DEAL TIME! Industrial Real Estate - Investment Opportunity

Adam Gower: Mark, David. Very happy to meet you, Chase Partners LTD. Thank you so much for showing up on my podcast. Why don't you give me an introduction? Who are you? What's your name and position at Chase Partners and then we'll roll.

Mark Panattoni: Mark Panettone, Managing Director here at Chase Partners. I'm in charge of all things for our fund that we launched this year and I'm sitting here with David Parker, the President of the company.

Adam Gower: Nice to meet you both. Alright, so, what have you got? Tell me about the fund. High level, basic parameters.

Mark Panattoni: Sure. This year we launched a hundred million dollar fund to purchase existing industrial property in Southern California. We love this market. It's growing. It's fast paced. The e-commerce numbers and the and the port numbers are through the roof and we're seeing this market really grow and so we're really excited to bring on some new partners with us and raise some money and buy some really great assets here in Southern California.

Adam Gower: What is the term of the fund, Mark?

Mark Panattoni: Sure. It's a seven-year term with a couple of one year extensions based on market conditions, just in case we need it to liquidate.

Adam Gower: And what's your capital call period? During what period of time are you raising capital?

Mark Panattoni: Ok. We have an 18-month raise with two six month extensions, for the raise period.

 

Adam Gower: Alright now tell me.

 

Mark Panattoni: Started last month.

 

Adam Gower: Very nice. Oh, perfect timing. Excellent. Right at the beginning. We can do this monthly with updates.

 

Mark Panattoni: That's right.

 

Adam Gower: Alright fine so now tell me - industrial real estate. Hey, that is the flavor of the month isn't it? Absolutely no doubt about it. Tell me something about the kind of assets that you're looking for that are going to go into the fund and your underwriting standards.

 

David Parker: So industrial real estate isn't new to us. We've been doing it for 40 years. Panettone has been doing it for nearly as many years and it's not our flavor of the month, it's our flavor of our life and it's what we do. It's what we've been doing it for a long time in southern California. State of California, we can go into the whole state but Southern California is our specialty. We've been doing it a long time. We've been around. We know it. We owned a lot of it. We built three, four or five hundred buildings. We just - this is what we do. Flavor of the month, though. The reason we put the fund together is, there's just a lot of opportunity. It's really, really, really hard to replace industrial buildings right now with environmental conditions, financial conditions. It's a difficult, difficult process. Many cities are putting moratoriums on additional development of industrial buildings due to the trucking requirements and air pollution requirements and those standards. So, we just think there's a great niche right now to buy existing buildings that are - need a little bit of love and care because it's a little specialized, the industrial business and we're just finding tremendous opportunities in the range in which we're buying, which is 8 to 15, 20 million dollar sized building. It's a great market.

 

Adam Gower: Yeah. And, you know, it was completely the wrong term to say flavor of the month. I didn't mean that. You are definitely riding a wave. If you've been in it for 40 years, you've been in the right industry for 40 years. Now is the time. There's no doubt about it. COVID has accelerated all the online trends so forgive me for saying "flavor of the month". That's not what I meant. It is a very high demand asset class. It's a very high demand for investors and it is little understood. So don't assume that anybody that's listening understands anything at all about industrial real estate, especially to the degree that you do. So just drill down a little bit for me, will you, on the kind of asset that you are investing because you have a very specific focus, don't you? So tell me about that eight million dollar sweet spot and exactly what kind of assets are they? Describe one to me. It's kind of - the ideal purchase fee. What does it look like?

 

