Latest / Real Investor Radio Podcast / EP43 | Kris Garin - Tenant Relationships, Portfolio Acquisitions, UPREIT Structure

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EP43 | Kris Garin - Tenant Relationships, Portfolio Acquisitions, UPREIT Structure · Real Investor Radio Podcast

• Craig Fuhr (00:12) special. All right, welcome back everyone to Real Investor Radio. I'm Craig Feuer with Jack Pavere. We're here again with Kris Garin from Riparian Capital Partners. We just had a great conversation on the previous episode. I'd invite everybody to check that one out first. We're going to jump back in with Kris. Kris, it's so great to have you back on the show. Thank you for all your generous time today. Know how busy you must be based on. Kris Garin (00:23) you Craig Fuhr (00:38) our last conversation. So we really appreciate. Well, we appreciate you taking the time and carving out this time of day for us. We're we're blessed by it. So thank you. Jack, we were talking on the last episode about sort of riparian's meteoric rise in terms of units from 2020 purchasing their first portfolio in 2020 of scattered site properties in Baltimore to Kris Garin (00:39) Appreciate you guys having me. Craig Fuhr (01:07) over there. I think you said 1350 doors right now, Kris. So that is a rapid rise indeed. And so we really focused on the last episode, sort of on the philosophy of, you know, riparian's approach to purchasing as well as their approach to due diligence on these properties when purchasing. One of the things that came up at the final part of the episode was, man, there's a lot of tenant issues that come along with this class of properties that you're buying in sort of post -industrial cities around the country. And I'd actually before the end of the episode, love to get your thoughts on, you know, the differences between say Baltimore and Pittsburgh and Detroit, where you operate and, and what you've learned in those cities in terms of leadership, in terms of what you're, what you're excited about and maybe what you're not excited to see in some of those areas. Jack and I just happen to know a lot of the neighborhoods that you're in. Jack BeVier (01:50) you Craig Fuhr (02:04) And I you know, like last night, for instance, Kris, I was looking on your site at some of your houses that are available. And one of them came up on 805 North Glover and in McElroy Park in Baltimore. And for those of who are not from Baltimore, that could be a tough little area. And I imagine that you run into, you know, Jack BeVier (02:05) you you Craig Fuhr (02:26) some tenants at times that can really give you guys a you know, a good deal of headaches. So one of the things that we were we were jumping into in the last episode was, how do you manage that? It's one thing to do your due diligence on a sample of properties in a portfolio and sort of get a sense of where the properties are in terms of capex needed. But what about those tenants? And how have you guys learned to really manage that aspect of the business? Because it has to be top of the list and things that you guys think about. Kris Garin (02:57) Yeah, you're absolutely right. I mean, first, I'll just, you ever notice how Class A properties don't have tenants? Class C properties have tenants, Class A properties have residents. So, it starts with the relationship we want to have. The neighborhoods that we're in aren't, they're not the highest demand, they're not the highest growth, they're not the highest income. But, Craig Fuhr (03:07) Yeah, we knew. Kris Garin (03:27) the best renter in that sub market is solid. The best renter in that sub market has options but is there because they have community connections, all kinds of reasons somebody might be there just because, not because they have to. And so we want to position ourselves as the ideal counterparty for that renter and that takes time. So, The first is that screening of the existing pool that we talked about. So we do a detailed file audit on anything, certainly before we go hard. And then again, before we close. So we understand where all the obligations are, where the delinquency is, all of those things. And so we have a plan going in. Jack BeVier (04:18) you Kris Garin (04:21) Um, if you sort of have that, you know, two by two, where you've got one axis is, you know, the resident, is this somebody we want a relationship with somebody we don't want a relationship with? And is it, and then, then the other is the unit. Is this a unit that, that we can operate at the standard we feel comfortable operating at or, or not? Um, you know, you've got, uh, residents that we just, we, we don't want that relationship anymore. Right. And we're going to give them an opportunity to leave. or they'll have to go through the eviction process. But sometimes we can make it attractive to them because there's this moment of turnover and it creates the opportunity for certain conversations. Then you have great residents who are in a problematic unit. We can say, hey, would you like another home nearby? We can work with you to move you there so we can keep that relationship. And... so on, right? But you sort of place the situation on that grid, and that gives you a pretty good sense of what the initial plan is. The ratios are going to be completely variable by portfolio. So I don't want to say, as a rule of thumb, because we really do see a range of situations. But in terms of how we're managing the relationship with with who comes in next to the units that we are turning over. I think it's one of the areas where being vertically integrated is super important and trying to reach as early in the process of that relationship as we can to start having the important conversations has been really helpful. For example, you guys will know being... Jack BeVier (06:06) you Kris Garin (06:14) being active in Baltimore, not everybody's used to paying the utilities that the lease says they're supposed to pay, not everybody pays their tenant portion. And there's a whole world of property owners out there who allow that to happen, not because they're bad at their jobs, but because they're in at a low enough