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260: Does Crypto Have a Role in Real Estate?

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Buck: Welcome back to the show everyone today my guest on Wealth Formula Podcast is Jason Ricks Jason is CEO and co-founder of liberty real estate fund which is an interesting fund that revolves around the single-tenant net lease market which we’ll talk about specifically in addition to that it is I guess the first security token offering type fund out there in this space as well. Anyway, welcome to the show Jason.

Jason: Yeah thanks for having me on Buck. Long-term listener so thanks again for giving me the opportunity to speak today.

Buck: Yeah of course and did I get that right about it being the first of its kind in terms of the security token?

Jason: That’s correct. It’s the world’s first. There’s been other funds or let’s say individual assets that have been tokenized but nothing as advanced as acquiring single-tenant properties across the United States like we have today.

Buck: Got it all right well why don’t we start out the usual way which is to kind of just start out with who you are what’s your background you’ve been in commercial real estate for a while it looks like.

Jason: Yeah so I grew up in Austin. I thought I was going to be a professional football player that ended up not going according to planned and I was a field goal kicker at Oklahoma state. In 2004–08 got out of college and said okay what the hell am I going to do with my life and fell into commercial real estate after about 19 interviews it was 2008. So it was kind of a difficult time to get into the space but cut my teeth on leasing a lot of early on brokerage and then over the course of my career, I got kind of shifted into asset management I worked for a large value-add portfolio out of a wealthy individual out of California and then decided I wanted to kind of get more institutional and work for a private REIT where I oversaw a portfolio of about 500 million.

Buck: Got it so let’s see your you know your fund focuses on the single-tenant net lease market talk about exactly what that is.

Jason: Sure so for your listeners quite simply it’s a single-tenant occupant now the easiest way I can kind of use an example think of a McDonald’s or a drive-through Starbucks you have one tenant on an out parcel usually with extremely high visibility and they control their individual space and the space around their building.

Buck: Got it. And so that would that include that wouldn’t include malls or anything like that. It’s basically just like single-standing buildings with one business for the most part right?

Jason: Absolutely think of like a gas station’s a perfect example. Sometimes these are on what I would call the parcels or the outside of the parking lot behind like a let’s say a grocery store like a Walmart or something like that.

Buck: So when you hear that you gotta wonder well what would the benefit of a single-tenant property within an investment portfolio be? Wouldn’t that be creating a lot more risk how do you deal with that?

Jason: Sure so surprisingly and we’ve done back data information on this single-tenant net lease for the last 30 years have been the highest occupied asset class when you compare to any other type of commercial real estate class so above a multi-family above industrial office and traditional retail and there’s a lot of reasons and advantages for single-tenant net leases that I can get into and they’re always in ultimate high demand from investors and from tenants.

Buck: And why is that? Why are they in such demand?

Jason: Sure it’s unfeathered access and visibility Buck is one of the big ones it’s literally a walking talking billboard so you imagine the best located real estate within a market. Tons of vehicles traveling to and from every day past that building it has control of its parking lot and the space itself and so becomes extremely highly desirable.

Buck: One of the other things to mention I guess would be the fact that they’re net leases. You want to talk a little bit about net leases as opposed to what we may be used to in the other types of real estate?

Jason: Absolutely. So this is the thing that this is ultimately why we call these bonds wrapped in real estate. So imagine an essential business like a convenience store with great credit behind it like a Shell or 7-eleven and they’re on the hard corner, they’ve got great visibility and access to their space and they’re structured on a long-term lease. And here’s the beauty: the taxes the insurance and the maintenance on the building is all passed through to the tenant and that’s structured in their lease. So I’m not getting a phone call in the middle of the night to change a toilet I’m not getting calls to say hey my roof needs repair or my air conditioning unit needs to be replaced so all those things are structured that way so we call these essentially just bonds wrapped in real estate.

Buck: Yep and I think that’s a good way to describe it because I think again going back to the idea of why you know somebody might look at this and say it’s a single-tenant is it riskier how do you look at individual tenants I mean obviously you mentioned you know bonds wrapped up in real estate well a lot of times that’s what bonds are right so tell me how do you determine or how do you classify or categorize potential tenants?

Jason: Well I’ll kind of give you some examples right so we’d look at like a Goodyear a Firestone for the market cap on some of these buildings or some of these tenants you know Goodyear’s close to 2 billion market cap, firestone’s 21 billion in market cap so you look at their credit and you can do a lot of interesting searches online and a lot of their financials again these are publicly traded companies and we can evaluate the risk profile from that standpoint.