David Parker: Industrial building is a building - I always tell people when they say: what do you do? I go, I buy and sell and build buildings that you'd never even pay us - you'd never give a second look to. These are the buildings where commerce is completed, where industry manufactures and distributes their products, and where a lot of people spend a lot of their lives being employed and just working. These are typically off the beaten path type buildings, large warehouses. And the driver, as you said, which is tremendous, is, you know, Amazon's building millions and millions and millions of square feet of distribution. If you service Amazon, you need to be close to them so you can get your product to them at the least cost and in a rapid, rapid fashion. And as Mark mentioned, being near the port to Los Angeles, so much product. A third of the product in the country and 75% of the product in the West Coast comes through the ports of Los Angeles and that product needs to be distributed from the port to a warehouse almost immediately. It can't sit in the port. So, those warehouses are in high, high demand and they're being built throughout Southern California and they have been for years but it just was not, you know, wasn't real well noted because e-commerce wasn't nearly as big as it is now. But the demands never been better. We've done - through the years, we've used industrial buildings for ice cream plants, for Baskin-Robbins or we've done the movie studios for Warner Brothers and Disney and just all the back end warehousing that they need and manufacturing facilities and the demand now is just staggering. Southern California is just staggering.

 

Adam Gower: So that's a really interesting nuance that you brought up. So, am I correct in understanding that your target market is within the Amazon hinterland? Does that represent for you, I want to say a credit tenant? We can talk about, you know, tenant credibility as well a little bit. But if you're looking at supply to Amazon. I've never thought of that because it's eight million dollars. You're not buying an Amazon occupied two million square foot warehouse. You're talking about something different aren't you?

 

Mark Panattoni: But, yeah, we're buying the buildings that supply the Amazon warehouses.

 

David Parker: And others.

 

Mark Panattoni: And others. You know, the distribution side makes a good portion of it but there's also some light manufacturing that goes in that gets distributed a little bit differently. But, we are a supply chain to your Amazon. There is no doubt about it.

 

Adam Gower: And so how do you guys assess tenant credit? How do you decide who's, because if you  get a vacancy, I know that the demand is very, very high, but it can take time. And it is - if you've got one warehouse and a tenant vacates. That's a whole warehouse. How do you guys assess credit, sorry, tenant credit.

 

David Parker: In an eight million dollar building, you're going to have a regional credit. You're not going to get a major credit. It's going to be a local manufacturer, a local distributor, a contractor, possibly. But, one of the beauties of what our business plan is, we not only have the ability to rent our buildings, but if a building does go vacant, doctor, we can also sell the building to an owner/user or someone in that category that needs a building for their own business, which is a huge demand as well. And so, we have two options to exit our buildings, in the event that they do become vacant. So, that's one of the things we really like.

 

Adam Gower: Right, and of course, owner/operator is always going to pay more than, for example so  it's always a good option for you to exit. So, that does suggest, though, also and on your website, I notice these pictures of ground-up development. So, within the fund, are you considering ground-up development or are you looking at value add?

 

Mark Panattoni: It's mostly value-add. We will not be doing any new construction in the fund that we're developing. But, for instance, we do have a building in contract that's scheduled to be completed here in the next six, eight weeks where the developer got into a little bit of an issue and needed some cash to complete the project and we found it was a great way to strike and get new construction in the market we wanted to be in.

 

Adam Gower: Interesting, so that's like an opportunistic deal which in industrial real estate, sounds like, you found the only one, basically, anywhere in the country. So kudos to you guys for doing that. So, in terms of value-add, everybody understands multifamily. You put in some cabinets and a new floor and you paint the walls and somebody pays you more rent. How do you add value to an industrial building?

 

David Parker: I would say most most of the stuff we're looking at has older leases in place, older tenants. They've been in there for - the last one that we bought, they were there twenty-five years. They had let a lot of the maintenance go: the landscape, the parking lot, the roof, mechanical units, air conditioning. So, it's just like an apartment, but it's on a bigger scale. So, we're just going to go in and put paint, carpet in it, clean them up, make them a little more accessible. Sometimes we have to add a dock-high loading. That's really important to a lot of tenants. We'll upgrade the utilities, add more electrical power, add solar panels and make the building more user-friendly and make it more available so somebody can come in and turnkey and start their business right away. They don't have to spend months and months remodeling the building. Much like buying a home that's old and tired and beat up or an apartment, you know, same thing. We're just cleaning them up, making them more attractive and changing the access and the physical nature of the building is really difficult. So, we just have to do a lot of cosmetic appeal.

