JF2212: Process Of Institutional Raising With Kevin Riordan

• Full-time professor at Montclair State University teaching real estate courses 
• Has been investing in real estate for 30+ years
• Career has been focused on the institutional side providing debt & equity capital, public and private, for commercial real estate
• Also took Crexus Investment Corp; a commercial mortgage REIT, public in 2009 
• Based in Montclair, New Jersey
• Say hi to him at: riordank@mail.montclair.edu 
• Best Ever Book: Grant by Ron Chernow

Theo Hicks: Hello, Best Ever listeners. Welcome to the best real estate investing advice ever show. I am Theo Hicks and today, we are speaking with Kevin Riordan. Kevin, how are you doing today?

Kevin Riordan: I’m well, Theo. Nice to chat with you.

Theo Hicks: Yeah, absolutely. I’m looking forward to our conversation and picking your brain. Kevin is a full-time professor at Montclair State University, teaching real estate courses. He has been investing in real estate for over 30 years. His career has been focused on the institutional side, providing debt and equity capital, public and private for commercial real estate. He also took Crexus Investment Corp – a commercial mortgage REIT – public in 2009. He is based in Montclair, New Jersey, and you can say hi to him at his email, he provided us with his email address. It’s riordank@mail.montclair.edu. Of course, the link to his email will be in the show notes, so you can just click on that if you want to reach out to Kevin.

Kevin, do you mind telling us a little bit more about your background and what you’re focused on today?

Kevin Riordan: Sure, I’m happy to. My background real quick on the education side; I was an accountant coming out of college, I got a CPA, and I was going down that route. I made a move into real estate on the accounting side, initially on the private side, but I had a little bit taste of actually making some transactions occur at that company, and I wanted to do that full time, rather than being in the accounting groups.

I’d say my big career move I made when I was 30 years old was making a move to TIAA CREF, which is a private pension fund for colleges, universities, non-profits. At that company, I joined as an assistant investment analyst, basically making real estate transactions, commercial mortgages, joint ventures, and I would stay there for 20 years, rose there to Group Managing Director. I started a number of initiatives, I was kind of combining — I was fortunate to be in a spot where public real estate capital is now coming into the commercial real estate space in the form of REITs and CMBS. I was there to structure and create a number of initiatives around that.

I left the company and then took a company public, as Theo has mentioned, called Crexus Investment Corp in 2009. I actually got to ring the bell on the stock exchange. It’s really not a bell, it’s actually a big button you press… But with that company, we were again providing finance capital to real estate owners and borrowers again, also assisting on some joint ventures.

Theo Hicks: Perfect. To make sure I just kind of wrap my head around it. When you say that you’re providing equity – are you providing this money to massive companies who are then using it to buy massive portfolios of real estate, or are these two smaller people who buy multifamily? I’m trying to understand what this money that you’re giving out, where’s it going to?

Kevin Riordan: That’s a good question, Theo. When I talk about working on the institutional side and providing capital for equity, one of two ways we’re doing that. One way we are doing it is we were simply becoming a joint venture partner with an operator. We are the money and then we try to find someone who is the operator developer. So we entered into a number of joint ventures with operator developers, having people on the ground using our money.

The way you would structure deals like that as you would be a partnership, and because you’re putting the money in, you would get a preferred return until some hurdle rates happen. And a developer, then once a hurdle rate was hit, then there is what they call the developer gets a ‘promote’, which is something beyond his equity contribution. I actually teach this in some of my courses. I teach how these are set up in the partnerships and how the money flows. That’s one aspect to it.

The other side, when I said providing capital to owners is assisting them to buy properties. That would probably be more, Theo, through a debt instrument; some type of mortgage instrument or participating mortgage instrument where he’s going to acquire and/or develop a property. And you are going to get, again, some stable coupon as a return, and perhaps share in the upside of the property through some kind of participation mechanism in the mortgage debt.

