Taylor Avakian
is La ever going to have that 20-year period that it's had from you know the '90s to 2020 in general M I'm bullish
October 1, 2024 · 1 hr 12 min
Are Los Angeles Apartments Dead? Is Rent Control the Real Issue? No Vacancy Ep. 2 Fred Gortner
With Fred Gortner — Co-founder, Paladin Realty
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Is Los Angeles still a good real estate investment strategy? In this episode of No Vacancy, Fred Gortner shares how Paladin Realty has managed to generate over $8 billion in real estate deals…
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Episode show notes
Is Los Angeles still a good real estate investment strategy? In this episode of No Vacancy, Fred Gortner shares how Paladin Realty has managed to generate over $8 billion in real estate deals, including $1 billion in added value to Southern California's multifamily market. They break down how to achieve significant returns in Southern California’s highly competitive real estate landscape. Learn key strategies to navigate rent control and uncover value in Class B/C properties. This episode is brought to you by Henry AI (https://www.henry.ai/). Henry helps investment sales brokers, like myself, more easily build BOVs and OMs so I can focus on what matters — providing value to apartment owners and investors. 🔔 Never miss an episode! Subscribe on your preferred platform and rate our show ⭐⭐⭐⭐⭐: 🍏 Apple Podcast: https://podcasts.apple.com/us/podcast/no-vacancy-with-taylor-avakian/id1768889293 🎧 Spotify: https://open.spotify.com/show/0mqgyJK00yivmqfH8zzLQW?si=f5ab2abbbe734fd7 📺 YouTube: https://www.youtube.com/tayloravakian Visit us at 🌐 thegroupcre.com Connect with us on social: X: @TAYVAY_ IG: @Taylor_Avakian FB: https://www.facebook.com/people/Taylor-Avakian-CRE-Broker/61557266265091/ LI: https://www.linkedin.com/in/tayloravakian/
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Episode transcript
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0:00–10:00
Fred Gortner
on California and I'm bullish on Southern California we've done probably 500 assets 8 billion of real estate eight countries we're in a housing market now unlike any other 2/3 rent most of them are renters by necessity they're completely priced out of being able to own homes and the answer is we need to build more housing welcome to No Vacancy
Taylor Avakian
where I share conversations with LA's top multif family owners investors and Visionaries I'm your host Taylor ven the founder of the group SI and I specialize in the sale of apartment buildings in Los Angeles on this show we cut straight to what matters Market insights and real world strategies straight from LA's multif family icons to help you navigate one of the most complex real estate markets in the world Southern California enjoy today's guest is Fred gortner Fred thank you for being here what I'd love to know Fred is is why are you sitting in this
Fred Gortner
chair today um well cuz you're a good friend and you're a a pro in the market and my whole business uh revolves around guys like you so I appreciate it and uh
Taylor Avakian
and you asked me I did I did I was very I was very persistent I would say but you were pretty easy you were down for
Fred Gortner
this so I appreciate you for doing that I love doing these things and and uh you know I I could talk forever about
Taylor Avakian
the business so give me like a so I wrote down some questions from chat gbt because it's it's so good at what it does um first one I think is a good place to start our nickname for that is Chad by the way anytime we need to have something done well let's see what Chad can do let's see what Chad does honestly I love it I use that thing every day are you guys implementing AI I've only
Fred Gortner
used it once I want to I am dying to I've only I used it once wants to write a job description for a VP of asset management and it did 90% of it was great in 5 seconds I just had to tweak a little bit of it totally I would I I I think it could be not gamechanging but if if I could have a virtual assistant if Chad could be my virtual assistant that could be huge I haven't figured out how to do it yet I think it's early stage I'm sure people are going to come up with apps that will make it work for People Like Us totally uh um how about you I mean have you found a way to use it
Taylor Avakian
I'm obsessed with it um just because I can see I have so many pain points on what I do in The Brokerage business that anything that can speed up because because we're kind of like solo entrepreneurs solopreneurs right and so um unless you have a big team and can afford to have four five six seven you know employees right like being able to be efficient with the marketing materials the listing descriptions the Outreach the follow-ups the all of
Fred Gortner
that stuff it that's what it should be doing and I don't think the capability is there yet but that's that's what you're envisioning the same thing I am yeah
Taylor Avakian
I'm pretty tied into it Fred and like the and I speak to some some guys at the blackstones and the grey stones and great stars and all that stuff the analytical ability for basically taking big data crunching it in and figuring out where opportunities are yeah right cuz real estate is one of the only businesses that they're still information asymmetry like you can yeah basically insid or trade quote unquote if you know more than someone else yeah which is well and other people are
Fred Gortner
going to do it so you have to do it and and the question is how um to the extent right now it's it's so obvious if content has been written by it yeah um and you know and it i' I've seen letters sent to me when we were interviewing for an asset man a VP of asset management position I had a few thank you letters that were so clearly written by chat gbt because they didn't say anything they just never there's nothing of substance you need to be really good at
Taylor Avakian
prompting Andor you need to take the 80% that it does and then add your flavor add the human element add some touch to it it's only going to get the worse as going
Fred Gortner
to but if it shouldn't be that way and that's what I hear the the guys who are using it it's all about the prompts and what I would love is if Chad could just Shadow me for six months look at what I do how I do it who I talk to how I communicate um be looking at my emails what are the applications that I use and then 6 months in say Fred I got some suggestions for you or let me handle this you know I've never I mean we're we're and you are too we're two white Glo we're a service business at the end of the day and and investors are the service we're providing is exceptional investment performance but communication transparency all that Chad can't do that you know but if we can make our White Glove service to our clients even higher Notch and if you
Fred Gortner
can get the an analysis the analytics in there totally that's huge I haven't found that yet I mean I've tried to prompt in okay give me some Market data on West Cina or whatever it is and it just it's not there yet no but there
Taylor Avakian
are companies that are spending a amount of time because of how big the commercial real estate is figuring out those specific problems and I actually think that's where this AI goes is these specific like use case models and the the way that humans interact with it is so specialized to that that like it niches itself yeah and all the knowledge is based on that Niche do you figure out a good productivity please share yeah I know I will please share um so just to give a little people or the people a little bit of color behind you so Paladin realy is uh what you this is our 30th year 30th year so using a a question from Chad what inspired you to start Paladin and how is your vision for the company evolved since it's
Fred Gortner
founding well it was actually it it the part of the Genesis came out of the story I was telling you beforehand which I'll just briefly do I I cut my teeth and I came uh I graduated from college and spent two years in New York in banking which was just great you got to live in New York uh once in your life and I was there from ' 86 to 88 which was just Prime Time top of the market great time to be there I see some of those old videos of New York City back in its Heyday and I'm like I was just such a great time to be
Taylor Avakian