Buck: Got it. So you can essentially kind of you know you’re basically basing your lease the risk of your lease on the financials of the company that you’re looking at and so I suspect and correct me if I’m wrong just like in bonds where you’re going to have high yield bonds low you know lower-yielding bonds a lot of you know junk bonds are the ones that yield the highest so you know you’re going to generally get the higher cap rate at the higher yield for you know businesses with that are not as creditworthy.

Jason: 100% that’s exactly right and it’s interesting that you brought up junk bonds because you know we’re closely tied to fixed income given the asset class type so you know junk bonds are yielding under four percent the ten years at one six one seven today floating these are real yields that are nothing I can go out and buy a 7-eleven backed by that credit and that market cap at five cap and then I could put debt on it at 70 percent and so I can get a premium coupon to investors which I would argue is better than what you could get on a corporate bond yield right corporate bond yields are around three percent right now so it just for me it’s a no-brainer for folks that are looking for fixed income.

Buck: You know and that’s right so you brought up five cap on a 7-eleven obviously this depends regionally as well right I mean correct cap in LA probably not you know or New York City how does that vary. I mean tell me a little bit about this market it’s good I think this group that you know my listeners are pretty familiar with multi-family real estate because we do a ton of it and you know in my Investor Club we’re doing a lot in Dallas Fort Worth and Arizona and we’re doing that because the profile of those markets are that they’re extremely fast-growing markets and they’re not tertiary markets you stay away from tertiary markets because of the fluctuations and the lack of fundamentals how do you look at triple net property is it just the parallel markets to multifamily?

Jason: So it’s pretty comparable so we have this old adage in our business where retail follows rooftops and so we’re looking at net migration patterns we’re looking at cities that are on the come essentially and where these demographic trends are shifting and so we have this catchy phrase it’s corning from my partner but it’s essentially the smile states that are getting a lot of the growth and so we’re big fans of DFW and phoenix just like you are Buck we also like Florida we like things that are happening in Georgia the Carolinas Tennessee’s getting a ton of growth but you know there’s this devil between do you reach for a yield in a two sharing market and that’s just not who we are yes I can probably go buy a better cap rate somewhere but I take on a ton of risk because if that tenant goes out for whatever reason trying to backfill that in a smaller town is tough.

Buck: Yep exactly so it’s actually got a lot of similarities you know to anything else that we do all right well let me ask you this because I guess the next question is I know I’ve got listeners out here thinking well geez you know this sounds like maybe the kind of space where I should just go out and maybe buy some my own stuff, after all, it sounds like it’s not terribly you know management heavy you know a company comes in there and you know you’re basically saying hey here are the reins just pay me you know and I’m just gonna collect a check every month I mean that’s basically it so if that’s the case why would I choose to invest in a fund if I can just afford to go out and buy some triple net real estate?

Jason: Sure I’m a big believer in diversification sure and you know you go out and put all your eggs in one basket you’re making a large bet maybe not for some of your listeners but some of them maybe you go out and buy I don’t know let’s say you go buy a dollar for three million dollars in one market you have a lot of concentration risk and so with our fund you get industry diversification and geographic diversification and you don’t have to deal with all the headaches of putting these deals together meeting with brokers interacting trying to do all the legal work trying to get all this stuff done the due diligence all those things that go into it we basically handle that upfront and then we do you know institutional quality reporting on the back end so if you’re super analytical and want to understand details we’re going to take that level of expertise that we have today and implement that towards the fund.

Buck: Yeah that makes sense. So let’s talk specifically a little bit about your fund, you mentioned you’re focusing on Dallas Fort Worth, Arizona, Florida, what kinds of property are you specifically looking at I mean are you are there certain companies like dollar trees are you sort of across the board or what?

Jason: Sure so it’s essential businesses and we came up with this idea about two years ago back when we saw online sales crushing traditional retail and we wanted something stable we really like the medical space. I think we’re very bullish on medical for a lot of demographic reasons and then we’d like we like auto care in service we like gas stations and daily needs and we’ve kind of looked into some other sectors too whether it be telecommunications even pawn shops believe it or not sure because some of these are very defensive in nature right so like let’s say for example the economy takes a nosedive and I was just listening to your podcast the other day you had a really cool economist on by the way that was fun and they were talking about maybe we’re going to have a dip in S&P500 here in the next couple years and you know when the market tanks a little bit you know they’re going to be spending more on their cars they’re not going to be buying new vehicles as much they’re going to be spending more time traveling in their cars versus getting on an expensive flight. And so a lot of these things are defensive even like a dollar tree, for example, well they typically do well in recessionary periods and so it’s kind of counterintuitive when you think about it originally but it kind of weathers both sides of the storm. So we like the diversity that we’ve selected and we really really bullish on medical.

Buck: How do you do a single lease with medical is it usually like an emergency room or something from a big company or how does that work?