basis where it's actually economically perfectly rational to just let that voucher come in, cover the rest. Craig Fuhr (06:23) Mm -hmm. Kris Garin (06:43) And so be it. You they say like the best time to plant a tree is 20 years ago, right? So like, I'm 20 years too late for that strategy, right? I'm not getting in at that basis. And so that doesn't work for us. So I think there's a early conversation, particularly with our leasing folks who... Craig Fuhr (06:47) Right. Right. Kris Garin (07:11) there's a way to have in a respectful way. Look, just so you know, these are real obligations that we expect. You can expect us to work really hard for you. You can expect us to do a great job. We want to be the best landlord you've ever had and keep you forever. But these are our expectations for our residents. And no harm, no foul if you're planning to be somewhere where you don't have to pay those. but this is not that opportunity. And so you should just be aware of that and save yourself and save us a lot of headache. And we've seen those conversations actually change the shape of our funnel a little bit. There are people who just don't bother replying because they're like, okay, right? I'm not, and for some people, the best amenity is affordability, full stop, right? They don't have the luxury of saying, I want. I value quality service, right? If they can save a few dollars a month, they're gonna do that and we get that. Yeah, that's fine. But we wanna set that expectation clearly upfront. Somebody with a voucher doesn't wanna be in a position where they're gonna put that voucher at risk. And shame on us if we haven't made clear upfront what those choices are. Similarly, we've added, and we picked this up actually, Craig Fuhr (08:34) interesting. Jack BeVier (08:35) it. Kris Garin (08:40) from somebody in the Detroit market, we actually ask for proof of on -time rent payments, not just income qualification, because our experience is income qualification will show the ability to pay the rent, doesn't necessarily show the habit of paying the rent, right? You know. Craig Fuhr (09:08) That's too good. That's too good. Kris Garin (09:09) And so there are things like that that are totally in line with fair housing, but do allow us to sort of screen for relationship type stuff upfront. And then finally, and we're better at this now than we have been, but we try not to unnecessarily piss people off. Jack BeVier (09:31) you Kris Garin (09:38) because when people get pissed off, they feel disrespected, they feel ignored, they don't pay the rent, right? And they lash out. And a lot of our demographic, they don't have a lot of control over a lot of different things in their lives, right? That they're just not in a segment of our economy, segment of our society where they get to really make a lot of choices. Craig Fuhr (09:40) Yeah. Kris Garin (10:06) They're kind of price takers in many ways. And this is their largest monthly expenditure, whether that's coming from a voucher or their own paycheck. It's where they do have a choice. And so I think there's a real soft side of this business where people who feel respected will do a good job. And people who don't, their first currency is resistance. Craig Fuhr (10:10) and in many ways. And this is their largest monthly venture, whether that's coming from a dowser or their own business, right? It's whether we have a choice. And so I think there's a real soft side to the business where people who feel rejected will do the job. And if you don't, there are different kinds here. Kris Garin (10:35) right? And they'll just, you know, and they'll show that. So, when I go back and look at where we've gotten our one star Google reviews that just like make my stomach turn, you know, um, it's never because of something that happened. It's always because somebody called didn't get called back, didn't feel heard, didn't feel respected. You know, they, you know, they, they, and, and, and, so we spent a lot of, energy and resources, human and financial, on retooling our phone systems, our voicemail systems, really making sure that we never lose a call, that people get calls back, and our experiences. our residents are pretty understanding of where like, hey, we can't get to that until this time, because we have to get this part in, or we have to get this. But they get really, really upset if somebody is not communicating with them. And so I think that doesn't eliminate the crazy. We see all the stuff you would expect that we see. But we're trying to have a non -commodity experience in a commodity marketplace and identify renters who are looking for an affordable rent, but within that, they're a premium renter because, but the premium is just meeting their obligations, right? But that's still a premium customer acquisition. And so I think we still do a lot more leasing than we do marketing. Jack BeVier (11:58) Yeah. Kris Garin (12:12) So I think there's still a lot of room for us to grow and really get more sophisticated and thoughtful about how do we go after that resident? How do we find them where they are? But that's the vision. And I think we've seen it bear out particularly in the last 6, 12 months of leasing, where we've integrated the steps of the value chain beginning much further up. Craig Fuhr (12:40) Interesting, Jack. Jack BeVier (12:43) Why'd you? So what led you to I'm gonna shift gears slightly. I want to get into the portfolio acquisitions conversation. But before we as a half step there, how like why Baltimore? Why Baltimore, Pittsburgh and Detroit? What other cities are on your mind? I mean, in 2020, you could have gone anywhere in the country. I would, you know, I'd think and you didn't go to the south like you, you know, you stayed in the north, north east and Midwest. What was the which what you're, you know, thinking on? that selection. Kris Garin (13:13) Yeah. There's no reason if you were a seller of a portfolio in Dallas or Orlando or kind of pick your sunbelt darling in like 2020, 2021 that you would have sold to Reparion unless we were overpaying. We got zero edge, zero edge in those markets, right? We see the Sunbelt growth