there big old boxy suits really oh yeah no dude I I I how many colored out man
Fred Gortner
I you know Brooks Brothers decked out and you know and we were being P paid well there was a lot of young people there and it was just a great time to be there but it was also a you know it was the ' 80s version of kind of free money we were making stupid loans in hindsight I won't name the organization but it just it just it but it was just the market wasn't the Savings and Loan crisis it was this predated that so this was 86 to 88 and you know I remember one and and and my clients were principally movie producers and real estate developers and I and I I remember one loan a developer comes in and we basically he wanted 110% financing so he wanted us to pay for the construction and cash out commit to it up front because here's what it's
Fred Gortner
going to be worth at the end of the day and uh and more than once our chief credit officer this is the risk manager said approved it and said well if we we don't do it Manny hany will do it or chase will do it and so I I quickly realized okay I'm on the wrong side of the table here this is and so I came out to business school in ' 88 and the best thing that happened was my future wife sat down right behind me the very first day of of business school which is great and uh and you know pick him right the first time been married for 34 years congratulations and um but so I actually I came out I want to either be a movie producer or real estate developer which are essentially the same skill sets much exactly the same thing I I
Fred Gortner
scored amazing internship at uh an independent studio uh in in Hollywood and I lasted about 2 and a half weeks because it was Ju Just this Cutthroat who you know but it just I it was not I I just did not want to deal with the personalities of the entertainment business at at Le and and the thing I like about real estate is you know these are hard assets and so much of it is common sense and to the point you made earlier and insider trading is legal and and how you can inform yourself on Insider information really helps determine success so I I hatched a plan in the middle of business school with a college a good friend of mine who's still in fact I'm having lunch with him today after this um uh his his father was a uh an
Fred Gortner
orthodontist but had invested in real estate and it was being managed by a third party property management company and the you drive by the assets they just kind of look rundown and tired and uh and Brent and I uh somehow convinced his dad to let us start a property management company around his family's real estate holdings we didn't know anything and here we are in our early 20s you know Brent had had been a runner at CBR so he knew a little bit R real EST old were you I was so I was when was this this was 89 so I was born in 64 so you know I was creeping up on my mid 20s but I didn't know anything I mean I was taking real estate courses at at UCLA
10:00–20:00
Fred Gortner
how many buildings and so about a dozen properties so you had to take on a dozen so we took on a dozen we created from scratch with like the original Doss version of yardi oh my a property management company um it we and we taught ourselves not only Property Management we taught ourselves how the value added business yeah and one by one we fixed up these things and his dad kept a short leash on us which was appropriate yeah but you know we can Vince them look let's we can upgrade this and uh add value um we had if you were a tenant in our properties you call and you had a leaky toilet at 2 a.m. you called a number and it would and and we had beepers a lot of your listeners won't know what that is these are little these predated phones they're
Fred Gortner
little buzzers okay and and and if if that number would make the Beeper buzz in one week it was sitting on Brent's bed stand and one week it was SE sitting on mine and just back and forth and that's and we just it was trial by fire in the trenches and that portfolio has been just the the the rock B of that family it's been an ATM machine for them Brent continues to run the company we started and it's been just a it it opened my eyes up but I wasn't making I I didn't have any Equity stake in the value we were creating so I was kind of itching my first child was on the way and I was itching to get out there and and be a principal and do something on my own and I got introduced to uh former treasury secretary Bill Simon um who was
Fred Gortner
a leverage he was treasury secretary back in the 70s and he was really the pioneer of the leverage buyout business in the 80s and he had massed this Fortune very quickly and he had a pretty substantial real estate portfolio but it was all accidental and so my partner and I Jim worms who's who was running Solomon Brothers at the time um created what is now Paladin realy in Partnership initially with the Simon family and our our deal with them is we will manage this sort of eclectic portfolio of real estate you own that had no stra it was really leftovers from Leverage bi out they buy a company and then they'd end up with a whole bunch of glass factories they'd hold on to the real estate but in the middle of nowhere and there's no strategy so we said we'll as we monetize and improve the value of that
Fred Gortner
you provide sponsor Capital so we can create a institutional business and fast forward you know 30 years later we've done about eight billion of real estate in eight countries we've we're a big home builder down in Latin America we've developed nearly 40,000 housing units down there jeez and we've done multifamily was actually it the multif family business started for us because we had the Simons had a portfolio the Simon and their Partners had a portfolio of glass factories with a negative tax basis and we said let's Roll that let's sell that roll that into 1031 into value added Apartments and that started our value added apartment business uh with a little bit of core Plus on top of it and 30 years later we've done over a billion um uh substantially with them but
Fred Gortner
with other investors as well um about 3/4 a billion in value over 20,000 units over 100 assets all across the country jeez and um 3/4 of that was value ad and of the value value ad portion half of those deals were here in La just cuz this is where we live yeah and and the and the SoCal returns were off the charts I mean the whole portfolio did extraordinary of of all the strategies that we've done across 8 billion of real estate our us BC Workforce housing value added apartment business has been by far
Taylor Avakian
the most successful So speaking of uh Los Angeles because I had a conversation with an owner uh the other day and we were talking about is La ever going to have that 20year period that it's had from you know the 9s to 2020 basically 2022 yeah do you think it's possible for the level of appreciation and rent growth in the previous 20 years to happen in SoCal and LA in the next
Fred Gortner
20 years so a lot of the success that you saw for investment was the was cap rate compression as a result of interest rates heading down to zero so a lot of stupid Investments looked good having nothing to do with the left side of the balance sheet and everything to do with h various fed policy um we are bullish on I'm bullish on California in general uh and I'm bullish on Southern California um and there are there are attributes in the about the SoCal market and and and I speak from experience because we've invested all across the country so I I I've you know active in Phoenix and Atlanta and Dallas and stuff real estate almost everywhere except for SoCal is all about
Fred Gortner
Market timing that's 80% of the profit that you make in a deal was determined when you bought it and what you bought where and when and it's not that those factors aren't important in LA but there are there are some attributes to this Market that in answering your question I think give it long-term resiliency and it probably has the most attractive Supply demand fundamentals of any market and any product type for class BC Apartments here um it is the unlike uh the rest of the nation where 2third of the households own their own homes the opposite is true here 2/3 rent most of them are renters by necess they don't they're completely priced out of being able to own homes and the
Fred Gortner
