What do family offices look for in a deal? How do they manage their investments, are they risk takers or not? How are they evaluating deals in today's market? Irwin Boris is responsible for Acquisitions & Asset Management at Peykar Capital, he has 25+ years of hands-on FP&A, due diligence, and operations experience.

Tell us a little bit about you.
I've been in this business all my life, I have an undergraduate degree in accounting, I passed the CPA exam, I practiced accounting for all real estate clients, and I've always been on the banking side either working for banks, or working for owner-operators and family offices building income producing portfolios.

Right now, I work with a fourth-generation family office, and we're building another portfolio. We aggregate them, and then we look for cap rate compression on an exit. One advantage we have is that we don't really care if there's an exit, as long as it's cash flowing, that's all that matters. We always make sure to take enough terms on our debt to ride out any bumps like we are having now. We don't have anything that matures for a year and a half, so we're safe. The ideal acquisition for us is something where the return is half through cash flow and half through appreciation. We're not buying value ads and selling you on an IRR and I could name a dozen people that are all over the internet, on social media doing that, and some of them are in lawsuits now. It's more important to have cash flow, especially as a family office and especially when you have other families invest with you, or high net worths.

We have a bunch of people in the medical community and for them, it's about having a stream of cash flow when your hands and your eyes are on their game, and you can't practice anymore. If you're getting, 8, 9, 10%, or more current cash flow, you could always reinvest that in and compound it. If I'm betting on an IRR, and I'll have to exit now because my debt is maturing, or you're one of those unlucky people that's getting a capital call notice from one of your sponsors, you're not very happy. Being an older American, as my children will say, I've seen the cycles a few times, I know what I'm looking for and what I'm not looking for, and when we don't take a lot of leverage, we like to sleep at night, if I lose a third of my tenants, if it's a multi-tenant building, we're not worried about being able to pay the mortgage. It's about having all your belts and suspenders, your bootstraps, and being ready for anything.

You're not the first person who started mentioning that IRR is not a good metric recently. But I still remember 2018, 2020, everybody was raising on that IRR and if we are more conservative, they're still going to go with these people that are promising crazy IRRs and now, these people are having cash calls. How do you explain to your investors that it's a much safer investment when everyone else is pitching a high IRR?
It's really easy. If you think about it - it's math. The more or the higher the current cash flow that's distributed, the lower the internal rate of return, distributions are dilutive to the backend IRR. It's like gambling, do you want to bet at all or nothing? If you're focused on an IRR, it has to work out because the chances are, you're getting nothing. I like to sleep at night and I'd rather know that if it's a bad investment, and we had a 10-year loan, and we held it for 10 years, and I got 10% on my money, I got my money out plus the depreciation, and then I got my principal back. If I'm betting it all on something that may never happen, I'll be lucky to get my principal back at the end. Here you get your returns for cash flow and then get your money back so, even if you sell it at a bit of a slight loss after 10 years, you've already got your money back.

It's about safety, the economy ran so hot for so long with these cap rates and these interest rates, which is what fueled all these guys. If you think about it, when the tide rises, even the boats with holes in the bottom come off the bottom of the ocean. It's really what happened. It was really hard to screw up a deal in the last 12 months, you had to really work at it to screw it up. A lot of people made money on some of their first deals, whether it was 2018, 2019, 2020, and they kept throwing more money at it and then all of a sudden, the music stopped. When people ask me what's a bad investment? I say, I got my cash flow, but there was no pop at the end, but I still got my principal back, I still beat the Treasury, I still beat everything else and I slept at night, knowing that I got that money back through cash flow. Don't bet the stars, everybody wants to hit a grand slam, but it doesn't happen. It's a game of putting men on base and scoring runs as one advances the next, like baseball. It's a terrible analogy, especially working with my money in the deal, and family offices where it's family money, even when we syndicate a deal we hold 25% of it. It's about preserving capital, and that's why the cashflow is more important than the IRR.

How were you evaluating deals when the market was hot and extremely competitive? How has that changed today?
We stopped doing multifamily early, about four or five years ago, and we sold a bunch, we only hold one multifamily project that I'm involved with right now. People call to buy it every day of the week. I say, I got six years left on my mortgage, we only have renovated half the units, I really don't care, if make me a stupid offer, and we'll consider selling it because I have no place to put the money. We don't really care about it. I've been doing industrial for many years, it's a cap rate play. What's the spread between your going in, your current cash flow, and your cost to finance? If I could buy on a 9.5 cap, I could finance on a 7.5% and then get 65% leverage with some interest only, I could probably get 8.5 or 9% current out of the deal, after closing costs. That's really what I look at, if you can't do it on a cocktail napkin, don't do the deal.

I went with the principal of a family office, somebody wanted to sell us 1,000 units in Raleigh, North Carolina. This was nine years ago when no one knew where Raleigh was. He wanted to talk to me about the price and he said, you didn't bring your laptop? I said, no, it's really easy. I had an index card, and I said we will take the rent roll, we're going to take 5% for vacancy and collection, and 45% for expenses, here's your net income, we're going to cap it at a seven because I know the financing costs were 3.5% and this is going to be your cash flow. Can you live with that? He said that's a great deal. We went back in and the seller sent us a contract.