Theo Hicks: Perfect. Let’s talk about the first example you gave, about you becoming a JV and basically being the money, and then the person you partner with is doing the boots on the ground stuff. And again, just ballpark numbers here, what would be an average deal size you’re talking about here? Are we talking about like million-dollar deals? Are we’re talking about $100 million deals?

Kevin Riordan: A lot of those transactions were done more at my stay at TIAA. Those transactions ranged from $12 to $30 million, and that would be the entire investment. Really, we would put up 95% of the money, if not sometimes 100% of the money. Thenthe  structure would be – again, there’ll be a construction loan to build the project. Then once our money came in, we’re taking out the construction loan, in other words paying that off; we then become the owner as a partner with the developer and then we then have a preferred return.  The first money that comes to us, in terms of the cash flow for the property is up to our preferred return.

Just using simple numbers, it was a million dollars, and you had a 6% return, that would be $60,000. The first $60,000 would come to you if it was a million-dollar investment, and then anything above that you start sharing with the developer. That’s basically the way those things work.

Theo Hicks: Okay, so the reason why I was asking all those questions is because I’m just curious if you get to kind of walk us through—and again, I might still be misunderstanding, but let’s say I’m an investor, I’m an apartment developer, or I do apartment valuate type deals. I’ve been raising money from family and friends. Maybe I’ve expanded out to, I don’t want to say strangers, but I’ve expanded out to people I don’t know as well, right? And then I’ve reached a point where I’ve tapped all that out and I want to raise money from an institution, right?

First of all, let me know if I’m right and that person’s actually ready to raise money from an institution. And then assuming that I am, what steps do I need to take in order to maximize my chances of getting an institution to give me money for deals?

Kevin Riordan: The way you’re setting it up is exactly the way I’ve seen it happen. We’re starting with friends and family, we move from there. Theo, I would just say is the most important things would be first, establishing a successful track record with the things you’ve done. And approaching people, that’s going to be the number one question – what have you done? How has it performed? The first thing is to have that successful track record.

The second thing then when approaching someone is to have a very detailed and informed plan. And again, sufficient information and due diligence will be necessary, so that you can explain your plan to whomever you’re trying to raise money from. If I could use a slight example, when I took Crexus Investment Corp public, and we went out to raise equity, we went to visit a number of institutions.

I had never taken a company public before. I had worked for a private pension fund. And now I was on the other side, where I’m going to raise money from investors and I’m visiting pension plans. I’m visiting Fidelity. I’m visiting BlackRock. I’m visiting all these big money managers.  What did they want to see from me? They wanted to see two things. One, what had I done before, that I know what I was talking about, and number two, what was my plan?

To your listeners, I don’t think there’s any difference between what I’m saying as far as what’s required from myself when I took the company public, versus someone who has been building and owning just small multifamily projects and keeps rolling them up into bigger multifamily projects, to the point—and it’s also important, Theo, it has to have a certain critical mass to it. Institutional money is not going to look at $500,000 transactions. They’re going to look at something that has little substance to it. There’s probably some kind of minimum size transaction that’ll get their attention, and then the other things if you will make it happen.

Theo Hicks: Perfect. Let me take you back – you said that $12 to $30 million for those deals… Is that just the down payment, and then they’re in turn getting debt, or are you covering the entire total project costs?

Kevin Riordan: Those are the entire project costs, and the reason they would differ would be depending on where you were building. For example, one joint venture I did was out in Doylestown, Pennsylvania, which is a really cool little town. But that was a typical garden-style apartment, 210 units, and that probably all-in investment was somewhere around $12, $14, or $15 million. I don’t recall, it was a while back… Versus another project we worked on in downtown Atlanta, which had some construction issues around it, obviously a building in an urban setting, it gets more expensive – that project was closer to $28 to $29 million, if I recall.