 

Mark Panattoni: And if I could just add one thing to that. In addition to your traditional value-add, you also have the value-add of your new leases, right, and structuring your new leases. And a couple of things that have come out and the reports that some of your big houses like CBRE is putting out there, they're expecting rent growth in the next couple of years to be about, well, 40 percent by 2024, in the industrial market in L.A. and over 30 percent in your Inland Empire and areas. And so, that leaves us in a position where we may be paying a little bit lower Cap rate but in 18 months, when that tenant rolls...

 

David Parker: Right.

 

Mark Panattoni: We're bringing them up to market and really getting a bang for our buck.

 

Adam Gower: So let's talk about that. Tenant leases and lengths of leases. With an apartment building, you start with one year and then typically shift to one month. The only reason I'm keying off apartments is because most high net worth investors, accredited investors, it's what they understand. It's intuitive. As you've said, industrial real estate is usually hidden behind the retail. It's hidden away. People don't see it. There's no intuitive understanding. So, help me understand how, if you buy a building, a value-Add building that has a tenant in it, that's been there for 20 years. What are you doing? Are you saying: we're not renewing your lease? Are you saying, we're going to do some upgrades and increase your rates? Explain to me the mechanism of how you turn tenants and how do tenants turn and how do you increase rental income over time?

 

David Parker: I mean, typically, we'll just go in and mark the building to market. We'll bring a  . a brokerage firm in. We'll do an assessment of the valuation of the building. If it were on the market, we'll value what it will take to remodel and rehab the building if we do go vacant, what the cost will be to pay commissions  and downtime and we'll offset against our IRR to see what a lease rate would be that would offset that and maybe be more profitable. Most of the time we can negotiate an extension with the existing tenant. They know they've been getting a deal for a long, long time and they understand that their products in higher demand than it was when they leased it 25  years ago. And so, it's a market driven concept, but it's very similar, you know, to what you're saying with apartments. It's just on a larger scale. And, the beauty of industrial, again is, we can sell the building to that user. There's SBA loans out there. They're very easy to get and we can sell that building to him. I don't have that option in an apartment, to sell it to my tenant. I don't have that option in a retail building, to sell it to the tenant. I have two exit strategies here and both are excellent.

 

Adam Gower: Yeah, it's interesting you say that because it begs the question of course that, why would somebody sell the building to you if they could sell it to their tenant?

 

David Parker: Again. Sorry, we keep stepping on each other here. But again, you know, a lot of times if the tenant does vacate, is when we sell. If that tenant - that tenant typically will not be our buyer. It'll typically be, the tenant will simply negotiate a lease extension. A buyer comes to fruition when the building's available for occupancy.

 

Adam Gower: Got it. Tell me a little bit more then about - you've mentioned the geography, the range that you're looking. Just, kind of, drill down on that a little bit more for me, will you? What is the full area that you're looking at? Just Southern California?

 

Mark Panattoni: Yeah, just Southern California. We do have Ventura counties and San Diego counties identified. We doubt we're going to do much business in those. They're kind of, their own marketplaces. We're really looking at the arteries coming out from the ports and which way they're going. Whether they're heading up to northern California, across to to your Colorado and Vegas areas or over to Phoenix and into Texas. And so, you can have, you know, three different choices in which way you're going to ship out from the L.A. ports. And those, along those artery lines, is really where we're looking.

 

Adam Gower: Let's talk about, from the investor perspective, for a few minutes. So, somebody comes in. Your minimum's $100,000 or $250,000. What is it? $250,000 right?  $250,000 minimum. What is the -  talk to me about the numbers. What's the cap rate, what are your projected returns, distribution frequency, etc..

 

Mark Panattoni: Sure. We have a 6% Pref that we're doing. 80/20 split with the investor up to a 10%  IRR and then 70/30 thereafter. We're projecting between an 8 and 12% IRR to the investors. We expect we will be able to pay, in the first year 4% current, with that growing annually as the leases grow in turn. But starting at 4 and then growing and catching up to that 6 Pref.

 

Adam Gower: So let's talk about that because this is a fascinating asset class and a 6% Pref is below market for accredited investors. When they go online now, they can find typically, actually 60 percent to 8 percent, 20 percent to 10 percent. So, you're in a rarified area. How do you answer investor questions when they say, hey, look, I can get an 8 Pref in this multifamily building over here or this office building, for example. Why should I invest with you and only got a 6?

