit, the government gives you a narrow timeframe that you have to identify a property, and oftentimes, people are overpaying for those properties. We don't believe in overpaying for something just to shelter the tax. If you continue to own investment-grade real estate, and you can monetize the properties in a way in which that is more tax-centered - so refinance some tax-free proceeds - that is not taxable.
So we're very focused on trying to minimize taxes. But I do agree with you the non-levered portfolio is not for everybody. But we have a wide variety of doctors who are investors, who are looking for supplemental cash flow. I think that there is a bit of leeriness in the market right now, in a rising interest rate environment; taking on too much debt can be non-accretive... Although when this company started, Larry's first interest rate, I believe, was in the 21,5% range. So from a historical standard, six percent is not too bad.
Ash Patel: Adam, your outlook on office space.
Adam Rosenkranz: [unintelligible 00:17:13.15] need to be repurposed. I think there is growing demand for people to come back to office. I know we've seen it within our own company, with colleagues... And I think that there will never be a time in which offices are obsolete. There's a reason why Google, there's a reason why my former alma mater, Wells Fargo is still building these large campuses, is because this is where some of the best collaboration and ideation of new ideas comes up. And the interpersonal connection that you have is, I think, in a lot of ways unparalleled, and especially for younger folks coming into the workforce, I think having that mentorship is especially important, that you can't quite get the same benefit from over Zoom.
The city of Los Angeles, and other municipalities that we operate within, they're doing everything they can to stimulate housing development, and that includes the conversion of office space into habitational space, and there's opportunities there to take advantage of density and floor area enhancements that you can get. And that's done with the goal of helping to alleviate the housing crisis that we have. But nobody's going to want to come in if it's not voice-activated. Elevators, I think those are one of the things that are going to be interesting; you know, you want to have an enhanced HVAC system, there's going to be probably more of a focus on owner-user spaces... And you're still seeing it in New York right now. I believe the article that I read most recently was 40% office vacancy in Manhattan... And I think the one element to that that is oftentimes overlooked is you have a whole new generation of graduates coming out of college the last few years, who have never worked in an office, and then to tell them "Now you suddenly have to come in every day" - I don't foresee that as ever being the case again. I don't think that there will ever be a time in which we had the same type of office environment pre-COVID. But the need for office space will always be there, and I think that the class B and C office space, going back to the kind of institutional quality, will suffer more than the class A, which has been updated and modernized and amenitized in a way that will help attract workers that come back to the office.
Ash Patel: What kind of office space would you buy today, that was not going to be repurposed?
Adam Rosenkranz: That's a good question. I think anything that's near a major employment center... And of course, that's a little bit vague, but I'm actually sitting in an office right now in Beverly Hills, in an office building that has got primarily entertainers, movie professionals, film producers, and it's got 100% occupancy, and it's had 100% occupancy because it's near the entertainment capital of the world. And I know it's kind of a little bit cliché to say, but... There are areas where there's demonstrated demand over the long term; we expect it will continue to maintain that and people will want to be, but we're really looking for office spaces near what we call high-street retail walking streets as well. So the Montana Avenue of Santa Monica, the South Beverly Drive in Beverly Hills, the Larchmont Village and Hancock Park... Areas where you could have that kind of experiential street retail experience and you can work close to that, where you can get out, you can go get your coffee, you can go get your lunch, and it's open air environment, which we always felt like our investment strategy was moving towards even before the pandemic, where big box retail was kind of falling out of favor... So having office space in close proximity to walking streets, where people are out there, and like I said, experiential kind of consumer-facing - I think people will gravitate towards that, and they enjoy it, and they prioritize being close to where they work, and to where they live, and where they can shop.
Ash Patel: Great advice. So yeah, for the Best Ever listeners out there, don't be afraid of getting some office space, and maybe just a couple-story building in a downtown, walkable suburban area, where there's bars, restaurants, and you can go to lunch to... You know, those are on fire.
Adam Rosenkranz: Absolutely.
Ash Patel: In terms of returns, what do you shoot for on a property that you're trying to maximize returns on?
Adam Rosenkranz: Christina has got, like I said, a 45-year track record. So we had an audited performance report that was done, I believe it's from 1993 to 2015, which was the time in which we changed strategies was through 2015, and we can go into that quickly if you'd like. But we had over a 20% IRR and over a 2.03 multiple of invested capital. So we had very strong returns for a very long time, and we're very proud of that. We actually don't give projections to our investors, which is very contrary to what a lot of our competitors do out there... Because we believe ultimately, at the end of the day, a projection is just that, it's a projection, it's not a guarantee of a result. We don't believe in preferred returns, we don't do a waterfall. We do a standard 75/25 split, and we believe to own real estate with a long-term outlook, but always, obviously, do what you can to monetize that investment as quickly as possible.
So I can always tell you what we've historically done; that's not necessarily going to be an indication of the future, but I think that there's a reason for 45 years we've been in business, never lost a dollar, and still have investors who've been with us since 1977.