only true affordable naturally occurring affordable housing available to them are these older Class B and Class C apartment buildings um so the so you have this resiliency of demand that that just defies Cycles number one with a permanent large permanent rental class that has no other choices near near the schools and near the jobs unless you want want to sleap all the way out to you know the the high desert or Inland Empire you know and be in your car 4 hours a day um the barriers to new Supply in this market are notorious and and need to be fixed yeah if that is the thing that we need to do Nationwide and in California and in Southern California where a million units in this state behind where we need to be in terms of housing people and that that's why
Fred Gortner
rents are high the answer isn't rent control the answer is we need to build more housing it's just econ 101 um the the rental housing stock here was built out in the in the decades after World War II when it was just orange Fields over here in the valley and so land was cheap it was plentiful and so what they built were these these low density twostory Courtyard style apartment building small I think 90% of the rental housing stock here is 50 units or less around a a pool or a courtyard you would never these are you could never build these things today they just wouldn't be feasible um and so you know you you got a a sea of these things um but they're priced off of today's income they're not priced off of what the
Fred Gortner
development potential is cu nobody's going to pay you for that with all the you know litigation it doesn't make sense yeah so the so the the cost Advantage relative to you know you know I I just read that Santa Monica is building affordable housing kind of move take the homeless off the street and house them at a million dollar a unit yeah did you see that that's unbelievable it's crazy it's nuts and and you know our all-in cost basis is between 250 and 350 a unit so we're at such a huge discount and that's for that's for like really nice new apartments right BC like your your renter type for
Taylor Avakian
the apartments that you guys build and renovate and things are are the the you Middle America workers right these
Fred Gortner
are these are working class middle low and moderate income households and and we typically gut when when we get a vacancy we gut the units yeah and it's all new it it looks like a brand new apartment when you're in it we do everything that we can to spruce up the exterior and improve the common areas and make it really feel contemporary yeah um there's not much there's not many amenities in these things if we can add barbecue areas there's not much space to add am there not that much space CU
Taylor Avakian
you're taking existing old 50s 60s 7s ' 80s '90s buildings right and then renovating the existing so tear down walls if you need to but sometimes just put in a painter coat uh new flooring new bathrooms new all that stuff
Fred Gortner
upgrading electrical and so forth and but what's what's really important to us is it needs the end product needs to be affordable yeah so we always try to be in the 30 to 40% of arean median household income in in whatever we do and that's one of the reasons Taylor that why we have a really high percentage of transfers where an existing tenant stays at our property and voluntarily moves out of a shoty you know M unrenovated unit
20:00–30:00
Fred Gortner
into one of our renovated units and we'll provide incentives to do that so you know it's kind of one of the fallacies of of folks who look in and particularly at at at some of the working class households the Assumption as oh they just want to live in the cheapest place that they can find no they want to they want every what every family wants I want a safe well-maintained professionally managed I want to live in the best place that I can afford for my family so affordability is a huge huge uh issue for us um one of the reasons we love this Market um and why there's great value added opportunity is it's there's very little institutional penetration in the BC space all the institutional capital is either playing the periphery like the Inland
Fred Gortner
Empire where they can get some scale but you might as well be investing in Phoenix as far as I'm concerned uh or they're doing groundup development which is not for me plenty of guys so this is a mom and pop space we have yet to buy an asset that has rubs which is The Rao utility uh Billing System that is how it it that's apartment management 101 which is crazy
Taylor Avakian
how apartment owners don't start like why that isn't something that's
Fred Gortner
done regularly so you know I it I think scale so I'd say maybe half the assets we acquire tailor are self-managed to I met with a last night yeah we asked for great guy I asked for financial statements historical financial statements they're handwritten okay so this is and and this is actually one of the more sophisticated mom and popop folks 2024 yeah so the mark That's the market here is it and and they manag them what they want is steady cash flow yeah and so they don't like a vacancy because a vacancy means the bare minimum I got to replace carpets and maybe patch this up I'm putting 57500 bucks into it I they don't want to do that so they deliberately keep rents low and they don't want to put capex in unless
Fred Gortner
they absolutely have to and it's rational for them particularly if you overlay I mean look at look at La City if you all these properties in LA City during Co operating expenses were going up by at least 10% insurance was going up by 20% a year payrolls going up inflation is hitting all the operating expenses so my operating expenses on we have one asset that's subject to City of La RSO went up by at least 50% in 3 years what did the city of La allow me to raise rents zero yeah during that time frame so my operating margin is getting squeezed but that operating profit does that's not that net operating income doesn't go into my pocket the vast majority of that is going into uh Debt Service and the balance is going into upgrades 100%
Fred Gortner
of our cash flow during the first three or four years that we own an asset is either going to our lender or it's being reinvested in the property to upgrade it the the experience for the tenants and and the value of the property we and we barely were able to do that we were we thankfully had budgeted extra Equity had we couldn't rely on any cashh flow from the property so you raised a little bit extra in the raise for that property to be able to because we knew it was RSO we knew
Taylor Avakian
that was our only way yeah it's um speaking of of RSO and I think that is what we've talked about a little bit too and why La is so attractive from a substitutional space but walk me through the misinformation on rank control like why is why is there this big us against
Fred Gortner
them good evil bad so the the advocate so first of all are there bad actors in our space absolutely and they taint the whole industry it's not a majority it's a minority but it's a it is it gets publicized and so forth so there's people that don't execute their business ethically we we are Paladin is huge on values and affordability and executing our business ethically is like top of the list you know do the right thing you asked my children we had gner family values on our stove top for 30 years and you ask my kids what's number one it's Integrity do the right thing and that's that's not just for our investors it's not just for the broker relationships that we have it's the tenants that we have um so number one there's some Bad actors that give the industry a bad name number two the affordable housing
Fred Gortner
crisis is real I mean it is real and housing prices have been going through the roof and rents have been going through the roof why is that it's you know you don't have to have taken econ 101 to know that it is supply and demand and we are a million units short in California we are 400,000 units short in just LA County based on the amount of new construction that's happened recently it'll take 20 years just for LA County to catch up on its current housing deficit and that doesn't take into account you know depletions of supply and so forth so so the need to address the affordable housing crisis is real and and rent control is it's well-intentioned because the
Fred Gortner