Theo Hicks: When you talk about having a very detailed and informed plan. Are you saying for the specific deal you’re wanting to raise equity from the institution, or are you saying just overall business plan for what you would do were you to find a deal? Like, am I going to an institution after I already have a deal under contract, or am I going to an institution to see if they would be willing to give me funds, and then go out and find deals?

Kevin Riordan: The latter is what I’m referring to. That’s where you’re taking your track record with what you’ve done, how you’ve done it, how it’s performed, how you came about getting those transactions, how you made them work and now you just want to put that exponent to them, if you will, right? You want to make those bigger transactions, you want to get larger money, so herefore, what you want to do is have some larger plan ahead of you. It can work that way, Theo; you could go on a contract contingent on getting the financing, but it might be better to have a situation where people will believe in you and then with that, they’ll sort of say, “Okay, this is what we want to do, and with those parameters.” You can take that and go out and try to see if you can fit it into their mousetrap if you will… Because they’re going to have line items to check off. There’s going to be a return profile, there’s going to be a geography profile, there’s going to be an asset type profile… They’re going to have a number of things they want to check off.

And then what’s important from your side is not just the transaction itself. Yes, that’s important. What’s going to happen to its performance, those are all very important, but the other side that’s very important too is they’re going to want to see what is the ownership structure? In other words, what’s the guts of the company going to do to make this thing work?

Again, the money is not on the ground, the money is giving the investment to this person and run it. How do they run it? How’s their accounting systems? How do they report? What’s the depth of the organization? How do they respond to difficulties? How have they responded to difficulties in the past? All of those things will come into bear. It’s not only a question of looking idiosyncratically at the particular transaction, but it’s also looking at holistically, what does the organization bring to bear to make these transactions work?

Theo Hicks: Perfect. They’re looking at deals and you’re also looking at, and they’re also looking at who you are, and who works for your company and what you’re capable of doing.

Kevin Riordan: Right, because the question is really, how do I initially get this going? Initially, getting it going – it’s the two things. But once you get that breakthrough, then it becomes a transaction, you know what I mean? And you’re just looking at transaction. But initially, it’s got to be two things; breadth organization, of as well as an investment thesis.

Theo Hicks: Okay, so how do I actually find an institution? Do I just go on Google and start reaching out to people on Google? Do I go on LinkedIn? Do I just show up at their headquarters? What specifically am I wanting to do? Assuming I have all this setup, I’ve got my track record, I’ve got my super detailed plan, I’ve got my business all set up, I’m ready to go – how do I actually find these institutions?

Kevin Riordan: Great question. I will tell you that my experience would be that that particular individual — let’s call him the entrepreneur, he would have more success if he was successful finding an intermediary to make the introduction. There are a number of types of folks, consultants, mortgage brokers who actually canvass not just on the debt side, but also the equity side. Those types of people have the calling card if you will. 

The presentation initially is going to be — I think, this is an easier way. Because if you think about it, the pure money side, there would be just too much sourcing coming through the funnel, that it would be difficult to parse that. A lot of institutions will use outside intermediaries to help them, if you will, source transactions, and source organizations.

Theo Hicks: Perfect. Okay, Kevin, what is your best real estate investing advice ever?

Kevin Riordan: I think my best advice as something I didn’t do. Here’s what my idea would be. In 2011, I had an opportunity to buy about $2 billion of mortgage debt that Barclays Bank was trying to securitize, but they couldn’t because of the financial collapse, if you will. I only bought $750 million of it. My advice was looking back, I wish I had tried to buy all the 2 billion… And my advice would be, try to be bold. We had the capability of doing more; we erred on the side of conservatism, and I think we didn’t look far enough in advance to see how the winds were going to trade and how real estate was going to perform.

I guess my advice would be to be bolder in your assumptions. I’m cautious too, Theo; I’m sort of talking to both sides of my mouth here, but be bold with what you want to try to do, but understand the risks.

Theo Hicks: Perfect. Okay, Kevin, are you ready for the Best Ever lightning round?