Ash Patel: What's your advice to a lot of syndicators out there that have the typical structure, the waterfalls, the pref? What do you see that they're doing wrong? Or if you were in their shoes, what would you do differently?
Adam Rosenkranz: I don't necessarily think they're doing anything wrong. I think everybody out there has got their own strategy, and I really respect that. I think that what we're doing is special and unique. But if you're doing a single asset syndication, the only thing that I would say is I don't think that you're maximizing the tax benefits that you can get. So if you own a retail building in Tennessee, and it's got a tenant in there, and it's doing well, you can only utilize the passive losses generated through depreciation and amortization against what's available to you at that moment. So if you have excess losses, they're just suspended. So there's a time value that you're not able to capitalize on there from an investment return standpoint. Whereas if you own real estate in a portfolio structure like we do, you can have property A, B, and C generating all of these losses, E and F and G are all providing consistent income through whether it be a sale, two properties are sold for $30 million, and you got $30 million of passive losses accumulated on the other three properties - you can completely offset that gain. So for us, the multiple properties in a portfolio structure was designed to capitalize on the generous tax benefits given to real estate investors. Perhaps no other industry is primed by the US government like real estate; I guess oil and gas from depletion allowances as well, but... If we're not focusing on the tax efficiency of the investment, it's probably not in designed in the optimal way.
But the other thing I would say is never finance a long-term investment product with short-term debt. I think sometimes short-term syndicators have a 7 to 10-year or 5 to 10-year investment life - I think that those people are in a world for hurt when you set a defined timeframe to liquidate a portfolio; it may be inopportune, you may have a bullet coming available, you may have a rising interest rate environment and the credit markets tighten up, and there's no capital available for you to refinance that loan.
Ash Patel: That is great advice. What's the minimum dollar amount that you'll spend for an asset?
Adam Rosenkranz: That's a good question. So we typically invest in the $10 to $15 million range; it's below the institutional level and above the mom and pop, so we try and kind of carve out that little niche marketplace where our purchasing power we think is the best. And we always kind of joke, it takes the same amount of time to do a $5 million dollar deal as it does a $25 million deal, so why not do the $25 million deal? But the fact of the matter is as well as that we are just looking for the best opportunity. If we see an undervalued property that we can maximize the value of and perform well for our investors, we will do that. But we're always focused on designing a portfolio and curating a portfolio that is not overly concentrated in development, or is not overly concentrated in one product type. So you're trying to get a little bit of diversification within that portfolio to the extent you can. It's a lot about -- we call it a family. So some of your children need braces, some go to college, some go to trade school and do just fine, and don't need any help.
So you've gotta manage the capital needs of the family as well, to make sure each individual property stands on its own and performs well, but the broader parent company does well. So we manage the portfolio accordingly with the needs of each child and what their needs may be.
Ash Patel: Adam, what is your best real estate investing advice ever?
Adam Rosenkranz: Well, I think it's honestly never finance a long-term investment product with short-term debt. I just think that that is one of the main ways in which you can go broke, and I think if you have multiple monetization strategies, and you buy the best locations, and you forget the rest... That's probably my best advice.
Ash Patel: Adam, are you ready for the Best Ever lightning round?
Adam Rosenkranz: I am. Let's do it.
Ash Patel: Let's do it! Adam, what's the Best Ever book you've recently read?
Adam Rosenkranz: I'm primarily a print journalist. I like to read the newspapers. But I'd say Fear by Bob Woodward on the Trump presidency. It was very interesting.
Ash Patel: Adam, what's the Best Ever way you like to give back?
Adam Rosenkranz: We are stewards of our own community. We live in the area that we work. We're part of a number of different charitable foundations. Actually, Larry Taylor, our CEO and founder is on the LA County Fire Department board... So we try and stay involved and intertwined with kind of the local officials and help better our local community. We do some volunteering through -- I'm a big animal guy, so I actually volunteer at the animal shelter, but... I'd say right now primarily through the LA County Fire Department board.
Ash Patel: Adam, how can the Best Ever listeners reach out to you?
Adam Rosenkranz: You can email me at Adam [at] ChristinaLA.com, or 310-728-1787. And we would love to have any of the Best Ever listeners participate in our Christina Five offering.
Ash Patel: Is there a minimum to get into that?
Adam Rosenkranz: There is. It's a $250,000 minimum investment.
Ash Patel: Got it. Adam, I've gotta thank you for your time today. Coming from the institutional quality assets of Wells Fargo, and coming into a much more nimble, what seems like a much more interesting company, teaching us some lessons about structuring deals, and some lessons about debt... So thank you again for your time today.
Adam Rosenkranz: I appreciate it, Ash. Thank you very much. I enjoyed speaking with you.
Adam Rosenkranz: Best Ever listeners, thank you for joining us. If you enjoyed this episode, please leave us a five star review. Share the podcast with someone you think could benefit from it. Also follow, subscribe, and have a Best Ever day!
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