the motivations behind it are real and need to be addressed the problem is it just it it it it is counterproductive it's misguided and it ignores just that those principles supply and demand tenants of econ 101 and it's also it's a very blunt tool because it it benefits rich kids as much as it is as it does help renters in place but what it also hinders is let's say you have a rent controlled apartment on the east side of Los Angeles and you have this great job opportunity over here on the West Side you can't pursue that or you're now faced with spending you know 4 hours in the car so there's a lot of disinform this whole notion that
Fred Gortner
Blackstone controls the housing market in California is ridiculous I mean the institutional owned housing across the country and in California is under 5% so it's such a small subset this is a mom and pop Market here so it it what you're that this these villains that they've come up with I mean it's not misinformation it is a it's disinformation to achieve a political iCal aim and and and I don't like that yeah um the the you know the the right solution uh is there's really two that I can think of anything that you can do to encourage new housing is what ultimately is needed to solve this problem the accessory dwelling unit law actually I think was some of the best policy to come out yeah and it's been a huge
Fred Gortner
a huge uh impact yeah um and it's and it's an impact that helps Mom and Pops and it's an impact that helps the overall Market the second thing is if you really want to help renters in need then give them and and you think that housing is a right and I you know the the principles of that are hard to argue with um you then the rent control doesn't do that vouchers do expand the voucher program Society should be paying for it because is a societal benefit it shouldn't be coming on the backs of Mom and Pops that are struggling just to pay the bills with their apartment buildings you
Taylor Avakian
know yeah no for sure it's it's uh it's interesting to see too because it's kind of this um it feels like cuz we were I I sat in or was part of the Uli Housing Council and so we sat in on this new chip ordinance this uh la is coming out with a new mandate mandated by the state a new housing program and in that the goal of that is to Spur more housing they you know 400,000 short they understand that they know that they're updating the TOC program they're updating um a bunch of different development standards zoning things like that density bonuses on menu off menu incentives and we were sitting down and and this is a room full of Architects and attorneys and you know real estate people developers and S and we were looking at this and we're we're we're it's
Taylor Avakian
so confusing you literally have to have a PhD and understanding development to make any sense of it as a normal human being and the the when you calculate the actual benefit from a development standpoint right like does this feasibly improve the ability to develop yeah on the surface okay maybe you have some more density but overall it it it doesn't we didn't feel like it moved the needle there were so many they they added one thing and then took another thing away that was a benefit we calculated the cost of construction and it's like it still doesn't pencil for a new development so how what changes actually impacted yeah so it feels like they're trying to they're like shuffling a bunch of things on the table and and seeing you know hey we did something new but in reality I don't know that the developers that I speak to actually
Taylor Avakian
feel like it's improving that ability yeah is there anything that we can actually do or is it is it got to be a policy push is does it have to be from the tenants where where does the change
30:00–40:00
Fred Gortner
need to come from well I so prop 33 could be a disaster um because it what what prop 33 does yeah can you explain prop 33 so back in 1995 some sensible policy came out of Sacramento and a law called Costa Hawkins was passed and that's been the law of the land for the last 30 years that what that did is it outlawed some of the most Draconian forms of rent control that um uh that not only limited what you could raise rents on an existing tenant which now there's rent control that limits that Statewide ab1 1482 which is really a moderate form I think a balanced form of R control limits that so people have visibility they
Fred Gortner
they're not going to get priced out of their homes but it limited if you had a vacancy you you it was limited on how much you could raise rent called vacancy control so there's you you what not only what incentive did a landlord have to try to upkeep these older properties but it they they actually were having operating margins squeezed I mean operating expenses were growing and yet rents at a faster rate than rents and at some point those lines start to intersect and and so this it's so again Justice for renters act the Justice implies that you've got some nefarious greedy corporate landlord this is the disinform it's it's is bad is the Ula tax when which they called
Fred Gortner
a mansion tax you know the Paris Hilton tax and and one of the LA City Council Members on she didn't think she was being recorded admit aded the bait and switch they admitted that it was a deceptive advertising campaign and you know it means it it applies 90% of that tax is coming from the sale of Office Buildings and and so forth and so all of a sudden that's ground to a halt so what what prop 33 would do would REM would repeal Costa Hawkins what Costa Hawkins did was was one of the most powerful things to incentivize new development because developers knew okay I got a 15-year period where I'm going to be able to get the market m r that I to to make an investment
Fred Gortner
and then after that cities could put put in place rank control the state you know ab1 1482 I think was a a a i I would prefer no rent control I think I I do believe that letting the market work and incentivizing housing having enough Supply is the best way to that's ultimately what we need we need more Supply we we have a million unit shortage in the state of California those are those you know that's a bigger cause of homelessness it's not blackstone's fault that we have homelessness in this state it's nimi it is all the barriers to new construction that have put people out there's obviously a lot of Economic and other factors that contribute to it so um it it's uh you'll we'll we'll see I think that I think that there's a pretty
Fred Gortner
big education campaign because this prop 33 will come on the backs of small mom and pop landlords who are already
Taylor Avakian
scraping by yeah no it's um it's going to be interesting to see we're in August of this year the the vote is going to be in November so we will know
Fred Gortner
eventually which way it goes I think for New York talk to your neighbors yeah it was disappointing that the California Democratic party end it I don't think they really thought things through on it to be perfectly honest you know the the the true answer is is targeted rent relief through vouchers to the families who truly need it let's expand that program um and uh and then ultimately come up with cre other creative ways besides adus to be able to add more housing so that's actually a good
Taylor Avakian
segue um I'm curious to know your view your contrarian view on the market and where where where do most people disagree with you like where where do you is
Fred Gortner
your views different than the majority well so when people actually understand what we're doing and how and and the conservative approach that we take you know whether it's the use of debt the uh discounts to replacement costs that we seek and so forth we never really get everybody understands the thesis and they're like wow that sounds great where I see any disagreement with what we're doing it's the focus on California and Southern California in particular there's a lot of people out there that are just bearish on the state and you get high-profile you know corporate companies exiting like Tesla and so forth to Texas or elsewhere and but I you know even that that that's just headline noise to me I
Fred Gortner