 

David Parker: Well, again, that's our Pref. We're looking at IRRs and we conservatively put them in an 8 to 12 percent on most of our products that we've done through the years with 17, 18, 19 percent. So, we're buying good stuff. We're buying right stuff. Well located, well built, hard to replace. And, it's just - it's slow and steady. We're not trying for the high churn, high burn type product. We're not trying to just burn and generate fees here and there. We're trying to put assets away. This originally started when, a few of my long time investors and relatives said, I want to put money in industrial properties, but they didn't want the risk of development, which is what we've done a lot of. And I said, well, we don't really buy and hold buildings and that's when Mark and I met up and Mark said, I love buying and holding buildings. So, with the knowledge that we both have and with the ability to generate a lot of returns for our investors, is where we started this. We just wanted to be realistic and not go out blurting an 8 to 10 percent Pref and all of this. We want to make sure that we can meet our requirements. And, these leases, they don't turn fast. And since we only get one opportunity to turn them, if I buy an undervalued building right now, I can't promise a huge return until we do turn the lease. So again, I think we're very realistic, maybe too realistic. What we didn't want to come out there and just promise the moon and not be able to deliver.

 

Adam Gower: But also the other thing is that industrial has tremendous stability as well. Of course, you do suffer vacancies from time to time and they can take time to fill, but you do have stability. It's a coupon clip. Typically I presume that your investments are a triple net, your lease is a triple net. Right, so you're really just managing. There's not much to give - you're just taking rent payments.

 

David Parker: Well, it's not that easy or everybody would be doing it.

 

Adam Gower: I know that. Alright so hang on. This is an interesting point that I find very interesting. So, buy and hold. You want to hold and by the way, we are doing 15 minutes but, if you don't mind going longer, this is a fascinating topic. I don't know how much further I can go. Are you guys OK continuing? Alright good. Let's keep going. So, the idea that you would want to buy and hold. Right? I mean, you guys have got hundreds of years of experience. That's 50 years of experience, I imagine, between you, you've got hundreds of years of experience in this.

 

David Parker: Thousands.

 

Adam Gower: So you know, and you wish, those buildings that you sold 20 years ago, you'd held onto. So why have you decided to put a fund together that has a defined lifespan that you have to exit from? Tell me about that.

 

Mark Panattoni: Well, that was really based on feedback we got from different advisers. We'd love to put something together when we bought it and never let go. I think that's probably more of a REIT structure. But this being our first fund, we thought that it was the right vehicle to kick off with.

 

Adam Gower: Ok, perfect. Alright so now, you talked about fees. Everybody wants to know, where's the alignment of interest? So tell me, what are the sponsor fees, from acquisition to AUM to exit. Just give me the full gamut.

 

Mark Panattoni: Sure. We have a 1% acquisition fee, 2% assets under management fee and 1% disposition fee. We do the property management and we're able to charge up to 3%, whatever is market. We don't look at that as a profit generator, by any means, but more of a cost control. And so we're doing market rates and what our upper forcasts, so we can charge up to 3% of gross rents, on that. That's pretty much it on the fees.

 

David Parker: The big money is in the profit. When fund generate - when the fund throws off money. Now and we don't make any money until the Pref is paid and then we split it and we take, like Mark said before, we're going to take 20% of anything after you hit a 10, we take 30%.

 

Adam Gower: Right, actually, so but, just to be sure I understand that right. You don't take anything until the Pref is paid and the principal is paid back, correct?

 

David Parker: Correct.

 

Adam Gower: No catch ups.

 

David Parker: No. No catch ups on our side, no.

 

Adam Gower: Ok. And what's your co-invest?

 

Mark Panattoni: We're putting in between 8 and 10 percent.

 

Adam Gower: So, 8 to 10 10 million and that comes from the management team?

 

Mark Panattoni: That's correct.

 

Adam Gower: That's you guys. So, for anybody that invests in the fund, $250,000. Is there any possibility of an early exit? If, you know, I'm just curious if there are any provisions in your fund docs that allow for the sale of ownership shares.