If it's a deal that the delta between the going-in cap rate and the financing rate is tighter, it's a question of what does the upside look like? What is it going to cost you to renovate? What is the return on that cost, for apartments? How fast can you get them renovated? With COVID-19, I knew people with projects that they couldn't get employees for. The contractors had no people, some contractors were stretched so thin, and a few of the regional ones in New Jersey filed for bankruptcy because they took everybody's deposits, they got everybody stretched out, and they couldn't finish the renovation. It's about knowing who you're hiring. But now construction costs are so high, I think you'd have to get $500. I'm looking at one project that I was asked to manage for someone, and they told me that it's $22,000 to renovate an apartment, I said, but you're only getting $275, it doesn't pay. Return on investment isn't there anymore. It's simple math, anybody can make a spreadsheet look pretty to an investor. And when you ask a sponsor, can I have the spreadsheet, I want to stress it, and they play dumb, run.

There's one sponsor who's all over the internet and has billions of real estate, they send me these deals that they're buying in Houston, they're buying them from Alliance Residential. It's not a mom-and-pop, they're buying from Alliance Residential, and they tell me that they're going to take the occupancy from 88 to 92% and increase rents by 20% at the same time in three years, and then there's going to be a big cash-out refinance in year three. And then I'm going to get a big pop and still hold it. I said, send me the live model. They said, what do you need it for? I said I wanted to play with the financing assumptions. They wouldn't send it and stopped talking to me. If it's not open kimono, with full transparency, don't work with that sponsor, for your own sake. It's an interesting market out there. The last six, seven years, you had a lot of new sponsors, who were lucky, they made money but as we all read in the papers, some of those same sponsors now have 1000s of units in default, or impending default, or on special servicing, because they're either undercapitalized or the sponsor had phantom equity in the deal based on the fees they took out at closing. So, you have to watch.

Family office’s goal is to maintain their wealth so does that mean that the deals that they're looking for are more conservative, that they're not really looking at that IRR? Do they invest in safer investments? Is it safe to say that they don't really go for the crazy potential exits?
Family offices usually have a mix of capital. Sometimes there is some risk capital, some are angel investors and have been very successful with startups, and they work with consultants that help them find these deals, some will do IPOs, and some are in medical and health care because maybe the office was founded by a doctor, or a medical group, it can be a multifamily family office that does these things. But it's all about how you get out of the deal. Tell me what the exit is, before we get out. Here, we have an operating business that generates revenue that's outside of the real estate. We recently built a large building, and we knew 70% was leased as soon as we broke ground, so we didn't really care that the other 30% was vacant, because it carried itself. Now, we just got the last piece leased.

At this part of the cycle, I don't think I would build an empty building speculatively because I see plenty of empty buildings on the Jersey Turnpike that were built that are all empty, Class A, industrial 36-foot ceilings, I think everybody wishes they didn't build them. But that's why, where I would buy is never going to be something that's going to be the shiny new toy that you want to put on the cover of the corporate brochure. I want to buy things that's going to stay full and pay rent. For example, one of the guys I work with jokes with me that I like to shop on the Island of Misfit Toys because you can move them around and sometimes you can see how to put a little shine on it. When you look at some of these buildings, especially in the industrial, and the Flex side, tenants have a reason that they're there, it doesn't have to be the main industrial area, or it doesn't have to be the central business district.

The one thing I did learn in the last five years, is it's not that easy for employers to pick up and move. I worked with someone who did an exchange earlier this spring, and they bought a building in Indiana. My first concern was that there were only six years left on the lease, and what was going to happen then, but when I looked into the tenant, I realized that they employ 400 people in two shifts of 200 each, and they're open 18 hours a day. They can't move to the other side of town so easily to save $1 a square foot in rent, because the employees could find another job, depending on what they do there, and make more money. Part of your due diligence shouldn't be just about the health of the company in their sales and the real estate comparable, and what everybody else is paying in rent, it should also be around what goes on behind the walls. How many people work here? How long have they worked for you? Talk to their manager, what is their average commuting distance? It's the human side of it that really gives me a lot of comfort, especially at this point where we are on the cycle.

What are some of your hardest deals and lessons learned?
There are always deals that die in due diligence. Hopefully, they die earlier than later because you have out-of-pocket costs. We have one deal that we really liked that was upstate New York, in the vicinity of Ithaca College, it sat on a lot of excess land that was zoned for industrial or multifamily, whatever I wanted to build there. Basically, the land was free, it was a covered land play with a lot of excess land where the current ownership had already gone through the PUD approval with the municipality. I just needed a site plan.