me California has been most heavily taxed and heavily regulated state in the nation for as long as I've been alive and yet we've grown from being the 10th largest economy in the world to the seventh we now if I remember correctly the fifth largest economy in the world Southern California which is an extremely difficult place to do business challenging place but uh it is the 19th largest economy in the world so despite all all of the Regulatory and tax and other pressures this state is firing on all cylinders why is that we have the best weather in the country we have the best terrain real beautiful real estate in the country we have some of the best universities in the country if you are going to start it we are the Innovation capital of the world you're going
Fred Gortner
to start a business particularly in technology you're coming to California to do it now once you're billionaire and if you want if you're selfish and want to save some taxes and move to Texas and and Florida great those are homes for you but if you want to build a company and you want a Workforce to do it this is the state that you do it in and so I'm I'm I'm bullish there's so you know there's 20 million people in our target market we're we focus on greater Southern California there's 20 million people in this market and so if 100,000 left during Co who cares yeah you know it it doesn't move the needle on it and and to me it is the supply the the the the it's such a high conviction strategy that we're doing it's all driven
Fred Gortner
Taylor by the way so you know we have this Latin America business that's now entering its 30th year and which was was another you know not an easy cell you know it's not on anybody's radar screen and but you know we ra five big institutional funds there with some huge brand name Pension funds and others and um and we shifted our business away from bringing US dollar denominated Capital into the region to raising capital from within the region because the one thing we could never control down there was currency risk so we might you know we were generating 2x multiples at the real estate level we delivering everything we said we were going to do and then you know we give 80% of that profit back in currency we could never overcome so that writing
Fred Gortner
was on the wall about 10 years ago and we sat down with our regional heads and we incentivized them to raise Capital locally and to be a developer because we had developed we had hired all these development teams because some of our local operating Partners had gone out of you know Global financial crisis hits all of a sudden six of our local operating Partners were out of business and we got a half-built condo project we have to complete it which we did without generating any fees wow we sat and so we had the teams in place and so by the time we came to fund for this about 10 plus years ago I sat down with all of our lead professors I said look we have great teams in place we've proven our ability to complete these developments if we hire a land acquisition P let
Fred Gortner
us be the developer we'll still bring in we we don't we're not vertically integrated so I don't want in-house construction or Property Management so we'll we you know we'll hire a local partner we'll pay him a fee we won't pay him a promote to be the construction team and every one of our institutional clients said love it we showed why it's a win-win for them you know we eliminate a double promote we get you we Paladin is now day-to-day hands on can you explain double promote that's so yeah so I mean a a real estate syndicator or sponsor or manager like us the fees that we earn the asset management fees that just keeps the lights on allows me to keep a staff where what we're really trying to do is if if our investors make money then we make money we share on the profit
Fred Gortner
and that that profit sharing is called a promote or a carried interest and we for the first 20 years of our Latin America business we were we would raise money from Pension funds and then we would joint venture with local developers so we were and and we were a control investor we were high maintenance Capital we were not Passive by any means and
40:00–50:00
Fred Gortner
um and and so our local operating Partners would earn a promote if the project performed and then we would earn a promote if that project and the hundred others that we did a fun performed okay so there were two layers of promote when we shifted to actually being the local operating partner with the blessing of all of our institutional investors we eliminate a layer of promote so doesn't mean the profits go up but it just it it better execution better alignment of Interest yes there was more profit now that would flow directly to our funds and it's been a it it it actually has proved out to be a win-win it's been very successful but that never could overcome the currency yeah so we we incentivized we started this shift away from being an Institutional fund manager in Latin America about 10 years ago and
Fred Gortner
that's that is largely successful now that meant two things among the many hats that I was wearing in the firm is I was Raising all of these funds I didn't have to get on airplanes anymore and raise These funds which is great um and then the second thing is Jim and I didn't need to put the Lion Share of our net worth in these Latin America Funds and and the one thing that was kind of missing from our strategy down there because it was for sale housing is it didn't generate any passive income and so here Jim and I I don't know 5 10 years ago we're kind of sitting at the same time going okay what are we going to do with our time and our money and and what it this whole the the growing of our we've always been
Fred Gortner
doing value added Investments but deciding to really focus on Southern California this is where Jim and I want to put our money yeah and and you know we've been having friends and family co-invest alongside us but anytime we're doing anything like this I just I just like to scale it so so we we brought one of our institutional relationships into the last three properties that we bought uh it's been great they provided 80% of the capital and then our what I call our friends and family Club investors who like to cherry-pick Deals they came in for 20% and that's been phenomenal and that's our formula going forward is to replicate that um I've been talking with a lot of a number of institutional investors about providing a programmatic sleeve for us for 202 and I want that
Fred Gortner
to be about 80% of our Capital because I where I think this strategy resonates the most because it you know Jim and I are individuals and it's our own money and our conservative approach is driven by I don't want to lose this is what I'm retiring on I work really hard to build this up and I don't want to lose it and so the downside protection is huge driver that resonates with everyone all of our high net worth and family office investors are in exactly the same boat rule number one don't lose money yeah rule number two don't forget rule number one right rule number three if you can grow my wealth more power to you
Taylor Avakian
yeah yeah so uh speaking of raising funds and I think you've obviously done an incredible job of doing that over the past 30 plus years how do you approach raising money for deals and what do
Fred Gortner
you think gives you the edge that you have cuz clearly you're you're very good at it well when we were starting out 30 years ago and we didn't have a track record and we didn't have any institutional credibility it was just a persistence I mean on that gortner family yeah value chart rule number two or value number two that the kids are is perseverance which is just keep moving forward and so we just you know just kept moving forward you just block and tackles how how do build any business right it's just grit and creativity it's a lot easier for us now because we've been in business for 30 years we are a sec registered investment advisor we are are are
Fred Gortner
quarterly reporting is those templates are used by our largest institutional client which is the second or third largest pension fund in the country that is the reporting template for all of their value added investors sorry buddies it's our fault but that's because it's very trans look we we are open book yeah and um so it's a little easier for us what what I think our our challenge is what we talked about California there's like some people are scratching their heads and you know particularly if we're trying to bring red state capital into a blue State you know Fox News completely mischaracterizes Cali I mean it does we've got our faults here but this is still the best state in