Jason: Yeah we like Davita we like Forsynias we like some of the big dental players Baylor Scott and white I’m sure you’re probably familiar with them with your research in DFW and some urgent cares. I think Buck you would probably know I know with your background you probably know some of that space. I think there may be some regulatory issues with urgent centers so we don’t want to go too heavy into that space so we may pick the best player in that but we’re not going to go full steam ahead on that individual use.

Buck: Makes sense okay so obviously okay so there’s this one piece that’s different as you mentioned from any other fund that’s doing it and that’s a securitization so for those people who don’t know tell explain what exactly a security token offering is.

Jason: Sure. The easiest way I can describe it, it’s a digital security and we’re able to capitalize on this by using blockchain technology which is just a fancy word for a digital ledger that’s the best way I can describe it without getting too far into the weeds.

Buck: Okay so what’s the big deal?

Jason: Yeah no totally so you know you know look I mean at the end of the day we’re a fund that pays our investors monthly cash flow but the reason why we did all this and this is our big kind of why we wanted to solve two problems we literally wanted to solve two problems and you’re in this space too. The first one is the lack of liquidity when you invest in a private real estate offering and I’ll give you a fun example here in a second you are beholden married with no or little say on what that sponsor does and you’re tied to the US dollar typically. If you’re investing into a US syndication so if they want to hold it for 10 years you’re along for the ride. You can complain all you want but that’s what they’re going to do that’s what they’re going to do so you have no control if you have a major life event. I’ll give you one that I’m going through right now we’re having a second kid which is exciting and but we need a bigger house my wife’s working from home so I’m trying to buy a house in Austin right now and everything is 20 over ask and people are wanting all cash offers so it’d be really nice if I could hey can I use this money that I have and all these other real estate investments that I have and just pull it out put it in the house and then later I can back fund it again if I wanted to. So you know things happen 10 years is a long time so liquidity and then what else you said yeah the other one is look if you’re a fixed income investor right now where are you going I mean there’s you don’t really have any options or choices so what we’re trying to do is provide an alternative to the fixed income bond market world and give you that same level of stability with the highest occupied asset class historically and give you those monthly returns and so that those are the two big problems that we’re trying to solve for.

Buck: All right so functionally let’s talk about how the security token works because you can have tokens all you want unless but if you don’t have you know any liquidity to the market it’s pretty much worthless. So how that’s going to be dependent on in part you know the size of your fund and the activity in your fund so talk a little bit about that my point here just for everybody who’s listening let me give you an example during the last cryptocurrency bull run. I had invested in one initial coin offering that turned my 50 grand into a million bucks but the problem is I couldn’t sell the damn thing even though there was this you know so-called token there was no liquidity to that market in the sense that yes there was tokens but there’s no activity on the buy and sell side so I’m playing devil’s advocate here not trying to you know call you out or something but I’m asking you how do you address that issue or you know is it you know the most people who are investing in real estate and these funds aren’t really looking to get out right so where’s the market? Who’s the market?

Jason: Yeah no great question. So yes we are in early innings we’re probably first or second inning right now of total market liquidity when you compare it to these other larger like you know for example the Nasdaq or dow or anything like that right so we’re not as robust on these exchanges as of yet but you have multiple different options. So the first option is I can go peer-to-peer right so that means I can call Buck. Buck’s got a lot of multi-family stuff security tokens and I want some I’m too allocated heavy towards industrial so I’m going to call Buck I’m saying hey Buck I want to buy some of your multi tokens I want some of that exposure in my portfolio you and I can make a peer-to-peer exchange so that’s the first way to do that the second way to do it is you have broker-dealers that can advertise and list these on exchanges for you or sell them in blocks to large institutions and then one of the other fun options is what we call these secondary markets that are very much up and coming but they’re getting more robust as people come around more to tokenization which is what we’ve seen accelerated over the last I would say last six months last three months in particular with the rise of all you know cryptocurrencies NFTs the interest in the fund and tokens in general has exploded so these secondary exchanges become really neat because on your dashboard. So if you’re an investor in our fund you can literally go to our dashboard and select on a secondary exchange and you can put it out on the exchange and see what the market would yield.

Buck: So if I’m looking for liquidity and I’m looking for exposure to real estate and triple net real estate and we’re multifamily again let me just ask you again from the perspective of somebody who’s looking for liquidity why would I go this route as opposed to finding a REIT that’s publicly traded and has a lot of liquidity?

Jason: Yeah no absolutely I’ll tell you why. Did you own any REITs?

Buck: Me? Hell no I don’t own REITs.

Jason: I know you don’t but you know in March of last year how much did those REITs go down?

Buck: Yeah I’m sure they went down a lot.