Kevin Riordan: We’ll give it a shot.

Theo Hicks: Alright.

Break: [00:18:09] to [00:19:23]

Theo Hicks: Okay, Kevin, what is the best ever book you’ve recently read?

Kevin Riordan: Grant, by Ron Chernow, and I’ll tell you why. I’m a big Chernow fan, but I read that book a year ago. What I had no idea was at the conclusion of the Civil War – yes, the Confederacy had stopped the war with the Union, but now they had created a civil war with the freed slaves. I think that’s very prescient as to what’s happening today, in June 2020.

Theo Hicks: That’s Ron Chernow, you said?

Kevin Riordan: Ron Chernow. He’s the author of Hamilton.

Theo Hicks: Okay. If your business were to collapse today, what would you do next?

Kevin Riordan: I guess I would try to figure out why it collapsed, and adjust to what happened that made that happen, and figure out, what do I do to avoid that problem again?

Theo Hicks: What is the best ever way you like to give back?

Kevin Riordan: I’m a full-time teacher now, a full-time Professor at Montclair State University. All my people who are either in the business or at the business, I tell them what I do, 100% say, ‘That’s great. I’d love to do that, too.’ I know I’m doing the right thing, and I do teach them exactly what to do in real estate, particularly on the finance side. I help the students with their resumes, I’ll give them some interview tips. If I hear of a job, I’ll try to get them there. I think that’s kind of what I like to do.

Theo Hicks: Is Montclair State University, these courses you’re teaching, is it undergrad?

Kevin Riordan: They’re undergrad. I am technically housed in the finance and accounting department.

Theo Hicks: Okay, perfect. And then the last question is, what’s the best ever place to reach you?

Kevin Riordan: My email at Montclair State University is best.

Theo Hicks: Perfect. Best ever listeners, as a reminder, that email is in the show notes, and how to spell it one more time, it’s riordank@mail.montclair.edu.

All right, Kevin, I really enjoyed this conversation. I always enjoy talking about things that I don’t really know anything about at all and I really don’t know much about how working with institutions works. It’s been an enlightening conversation for me, and I’m sure it has been for the Best Ever listeners as well.

Kind of the crux of our conversation was around how to get your start in raising money from institutions, and kind of talked about the two important prerequisites, one being establishing a successful track record, and two, having a very detailed and informed plan, specifically in the beginning, about your business and your company. Obviously, after that, once you get your foot in the door, it’s more transactional, having a very detailed and informed business plan about the deal you’re working on.

Then you kind of mentioned the two things that institutions look at. One of them is the return, geography, asset class, profile, checklists, things like that, but they also want to know what the ownership structure is going to be, how you plan on running the property, what’s the depth of the organization, how you’d respond to difficulties in the past, things like that.

Then we also talked about how to actually find these institutions. It is essentially through these intermediaries, these brokers, so you’ve got different consultants. I’ve actually talked to mortgage brokers who do equity and debt, so when you’re having conversations with mortgage brokers, ask them if they also do equity and work with institutions, and that’s a great way to get your foot in the door, is through these intermediaries.

Then you gave your best ever advice, which is to try to be bold. Obviously, it’s important to be conservative, but you kind of gave an example of the time you had an opportunity to buy $2 billion in mortgage debt and only bought $750 million. You had the ability to buy all of it, but you decided to remain conservative, and then it sounds like you kind of regret that, and if you would have been bold, you probably would have made a lot more money on that transaction.

Kevin, I really enjoyed this conversation. Best Ever listeners, I hope you did as well. Make sure you take advantage of him providing us with his email address. He’s definitely very knowledgeable. He’s been doing this for a long time and he teaches people how to do it, and they pay him… So definitely take advantage of that.

As always, thank you for listening. Have a best ever day and I will talk to you tomorrow.

Kevin Riordan: Thank you, Theo. A pleasure to spend time with you.

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