 

Mark Panattoni: The sale of ownership....

 

Adam Gower: If somebody invests, yeah and then, you know, somebody passes away and somebody, you know, unforeseen so. It's technical more than anything. But is there any way out? It's OK if there isn't. Most funds..

 

Mark Panattoni: There is - we would work with whatever situation came across. These shares are typically nontransferable. I mean, your heirs can receive them. But if a party came to us, we'd do whatever we could to...

 

Adam Gower: Figure something out. What's the fund's leverage policy because I know that's a big deal.

 

Mark Panattoni: Sure. It's a max of 60% on the fund and 65% on any individual asset. And that's because, if we do have to do some value-add, we want the flexibility to just - to put a little bit of extra money into a building. But, from a total fund perspective, it's at 60%.

 

David Parker: And then we're still borrowing at 3% so, I mean, you know, if we can buy a 4 - 5 Cap,  we're still positively leveraged, even if we took 60% loan. So, we did want that amount. The original target was to be no more than 50%, but, just with the interest rates the way they are, we just thought we'd give ourselves a little edge to go to 60 or 65 if we had to.

 

Adam Gower: So 60 is the fund level but you could go higher on individual.

 

David Parker: Right.

 

Adam Gower: So if you got a 65.

 

David Parker: 65 yeah.

 

Adam Gower: Alright. Just tell me, what is - so in 7 years time, I invest a quarter of a million today, in seven years time, what is the exit strategy and what is the downside, like, how do you....what exit strategies do you have, is my question.

 

Mark Panattoni: There's a couple of them. The first is, you go through and you sell off every asset over the course of a few years as the the rents mature and you're at the max value and you liquidate over time. The other would be to sell the entire portfolio to another group.

 

Adam Gower: Ok. So now let's talk a little about your background. So, we know that you have hundreds, thousands of years of experience, just, kind of, give me a quick...

 

David Parker: You heard me.

 

Adam Gower: I did. Give me - I like to tell people that I go back to the pyramids. You know, I was a laborer.

 

David Parker: I bet it was hard to get your computer to work then.

 

Adam Gower: Alright, so just give me a quick rundown. What is your background because I noticed, you actually - on the pitch deck that you sent me. I think it says, a lot of experience in real estate, specifically, it says real estate. It doesn't say industrial real estate so tell me more about your background a little bit. Give me some color.

 

David Parker: Go ahead.

 

Mark Panattoni: OK, well, I've been in the real estate game since my mid 20s or so. I had a law degree. I worked in a law firm that did exclusively real estate transactions then we opened a securities company to process investors for those same real estate deals that we were doing and went through all the underwriting there. Then we started buying our own assets. Did a lot of multifamily, did a lot of industrial. And that leads us to today and partnered with David who has a lot more vertical development experience than I do. Mine's more on the underwriting and management side.

 

Adam Gower: I tell you, do me a favor. Give me some client numbers. Square footage, in terms of, number of square feet of industrial space, or dollar volume, or dollar value over the course of your career. Just give me, kind of, some high level numbers. What does it look like?

 

Mark Panattoni: Oh geez, I wouldn't even know where to start.

 

David Parker: The Panattoni name is a legend in industrial real estate.

 

Mark Panattoni: Yeah.

 