Taylor Avakian
the country um what was the is there any stories early on like what was the the first time you raised money I know that you had the family backing from that but like Simon yeah what was the first is there any interesting stories about raising money or doing a deal or interesting deal story that you can think of that was like stand out God
Fred Gortner
you know there's there's so many um it's hard to pick because we've done probably 500 assets 8 billion in real estate eight countries um I think the one the the first deal that got us into Latin America is kind of a fun story because you know it's round Jim and I started the business with the Simons in 1995 and our principal investor at that time was the Simon family we were creating our track record with their capital and and doing very well with that um we had been looking at master plan resorts in in on the west coast and on the east coast and so we were pretty familiar with that business and done a a couple of Master Plan communities and uh a friend of mine put an opportunity in Costa Rica in front of us and the project level economics were off the charts we had not done
Fred Gortner
anything in Latin America and and it was one of the largest most successful master plan resorts in Costa Rica my my partner Jim said No at least two or three times finally and I I don't lie but I I kind of tricked him a little bit I said hey come on in I got some you know some California home builders which is the truth uh in the conference room just do a quick meet and greet comes in I close the door we had the whole everything rendering plans you know all everything you POS the War Room was set up on our giant conference room table and I just said Jim sit down for 10 minutes and just listen to this that was on a Thursday we were in that conference room for 3 hours Jim flew down the next day to Costa Rica and tour it he came
Fred Gortner
back on Monday and sat at that time Bill Simon senior the legendary former treasury secretary and you know leverage buyout Pioneer was chairman of our investment committee so Jim sits down with him and goes this is the best deal I've seen in my 30 years from a project level economics the value proposition here if we airlifted this to South Florida it just it's night and day wow and and he he goes bill I feel so solid about this deal I will put 100% of the money I'm putting in all our deals today in this one deal that's how good I go and and Bill senior had really distasteful views at the time about Latin Americas cuz during his treasury secretary days it was banana republics and hunas and things like that but it was was very different in the '90s you know there it's it's
Fred Gortner
SE it's not Emerging Markets anymore it's kind of emerged yeah and so what year was this by the way this was 97 okay so he goes okay Jim you got one of these so that was the first deal we did we still own it and it's been we've already gotten our money back and then some um and but it opened our eyes up to the region and you know you know it also just says no doesn't always mean no I wouldn't be married Taylor because my my wife when I finally uh when I finally got up the nerve to sne I got I made sure that I got into every study group that she was in so I was like a shot over her number two persist exactly persistence and um she actually broke up with me after I had snuck a pee a kiss in somewhere
Fred Gortner
we drove up to the Bay Area together and she she said look you're a nice guy and everything but I I'm in business school and I don't want to get dragged down with a relationship and stuff like that so she broke up with me at Harris Ranch a week later we were madly in love and and like 3 months later we were engaged so no never means no it usually means not yet yeah our first uh Latin America fund I remember the head of real estate at this large pension fund just kept saying no no no and so finally he goes okay gordner I will throw the spaghetti against the wall and I'll talk about it with my chief investment officer they ended up becaming becoming the lead investor in that fund and we hit our maximum within a six month fund raise so again no
Fred Gortner
never means no doesn't always mean no you know not yet and if you really do if you really do believe in something and you've got this North Star go for it yeah but you got to be you got to have tenacity and persistence and my kids hate the word grit but it's a good word you know you you know you you and they show it they have it they
50:00–1:00:00
Fred Gortner
just hate the word it's like a cliche word yeah but but there's a reason cliches are cliches because that most of them are true it means something right absolutely
Taylor Avakian
right there's there's value behind that I think uh it's super interesting to to hear that from you because my experience in The Brokerage side of the business too has been one of no means not yet or or you know and a lot of times right we have so much going on especially in today's world there's a million in one things we could be doing at any time we're always connected to our phones there's always something to do if you think about it and so sometimes what we truly want is not necessarily clear
Fred Gortner
to us well and you also and and your business it's huge because you know our style is we don't do auctions yeah and the only Market where you can do that is in a mom and pop yeah market right any instit any Market any real estate market with broad institutional ownership you have to have create an auction process so why does it why though are you being a good fiduciary to the seller by Say by bringing by allowing Paladin to preempt the market and not take it to auction the reason is our only competition here our main competition here are Mom and popop exchange buyers who are a notoriously flaky group and a lot of times the seller wants to go into a 1031 exchange and so they need certainty of closing is more
Fred Gortner
important to them than the highest price and you've you've seen it where we have been where so our our value proposition to our stakeholders like you who are Partners in our business we would not be able to survive without the the tailor of the world is look when you get a listing a pocket listing before it gets on Loop net to give us a two to three week Head Start we can we'll take the hand scrolled financial statement say get it let us walk through it we'll share our numbers with you you can share them with the seller and here's our price and and and and and you represent us so it's it's it's a good there's an economic incentive but what your but what your pitch is to the seller is
Fred Gortner
look I've done a bunch of business with these guys they've been around for 30 years when they put something under contract they close they don't re trade price you can't say that about everybody that's in the market and we've had four situations in the last two three we haven't bought anything in two years but over the last three or four years we had four situations where we were doing that some kind of preliminary preemptive work with folks like you and then an exchange buyer showed up in the middle of the process and was willing to pay 10 or 20% more and said good luck to you yeah we're we don't we're we're not going to compete and then lo and behold three or 4 months later I I get a call and the exchange fell out are you guys still good at your price M and you know our last
Fred Gortner
four Acquisitions actually was that exact scenario wow so uh what it means is when I tell you no yeah yeah it doesn't mean no yeah yeah of course no it's it's
Taylor Avakian
it's so cuz we I mean this is literally conversations I have every day I have every single owner and even if they say they don't want to sell every everything's for sale at a certain Price Right their price might not be realistic but it's for sale so why do you think that the off-market game I understand why it's attractive from a buyer's perspective but why do you think it's still so prevalent
Fred Gortner
