In this post we will learn the story of how a successful retail real estate investor actually got into real estate, what was his first deal like, what has been the best deal of his career, and we’ll also touch a little bit about a not so talked about topic: how to deal with political risks in the city that you invest in. We are interviewing Michael Flight, an expert retail real estate entrepreneur who has been active in commercial real estate over the past 34 years. Michael has handled more than $500 million worth of real estate transactions. Him and his partner formed Concordia Realty Corporation in 1990 which has grown into a premier boutique shopping center investment and redevelopment firm.

How did you get into real estate investing?
I was going to college and my older brother and I decided to go to a nothing down seminar where they taught you how to buy real estate with no money down, no credit or anything else. And that fit us because he had just graduated from college and I was still in college. So we went to the seminar and we were all excited to go do this. The first broker that we walked into and said "We want to buy some stuff and this is how we're going do it". He said that that really doesn't work. He said you couldn't get qualified for credit. So I got a job rehabbing apartment buildings with a local real estate investor. He really taught me how to buy apartment buildings and upgrade the tenants as they turn over. And my brother and I ended up buying a three flat in 1984. I have seen a lot of the ugly parts of it, and some really great parts of it.

After the three flat we learned all about the negative and the downside of real estate. The guy that sold it to us was a tenant and he left. As soon as we took over the property, the first day, the tenant on the top floor said he was moving out because he was a Polish guy. They were a young couple and he was worried that two young guys around his wife, that she would end up cheating on him. So they moved out overnight.

The only income that we had on this property was the lowest paying tenant in the basement. We learned all about kicking tenants out the entire gamut of real estate ownership. It was a little microcosm that was my master's degree in real estate from the School of Hard Knocks.

How did you survive that?
That my wife and I got married. We needed a place to live. We were trying to sell it and weren't successful, and neither my brother or I had the time to really put into rebuilding it. So I said, I'll move into it so that because I'll be living there, I'll have to fix it. We got it fixed up, turned around and sold it. The guy that we hired as a broker was slightly younger than me, but really aggressive guy. And he ended up being my partner in 100+ fix and flip deals. We also did a few condo projects together and we did a workout for a hedge fund for a condo project. So it ended up being a long term lasting relationship out of that first initial sale that he did for us.

After that first deal, what happens next?
During my last 1-1.5 years in college, I was working for a gentleman called Merrill Becker, and Merrill was an ex lieutenant colonel in the Army. He owned a number of different apartment buildings throughout the city of Chicago and he would buy B-class properties. As the tenants rolled over, he would renovate the apartments and then get more rent out of them as he flipped them over. He taught me a ton about how to buy, what to look for, and all the rest of it. And when I was ready to graduate from college, I thought I was going to get a job with him. And that he didn't have the money or the payroll to put me on a job, and recommended that I become a commercial real estate broker where I can learn more about investing, make some money, and then invest the funds from the commissions.

I went out and started looking into and interviewed with a number of the larger companies and the larger companies didn't take me because I didn't have a degree in real estate. My degree was in sociology and psychology and I decided that I was going to go into retail real estate because, being a little bit lazy, I didn't want to keep cold calling industrial tenants or office tenants because you would cold call them all day long. And once you find a tenant that wanted to move, you moved them, then you would have to start over.

With retailers, if you got a tenant to go into one of the properties that you were representing, and they weren't represented in the market, you could also get them in an exclusive representation agreement, especially in a market the size of Chicago. You could end up doing anywhere from six to twenty to twenty five stores. That's what I ended up doing, and I ended up representing a few different tenants. And that's where I met my next employer, a large syndicator out of Philadelphia. They had owned around two hundred and seventy shopping centers nationwide. So I went to work for them as a leasing agent.

At what point did you decide "This is great money. How do I get into this now?"
I was making very good money for the syndicator. I worked for them for about a year and a half. Right around 1989 to 1990. There was a thing called the savings and loan crisis and the economy went into a recession. There were foreclosures and all kinds of other things happening. And they had also changed the tax laws so that syndicators back in the 1970s, 1980s did all these syndication deals based on taxes alone. The majority of them didn't even make money. They were just there for doctors because at the time before they changed the tax laws in the mid 1980s, I think the highest tax rate got up to 70 to 90 percent.