Jason: Sure now ask me how much did that cap rate suppress for 7-elevens did it lose did it go from did it go in California did it go from a four cap to a six cap no yeah actually you dropped yeah it dropped in value okay and I work for a REIT so I know all the fun in and outs of reporting the overhead the weighing down of the returns for investors and it’s an operational company it’s not like you’re investing in the real estate.

Buck: No I get it but I guess what I’m trying to do and again I understand I’m playing devil’s advocate because that’s my job here is if you start talking about the liquidity and exchanging securitized tokens in the same environment. You may have the same problem right I mean who’s you may have the same buyer fears with a security a securitized token as you would a stock I mean the reason why that stock price on the REIT went down is because people get worried and they start selling and they don’t want to buy stuff right so why would it be any different?

Jason: Well I’m honestly if it’s yielding what it’s yielding and someone wants to sell it at a 30 discount I’d be tickled to death to buy it first of all because yeah it’s the underlying value in nav right which is what we’re trading on not necessarily if a new CEO comes into the to the realm of the great sure or if they’ve got way too much exposure to AMC theaters, for example, yeah or some other you know old-age retailer or particular scenario that’s not favorable to the REIT.

Buck: Got it. All right so where is the market? How’s the market? What platform are you using for the trading of these tokens?

Jason: Sure so our registered transfer agent and again I’m trying not to use these terms but it’s securitized as the one that’s going to be issuing the tokens on our behalf and we’re looking at a couple of different exchanges right now because we’re launching the fund in may we have kind of this 12-month lock-up period before people can start trading it. So we’ve got a few different groups that we really like fusing out of Hong Kong is one of the exchanges that we’re really excited about they’ve had a lot of interest and a lot more transactions in their marketplace and then we’re kind of evaluating three or four others some are based in the United States some are also foreign.

Buck: So right now you haven’t gotten to the security token part of this and so people who are currently invested in the fund they would you know if essentially they would their ownership would be converted to securities?

Jason: So the fund will launch in May and then once essentially we go live with the fund and funds are invested and we start buying properties there’s a one-year lock-up period for the investors before they can trade it.

Buck: Yep that makes sense typically with the accredited investor issues that’s what you see. One other technical question and this is more out of curiosity because I’m just you know my brain always goes towards taxes Jason and so let’s say so your typical right now and you know we’re buying all this multi-family and one of the tremendous benefits that people get when they’re investing in this type of stuff is we’re using cost segregation analysis and bonus depreciation and you know we’re getting situations where we’re literally sometimes writing off people are writing off as much money or more than they actually invested as depreciation in the first year which is huge obviously in different real estate you have different levels of depreciation but there is always that level of depreciation how does the tokenization of this stuff how does that all work in terms of taxes and depreciation obviously I mean in our case if I bought something and I took that depreciation in the first year and all of a sudden I’ve got this asset that the basis is way low and presumable if I sell and I’m paying recapture so how does that work or is that something that maybe isn’t as applicable in your your space

Jason: I’m yeah I’m so glad you reminded me of this because I forgot to bring this up answering your read question we are a traditional 506C RegD so just like every other private fund that most of your investors invest in and because of that they’re K1 investors and so we take advantage of cost sag and bonus depreciation just like you guys do and that’s one of the benefits is on the REIT side those dividends are taxable at ordinary income and then this income through the fund is tax-advantaged.

Buck: I guess the question I have is on the technical aspect of that is one of the reasons you can do that is because you’ve got the K1s but the K1s are showing depreciation and you have a new basis you know with the depreciation now if you’re securitizing these tokens how does that when that token is transferred to one person to another how does that work because now you’ve got a token or a security that somebody owns that you know you’ve taken you know 100 depreciation on I mean when it gets sold to somebody else. How does that work?

Jason: Yeah absolutely it’s all done via what’s called a smart contract and this is one of the benefits to the early investors into the fund so if you’re an early investor into the fund you know obviously as the length of the fund goes on we get rental increases which increases your cash on cash we plan to do cost sag early on in the fund to basically benefit the early on investors that are coming in so they get some of the initial tax advantages and then when they sell them let’s say in five years from now yeah that basis is going to go to that new investor which ultimately gives them a little bit of you’re not as an ideal tax position compared to the guy that originally got in.

Buck: Got it. Well listen, how do we learn more?

Jason: Yeah we’ve got so many things out there. So we do the Chicago Blockchain Collective you know you can hear Mike on his podcast nothing but all this is basically at our website. So we put out free content all the time. You can hear me and Michael on multiple different podcasts. We’ve got a youtube channel it’s at libertyfund.io so libertyfund.io and you can feel free to reach out to me anytime at Jason libertyfund.io.

Buck: Jason good to have you on the show and good luck to you.

Jason: Yeah thanks Buck I appreciate it.

Buck: Be right back