when clearly there's there's a reason that people want to buy deals off Market well I think so much of it comes down to trust okay you've been that's a seller Rel relationship you've been nurturing for years and you've been doing a ton of work for nothing to help them with Estate Planning and all kinds of things right thank you so you you're you're like their one you're one of their trusted financial advisers it would not happen if there wasn't trust like somebody just can't pick up a listing and convince that so you they're trusting you to understand the market and to be able to put you know describe the the pros and cons of a particular buyer and you know that so your reputation is everything and our reputation
Fred Gortner
is everything and our reputation with you is everything I I don't I except for one situation where I've bought an asset from somebody I know I don't know these guys so it's all it's all trust-based it wouldn't happen without that and they they we're are paying a what we think is a fair price and you're demonstrating that to them and you're being honest and saying look we could put we could list it um and there are people who are if they're in an exchange they've got the the you know a time deadline and they're willing to overpay they're somewhat price in sensitive to avoid that tax hit you might get lucky with an exchange buyer you might go under contract with them their deal might fall out I mean there's so many moving pieces whereas I've closed a half a dozen deals with with Paladin these guy you know
Fred Gortner
I've known Fred forever I mean these these these guys have integrity and when we go under contract it'll close and that that reputation and that level of trust is is everything so it wouldn't it could only happen in that environment from that you mentioned uh briefly you haven't bought anything in two years yeah why it's really frustrating it's really frustrating because the the you know pal hikes interest rates to make an name for himself in the history books and all of a sudden my cost of capital's gone up but it hasn't been reflected in in I I can't pay as much as what it boils down to there has to be a pricing adjustment and there hasn't been any pressure yet on sellers um they're still hoping for that dumb exchange buyer and that's actually a different a a a challenge of this Market because it's Mom and
Fred Gortner
Pop owned is that you don't have institutional ownership that is so attuned to well of course cap rates should go up by 50 to 100 basis points you know you're you're all the sellers you've been talking to still have 20 21 prices in their heads they're not going to change that unless one thing hap it happens and well they could have estate planning death divorce you know diaper there's a lot what 4 DS right that that cause a transaction but the one that is now we're at the front end of I think a three-year wave is this wave of Deb commercial debt maturities there's a I think um somebody told me that one in five apartment Loans in LA and Orange County over the next 3 years are maturing so that loan that had been at a 3 or
Fred Gortner
4% interest rate and cash flows servicing it it matures in a what is now probably a 5 6 7% interest rate environment depending on the amount of Leverage and you it's not the cash flow is not going to serve as the debt at the higher interest rate so you've either got to write a big check to refinance it a cash in refi uh or you sell a lot of these Mom and Pops don't have the financial capacity nor this they're just like oh my God I got to write a check for half a million dollars to refinance Taylor really so a lot of them are bringing are now they're going to be forced to bring assets to Market and we're I don't I it's question for you I mean we've seen we we made an offer on one
Fred Gortner
deal last year after looking at over 200 jeez and we came close but we were still 500,000 apart which was a meaningful amount for us and we're not going to stretch in this kind of environment we've got just in the last two months we've put offers in on six deals I had a very good meeting last night so you know I I think it's I think we're now starting to see some cracks where there's we we're we've been in this 2-year period of price Discovery and we're waiting for seller cap capitulation basically to accept the the new reality the new reality is your building isn't worth as much as it used to be MH it's the bottom line yeah it's just not we've come up with some creative ways to overcome that but you know it so I'm I think it really
Fred Gortner
will start to hit next year I think 2025 will be a good time for people to sell because interest rates are going to be coming down but it'll be a good time to buy I think it actually you'll you'll see normaly return to the market there's no normaly in the market for the
Taylor Avakian
last two years yeah you uh you said some creatively how how do you think about Creative Solutions to make a deal happen well
Fred Gortner
one of the one of the things that we've done so a lot a lot a common theme particularly a lot of the sellers tend to be older folks so they're either you know if if a kid in if if if the Next Generation inherits the property they get a step up Bas it's great let's sell it and we we we don't have a tax hit but for an Oldtimer you know older folks that have you know they they they
1:00:00–1:10:00
Fred Gortner
they like the income but they hate the management they they're rent control is just another reason for them to want to throw in the towel but God I mean what do I convert this into and you know do I buy a triple net property in ski or Illinois or whatever and so what we've done is we've we've sat down with them and said look you know you've owned this asset 30 years you know it okay but it's you know it is it's run down and you and you've deliberately kept rents well below Market let us come in let let us lease it from you we'll give you the current noi that you're currently paying we're going to invest a couple million dollars in your property and enhance it and we're going to capture that
Fred Gortner
difference between where your noi is today and where we think we can take it and give us a few years to actually have some cash flow so that our investors can benefit from that renovation premium if we default or walk away you get to benefit from all these improvements you know we don't we we can't take them with us they have like a purchase contract in like year three and and then yes then we have an option okay and it's you know somewhere in 3 to five years and sometimes they say well what if I find an asset I want a 1031 into we'll give them a put but we need enough time to be able we can't have them put the property to us if we're in the middle of a value added business plan and have the buildings vacant and under
Fred Gortner
construction and so but we've come out we we we really try to sit down and just say look what are your objectives here what do you really trying to achieve what would be like the best case scenario when we try to craft it around but this lease option has been a a a nice alternative to a 1031 it requires a level of sophist it's a sophis icated idea that that requires a sharp broker yeah and also requires I think a level of sophistication of the owner to really understand but um you know we've we've had that we've had some owners in the middle of that dialogue say okay so how much you putting in well we're going to put about 2 million into the property we'll pay we we usually pay them a a nice deposit up front like let's say if we're going to buy it
Fred Gortner
for 10 million bucks we'll pay you a million dollarss upfront now so let's say I have to I got to raise money for that million and then I want to put 2 million into it so let's say round numbers that's 3 million and well what do you you know what do you normally give to your investors and I tell them you know we try to you know deliver you know market rate uh value added returns to our investors which are annual returns in sort of the low to mid teens he goes well well what if we partner together and all that was like a total Zinger when one of them had had suggested that it didn't ever it didn't happen but it was one of those things where it was was like okay you know
Fred Gortner
once you actually get to know us and see what we're capable of doing it's like okay these guys actually know how to how to harness value in an under in in an asset that that's got potential some of them actually want to be our partners longer than you know just stand up so you never and Jim and I have done probably two or 300 joint ventures over 30 years I mean there's no boundaries to the creativity that we've done so when somebody proposes something like like okay take a look at it you know if we can align our interests let's do it it feels like with because I actually had this idea about