In the middle of due diligence, the seller told me that their major tenant called them and said that they don't need all the space, they want to renegotiate the lease and give back 20% of the space. I said I don't want to deal with this now. And then the lender's appraiser found that was a sublet listing on Costar for the space. Unfortunately for the sellers, who were all in their late 70s and early 80s, they've owned this for quite some time, they asked me, what do we do? I said, you really don't have a choice but to renegotiate their lease now and ask them for another five or seven years before their options because three years from now, when they are up for renewals, they got you, and they'll tell you what they're going to pay. Here, you still have a little bit of strength. They ended up taking my advice, and they took back the idea, they brought down the rent a little bit, and they have seven years left before five-year options. But unfortunately, based on the revised income, I couldn't stand behind the price anymore.

There's always going to be deals in due diligence that die in due diligence. And there's no way to flush those out in advance. One thing I do with commercial buildings is I like to get the 10 largest tenants on the telephone and interview them. How's business? How many people? What are you doing? Are you back in the office? Are you still remote? How's the square footage working out for you? You flush a lot of these things out when you have those interviews. Don't just rely on an engineering report, an appraisal, and the financials because the tenants are going to tell what you the future of the building will be after the close.

One of my favorite commercial books says the same thing, "Talk to all of the tenants, as many as possible."
It's important. I bought a deal at the beginning of COVID in Atlanta. In an interview with one of the tenants, I found out that they needed another 5000 square feet that the seller didn't know about it. So, you might get some positive surprises, too.

We just got news that the rates are going to be the same for a while, where do you think things are going? When will you be investing.
We're investing now, we have an accepted an offer on a sale-leaseback, it's 800,000 sf in three locations. We are buying at a high cap rate because of the cost of financing, we will structure it to protect ourselves. On a high-rate environment, especially on a multi-asset portfolio, it's hard to figure out what the future value is in three different states. We're not opposed to amortization, that the investors will get 8 instead of 9% on their money, which is still fine and still beats the treasury. I made another offer on another portfolio where they were trying to sell it on an 8 and I said, when the Fed raises rates in November, that's going to be your cost of financing. I did it on a 9.25, I'm sure the broker is going to call me and give me an earful, but they understand.

You can never really time the bottom; we're getting to the bottom where we're going to plateau out by the first of the year. If you have capital, and you want to know when to buy, you should start looking now because you can't time the absolute bottom. And if you could, by the time you hit the bottom at that point, you can't get in the water fast enough with everybody else. And at least by then, you will have some kind of a reputation and you close in these markets, so the deals will follow you.

I think now is the time to buy, it's a terrible thing to say but someone said to me, the time to buy is when there's blood in the streets, even if some of it is your own. One person I know told me that was a terrible thing to say because some people are really suffering on their investments, but one man's ill is another man's game. It's just the way it is, it's the same thing with the stock market. There are deals out there, and I wouldn't be afraid to make an offer, even if the broker tells you that it's a ridiculous offer, because you never know what's going to happen. Everybody knows what the cost of financing is, and it's about the sellers coming to reason that they're not getting that money unless they're sitting on it for another couple more years. And I don't think cap rates or interest rates are going to go back to where they were two and a half years ago. I don't think you will be able to get a 3.5%, 10-year CMBS loan again, at 65% LTV. I have some of them, but do I see them? No. We did some floating rate deals, I think I'm 120 over SOFR and SOFR was nothing, so I'm locked in a 2% and I took a seven-year interest rate cap three years ago, the cap is paying, but I don't expect to ever see those numbers again.

The industrial that sold on a 4.5 cap rate, maybe the institutional quality gets to a 5.5 today. Or now maybe it's a 6.5 although brokers are still telling me 6.5 and the guys on the finance side of the desks are telling me it's not trading, so don't worry about it.

Any other recommendations, thoughts, or feedback for our audience?
There are plenty of deals out there, it's a question of looking in non-traditional places. We see it on occasion, from talking to our attorneys or accounting firms, people that have exchanges or people that are thinking of selling, but they just don't know what to do with the money, sometimes you try to structure something where they could take half of their money out and still stay in and get some of the upside with you. Or you can go into contract and give them an installment sale basis, minimizing any tax gains, so they don't have to worry about it. We have people that come to us all the time saying, I have an exchange, what do you have? Where can I park my money? And so, we structure deals with a 7, 8, 9, 10%. There's always money out there looking to be placed, and there are always deals for sale. Talk to brokers, talk to your accountants and attorneys, see if they know anything, don't be afraid to offer brokers a lot less, at least they know you're serious. I'm not afraid to send anyone a letter of intent with the 9 cap on it on a dollar amount, because I know I'll close on that. If I was buying a $10 million deal, I wouldn't even necessarily worry about financing, if I could raise 10 million, I'll buy all cash. If you're an investor who works with smaller deals, think about raising the money and closing all cash. Sometimes, you can get seller financing. I was offered seller financing on a flex property down in the Baltimore market. Unfortunately, we were apart on price, but he was willing to hold 5 years of 5% paper. But he wanted a price that didn't make sense. I don't think I could refinance out. Be creative, don't be afraid. If you're a buyer abd you have cash, I think you're in the driver's seat.

Irwin Boris