There were all kinds of crazy deals. I had one deal in southern Illinois that had four loans on it. There was the regular loan and then there were three wraps on the initial loan and they would just stack up debt. They would do all kinds of crazy things just to get accelerated depreciation and everything like that. But the recession came and they laid off everybody because they made all their money buying properties, they made huge acquisition fees, etc.

Once that pipeline dried up industry wide, all the developers and everybody throughout the country were laying people off. The buzz phrase at the time was "Stay alive until ninety five". I was friends with a guy who worked for another mall company and he had been laid off as well. Around the same time, I had started my company. I was living at home, and worked out of my mom's basement. Him and I started the company in 1990 and we just got 500 square feet in the attic of an office building in Oak Park, Illinois. And to defer some of the cost, we subleased to a friend of mine that had started a computer company. They were making all kinds of money. We actually had to work a job delivering papers in the morning and then come to work and work. In 1990, we were doing workouts for institutional investors. One of the guys that I worked with before was an asset manager at another company and worked with institutional investors at that company.

He needed somebody to do some things in the Mid West for him. So we started managing and leasing their projects and eventually joined ventures with them on one or two deals. And then there was another guy that went to work for a real estate investment trust, we did a few workouts for him on two of their properties. And another friend of mine ended up working for a pension fund consortium based out of Holland. It was called Sara Creek Properties.

They were publicly traded in Holland and they had bought several properties in the United States. And then we redeveloped a few malls for them. Eventually they dissolved that company. It morphed into Merchant Equity Partners. All throughout the 90s, up until about three years ago, they were our major joint venture partners. They would get the institutional investors and we we would find the deals and be their deal operator. With them, we joined ventures with Soros funds, we joined ventures with Westbrooke Partners, which are major hedge funds. And we joined ventures with a few other hedge funds, a few pension fund advisors, and one insurance company. And that really worked out great up until my friend Jeff went in for an elective procedure and passed away on the operating table. Their company closed down.

Tell us bout your best deal.
There are a few best deals. There's one that we're still working on. We started managing it in nineteen ninety and we've redeveloped it three times now.
We've expanded or renewed most of the tenants in the shopping center. It's a 300,000 square foot shopping center in suburban Chicago. We've actually torn down and rebuilt forty five percent of the shopping center. We took a Walgreens that was doing phenomenal volume and moved them to an aisle parcel that was just vacant, a parking lot. Over the years, the managing partner that became partners with us on a few different projects that we've done, that's just been a great project for us to expose us to a lot of things, not only with that, but geotechnical problems with soil stability. I'm fairly certain that most of the environmental problems are corrected, but every time we stuck a shovel in the dirt over there a new underground storage tank would come up. The other exciting thing was that it was in two major motion pictures. The first one was Wayne's World. The other picture was with Morgan Freeman and Angelina Jolie, for the movie Wanted. And they blew up one of the stores that we were replacing anyway since they were going out of business.

We also had a shopping center in Wayne, New Jersey, and it was not a very successful mall. It had a very attractive food court. And The Sopranos would shoot there because they would know they wouldn't be disturbed and they wouldn't be disturbing anybody because there was not a whole lot of business being done in the mall.

Is that profitable?
Sometimes they pay really well, we have a television show being filmed at the high school behind one of our centers right now. We make a thousand dollars a day just allowing them to stage in the back parking lot of the shopping center when they're shooting. Sometimes it's OK. A lot of times it's more hassle than it's worth.

We don't deal with any permits. All we do is show them our license. And a lot of times they will have their license agreement. So you'll have to change their license agreement or their location. And you need to make sure that they have insurance. You need to make sure that all the rest of it is covered. But they do all the permits. And then most of the time, most municipalities want them shooting because they bring a lot of people to the city.