Taylor Avakian
a year ago I was my thought I was like there's a business in this right how many owners have properties that either they don't have the funds to renovate they want to maximize the value that they've created right they don't have the team in place they don't have all that stuff like if there was a company that could go and basically JV this hey we're in this together you're going to provide the real estate we're going to provide some of the capital and the working and do all the work for you and then either we refinance or sell
Fred Gortner
and you're going to be able to take part of that you you know you if we sell it you get the first x million which is what it's worth today yeah and then we'll split the profit above that and I feel like that would be a it's is it the trust that's the hard part it's totally this the first time this was proposed to us it only came about because I had met with the seller several times and I had sent him look you here's who we are we talked about things like integrity and children and school and all that stuff so it it would never happen it only happened because there was a level of trust and then a level of intrigue of well I don't really need the income from this property actually and I do make real estate Investments with groups that do what
Fred Gortner
you do in Kansas City so all of a sudden he he went from being a seller to wanting to be a partner yeah it it it it was a complete curveball for us but that's great I mean what a great validation of things if you can
Taylor Avakian
be nimble and it seems like you guys are very creative and your approach because you're willing to look at opportunities from different angles right and it speaks actually to your discipline with not buying anything in the last two years because there's been a lot of sales in the last two years not as much as there was previously but there's still been a lot of activity so I think for for you it speaks to your ability and and Palin's ability to to really stick solid to those values and and
Fred Gortner
how you look and approach a deal well there's two things Taylor also that we're going back to your question on what kind of gives us a Competitive Edge yeah we've been in business for 30 years and we have I have revenue streams from our Latin America business and so forth so I don't have any pressure to put money out for fees which is great mhm also it's my money so I'm not going to stretch I don't want to lose it right that's an enviable position to be in yeah and uh you know not not everybody's in that so I'm I'm blessed from that standpoint we'll uh we'll wrap it
Taylor Avakian
up with kind of a a last question or maybe one or two questions but um looking ahead what kind of Trends do you anticipate are going to shape commercial real estate in the next like 5 to 10 years like and again no one knows no one has a magic Crystal Ball but what do you think is going to shape the way that you do business I do business the commercial real estate businesses done in general in that 5 to 10 year window so AI as
Fred Gortner
we talked about for sure and and how that reflects what comes out of that there's so many different ways it's going to influence life that it's going to be exciting to kind of watch that unfold I'm more of an optimist I've got a lot of concerns about Ai and Bad actors and it's going to happen so hopefully somebody will figure out how to avoid us from blowing up the planet and having the machines take over um we've done every product type over 30 years you I cut my teeth doing Main Street retails we talked about when I was in business school um I think that what Co did was it accelerated and maybe unlocked some of the the Dynamics
Fred Gortner
that were happening and and the some of the you know creative destruction that was happening in real estate that was predating it so for example you know the Amazon effect on retail it just accelerated that I mean I prior to co I did not want to buy anything on Amazon I wanted to support Main Street retail I didn't want to enrich Jeff Bezos but you know Co hits you had no choice all of a sudden GrubHub and Uber Eats and all the you know instacart all pop up and now I realize okay I like the convenience and I'm actually helping these gig econom workers so I'm I'm sort of rationalized it a little bit but so that's having a real impact on on retail so the whole where retail ends up it's going
Fred Gortner
to it was already heading in a direction of you know outlet centers I don't know how they're going to survive but experiential retail like what Caruso tries to do that should do well office same thing I remember going to UI and DC car America was showing off a brand new office building we're walking through the lobby and they were describing how they had hired a hotel architect to design the lobby and its amenities and when if you in there you would think you were in a hotel you know there's a there's a a deli and uh uh you know beastro and there's a the equivalent of a Starbucks and there's conference rooms and there's free fitness centers and all of these amenities that they had to provide um it it it felt like a hotel that's where office is heading and the the whole
Fred Gortner
we Works thing MH that business model was flawed you know you know long-term liability short-term revenues it was wasn't smart it was but if you looked at the tenant base of Wei works it was all Fortune 500 companies and what were they doing they're paying a little bit more for rent but what they're gaining is is basically hoteling month-to-month flexibility and and I so and and then you take the whole
1:10:00–1:20:00
Fred Gortner
work from home Zoom phenomena that's now kind of anchored I think like a third of the workforce is working from home which has its pros but it has its cons you know you're trying to build teams and and still corporate culture and and cultivate you know all of the kids that I Mentor are coming out it's like don't work from home get yourself in an office surround yourself with with you know get on a team with really talented leaders and just be a fly on the wall and learn how they do it you cannot do that from zoom and so there's I think those Trends are all going to continue one of the reasons I love you know the common theme across everything that we've done at Paladin you know we want it to be scalable because we're institutional it's got to be demand driven but the
Fred Gortner
key is you know our focus on housing probably 90% of the Investments we've made across that 8 billion is low and middle- income housing either for sale or rental you got to live somewhere you can't live via zoom and it so what we're doing here in LA and what we're building down in Latin America it's an essential need in a supply constrained Market with very little institutional penetration there's very little institutional penetration in what we're doing here in SOA very little down in Latin America and that's why we like it we don't like competition but we bring that institutional competitive advantage and that discipline to this non-institutional space where there is a great Market opportunity to provide an essential need so you know it will be sold and you know it will be rented
Fred Gortner
and the key is did I get my rents right did I get my price right did I get my expenses right and I get my costs right those and get my time right you know those are the factors yeah and if you can get all those then you know I think you hit it out of the park exactly right I appreciate it Fred Taylor great great times this is incredible yeah always talking with you yeah
Taylor Avakian
likewise thank you for listening to this episode if you enjoyed the podcast it would mean the world to me if you could rate US five stars on YouTube Spotify and apple podcast it really helps us get our name out there and helps us get fantastic people like our guests to share their insights and knowledge with you again my name is Taylor ven I specialize in the sale of apartment buildings in Los Angeles in Southern California and I look forward to sharing more of these conversations with you see you in the next one