David Parker: Mark's been involved in it for years. I ran the Charles Dunn Company. I worked at the Charles Dunn company, downtown Los Angeles. They've been around about 100 years - almost back to the pyramids and, I was in the investment division there and ran Chase Partners, through there initially. So, in the 40 years, I started out in apartments. I know them well. I started out building them and renovating them. Did that for a long time but housing just got very, very difficult to build in Los Angeles, and it's gotten more so, now. And so then we moved on and started doing building to suits for the County of Los Angeles and larger tenants and then, but really the industrial was where we've been focused for the past 30 plus years. Industrial is easy. I like it. It's just - we did about a million square feet, last couple of years. We've probably done, in transaction number - we built three to four hundred buildings, maybe more, individual buildings. We have done at least - I've got to say, a billion dollars worth of real estate in my career, doing larger projects and projects that we've been involved in, in that period. So, we've just have been involved in it day-to-day for a long time. Largest building we've ever built - just, kind of, above the sweet spot, probably two hundred fifty, three hundred thousand feet , so on the large side. But again, our sweet spots, 8 to 10, 15 million dollars. The 30 to 40 thousand foot buildings, those buildings, kind of, fall below the radar of the REITs - the stock exchange traded companies, but they're above the level that a small guy or a contractor can really build, just on spec, for his own account. So, we're kind of fitting a good niche there. It does take a little more money, which is one of the reasons we started the fund and it's a good opportunity to really be involved in a market that's not getting as picked-over as some of the other markets. And that's really where our experience has been all these years. As far as transactions - been involved in over a thousand transactions, sale and lease, again, at the Charles Dunn company 25 years. Chase Partners was 15 years of that. We started Chase Partners in '93 actually. And, you know, it's just what we've done for a long time. It's what we do.

 

Adam Gower: I've got two more questions for you, but. Well, one more question but I'm going to introduce another one and that is....when I started with crowdfunding, 6 years ago, it occurred to me that there were some "superstars" of the industry. That, if you're in the industry, you know everybody but the accredited investor community, the non-real estate investor, the high net worth individual, has no clue because it's essentially - historically, it's been a closed industry. And, you said something, a moment ago, David, that Panattoni, forgive my pronunciation, is a legend in the industry. That is not a trivial thing to say. So, for somebody like me, who doesn't know, and the one other guy who's listening now that doesn't know who the Panattoni family is, in industrial real estate, please tell me. What does it mean to be a legend in this industry?

 

David Parker: He's shy, but it's not - go ahead.

 

Mark Panattoni: Panattoni Development's been very successful. It's my uncle's company. I've worked around the company for several years of my career. But, they've done a very, very nice job building a great company.

 

Adam Gower: Over how long? Let me just tell you something. My job is to help people find investors. Don't be bashful about things that really mean something, because what you're talking about is deep, multigenerational knowledge and expertise and investors - they don't invest in industrial real estate. They are investing with you. That's who they are investing with. And so, they need to know who you are. And it's OK. This is a short podcast call. That's OK. But going forward, I would strongly recommend finding confidence and discovering a way to be able to articulate that way that is impressive. Even if it is humble, that's fine, but it's very, very important. People want to know who you are.

 

Mark Panattoni: Sure.

 

Adam Gower: Last question. Investor avatar. The ideal investor. If there was one person that was listening to this podcast today, what would you - the absolutely perfect candidate for your fund, he's going to write you a 10 million dollar check and he didn't listen to anything but this last sentence or two, what would you want him to hear?

 

David Parker: What would we want him to hear? I would say - this is an opportunity to place funds into Southern California real estate, led by a group of experts who've done it for thousands of years, as you said, thousands of years of experience, but really, with 60, 70 years of experience, well known in the industry and straight shooters. They're doing it for family and friends. We're not doing it to start the fund. We're doing it for family and friends and that's what really got this going. So, it's a good opportunity. We've done a lot of partnerships over the years, but this is a great opportunity for outsiders to get involved.

 

Mark Panattoni: And I'd just add - this is one prong in someone's investing strategy. We looked at this and wanted to do something a little bit more conservative than your typical high teen, I'm in a real estate development project. We wanted to provide a different vehicle and show people the security of the asset that we're buying.

 

Adam Gower: Beautiful. Diversification within real estate.

 

Mark Panattoni: Yeah.

 

David Parker: And the fund does that too, by buying several buildings. So you're not subject to one guy canceling and another company canceling or, you know, a larger company bailing on one building because we'll have a multitude of builings. So, it's going to be across the full asset class of property, in the region. And that was more why we wanted to put the fund together too, with smaller buildings, grouped together in a larger pool.

 

Adam Gower: Mark Panattoni, David Parker, Chase Partners Ltd.  An enormous pleasure meeting you. Thanks so much, truly, for being on the podcast today.

 

Mark Panattoni: Adam. Thanks a bunch. Appreciate your time today. This was great.

 

David Parker: Yeah, thanks. It was fun.