Why was the 300,000 square feet center one of your best deals?
Because it continually gets better and better. As the tenants go out of business, we've been able to replace them with better tenants. We had a supermarket that took seven years to get the lease done and built. It was with a large company called Myer, based out of Grand Rapids, Michigan, they're a phenomenal company, probably the second or third largest private company in the United States.

We thought they were going to be an excellent supermarket, they were ninety thousand square feet. And it turned out that they really didn't merchandise well to the local economy. And then this is another thing that I think people really need to take a look at, especially if you're in California, New York or New Jersey, is that, you have political risk. Meyers only had four stores in Cook County, but Cook County decided that they were going to change their minimum wage way above the rest of the state, and the surrounding states, and Myer was a unionized company. If they had to pay their workers in Cook County higher than that, it would affect all the workers in their surrounding stores. So it would have ended up affecting their entire company. And then Cook County also passed the soda tax, which made things more expensive. And then the biggest problem is the real estate taxes there. The average real estate taxes for shopping centers in the United States are anywhere from $1 per square foot up to $4 per square foot on the high side. This shopping center is at $9.50 a square foot. That's average in Cook County. After four years they realized that this isn't going the way they wanted to do, that this was going to create a lot of other problems in their business.

They closed all their stores in Cook County. It took us about a year to replace them. Myer was doing X amount of dollars in volume, which was okay for a supermarket. It's probably double what a normal supermarket is. But the guy that we replaced them with is a local retailer and he's going to do double the volume that Myer was doing. So we don't have a parking space in the shopping center anymore. It's doing so well, not only with Tony's, but we've tenants in there that are at the top of their chain. Walgreens does three times the national average of what a normal Walgreens does. Marshals is way above, and the Ross that we recently put in are way above the national average. It's just a good deal. And it's all because not only does it have a great location, but we've been able to merchandise it well to orchestrate those type of sales.

How did you feel to negotiate a lease with this supermarket for seven years? And why would they take it that long?
They initially were interested in it, and then they put a hold on doing things in that market. We then started with another company which was owned by Kroger. It was called Food for Less. The city did not want Food for Less there because they wanted a higher end grocer. And so we had to go back and restart the negotiations with the other guy and try to convince them to go in there. It takes a long time sometimes to do some of these deals. We're starting on a deal right now and we're expecting that if we get the lease signed by June of next year, that tenant will open up in time for Christmas.

We just had a Pet Supplies Plus store just open today. It's their soft opening. I just went over there on the way over here just to take a look at how they looked. This was a deal that took probably a year and a half a year and three quarters to close.

That sounds a lot more reasonable.
We used to be able to do things where we could bring out a form lease. When I was working for the syndicator out of Philadelphia, we could just take a flight out to Ohio or something, show up with a form lease to a local tenant, and say "Sign here, here's your copy, thanks a lot. Here's the keys of the store." It's a lot more complicated now, a lot of red lines.

You briefly mentioned that the city wanted you to have a different tenant, can you elaborate there?
We have run into that in a number of different municipalities all over the country. It really depends on how strict their zoning laws are. It really depends on the individual city. That's why if you're buying a shopping center, you're going to have to live with whatever is the political system in there. Even if it's in a good state like Texas, it could be a difficult city. You need to know about that in advance. Now, we've had situations where we were doing a facade renovation on our property in Connecticut, next to New Haven. Most of the guys that were on the zoning board, probably three of them, also taught in the Architectural Department of Yale University. They all thought that they knew way better than the property owner what was needed for the shopping center. We went in with plans and they actually redesigned a large majority of the plans.

And that's how much control they have over most of the time with the facade renovation. It doesn't require a zoning permit and you would just go in for a building permit. But some of these municipalities have very strict zoning code, signage code, design code. They're into the minute details. Another thing that triggers some things is if the municipality has traffic planners. So if you decide to change any part of the parking lot, they will tell you that you need to do this and that in the parking lot. You just need to be aware of some of the things that go into it. Slightly different than owning apartment buildings. They're more visible and so cities take a more active interest in it, and a lot of times they generate sales taxes, so cities take a larger interest in it as well. They're kind of your partner, but without putting any money into it.

Michael Flight