story. I do think a lot of people trying to walk through that door at the same time, but that's okay. There's a lot of growth there. I do think... There's more that growth has been realized than is ahead or because of how much has been pulled forward in COVID. Particularly if you take the view that the real driver of the Sun Belt, I don't know if you call it Renaissance or whatever, but was the cost of living differential as opposed to just the nice weather. Craig Fuhr (14:09) you know it's not Jack BeVier (14:16) Mm -hmm. Mm -hmm. Kris Garin (14:21) You know, and that cost of living differential is not what it was 10 years ago. Yeah. Rents, property taxes, insurance, particularly in climate exposed geographies. You know, it's not, you know, so it's just demonstrably not. That doesn't mean that Baltimore and Detroit are going to be tomorrow's growth stories. But I think when you look and say, There are a lot of people who are really well capitalized. They have lower cost of capital than we do. They have scale. And so it's a competition we don't want to win because why would we be winning if we weren't overpaying? And then we're trying to organize ourselves for the next couple of decades, not for the next three to five years. And so I think the... Craig Fuhr (15:07) not for the next three to five years. So I think the Craig used to come post -industrial. I think all these cities that were on the wrong side of the world, that were on the wrong side of the world, they had various significant population loss. That's where the condition for, if you like, five or four years, like we did, if you have that perception. Kris Garin (15:15) Yeah, Craig used the term post -industrial. I mean, I think all these cities that were on the wrong side of the industrialization, on the wrong side of globalization had their periods of significant population loss. That's where the conditions for, if you like to buy portfolios like we do, if you have that affliction, that's where the opportunities 10, 15, 20 years ago for a Craig Fuhr (15:37) That's where the opportunity came from, 20 years ago, for a right non -industrial owner that is just a whole other business. There's some though, they never had much of a business, right? They never had the agency that they had. And even at the ESG, there's kind of one institutional business. Kris Garin (15:44) bright, but non -institutional owner to aggregate those portfolios existed. In the Sun Belt, they never had population loss. They never had those vacancy dynamics. And even in the GFC, those kind of went institutional in many ways. The housing stock is much younger. And so we think there's a lot of opportunity in the secondary Jack BeVier (15:51) you Kris Garin (16:15) cities across the upper Midwest. And when you think about kind of where that graying boomer sort of was done really well and is now ready to transition, where we can go find them and come up with a solution that's attractive to them and also works for us and our investors, I think that's where we go looking for them. I'll also say Baltimore, Jack BeVier (16:22) you Kris Garin (16:45) I love Baltimore. It's not high on institutional investors lists because a lot of institutional investors have lost money in Baltimore. But every time they've lost money in Baltimore, it's because they're like DC, Philly, New York, 95, Hopkins, the port, Ed's and Med's, like Charm City. How can this not be right around the corner? So much going for it. Right? Jack BeVier (16:56) you Kris Garin (17:14) And, you know, so far not yet. But the people who have, you know, participated in Baltimore as it is, underwritten it as it is, you know, they've done just fine. I mean, even in apartments, the workforce rents, you know, during the era of population loss, you know, they just ticked away. They were fine. It wasn't like a great growth story, but they were just fine. Even as the city was losing, you know, Jack BeVier (17:18) Yeah. Mm -hmm. Kris Garin (17:44) numbers of people. And so now you look at Pittsburgh, Detroit, Baltimore, they're flat. They're not like growth stories. Columbus is a growth story. Indianapolis is a growth story. They're growth stories in the Midwest for sure. And there's a heartland Renaissance story that I think will probably become less and less contrarian over the coming years. Jack BeVier (17:57) . . . . Kris Garin (18:05) You know, we kind of see more reshoring and, you know, kind of manufacturing renaissance and all that stuff, but they're fine. They're totally investable. Right. You know, as long as you are. Not underwriting them like Austin. Craig Fuhr (18:12) Jack, I'm kind of curious here quickly before we jump into the next topic on, you know, you both operate, you know, significant portfolios using Jack BeVier (18:20) Yeah. So let's talk. Good. Craig Fuhr (18:35) almost primarily voucher programs. Specifically, I would think that Section 8 would be top of the list of all of that, right? And Jack, I don't think I've ever heard you talk more about sort of gauging risk. Jack BeVier (18:48) . . Craig Fuhr (18:48) and really just talking about risk in general. And I wonder, you know, how could how would your portfolio perform without those programs? And, you know, there appears to be no lack of legislators, you know, who want to who have a target on your back. And I wonder, you know, like, Kris Garin (19:07) you Craig Fuhr (19:10) in the coming years, you know, in a country where we're adding a trillion dollars to debt every, you know, 100 days now, how these programs might be affected and how specifically, you know, you're sort of thinking about that as, you know, someone who really relies, you know, in large part on government programs to pay the rents in your portfolios. Jack BeVier (19:18) Thank you. Kris Garin (19:35) Sure. So a couple things there. There was a lot in there. We don't get to pick, right? Because we don't discriminate. But I would say the sweet spot for us is somewhere between 60 % and 80 % voucher occupancy. And the reason for that is we want to be in... Craig Fuhr (19:43) Yeah, of course, of course. Kris Garin (20:05) So this workforce demographic, right, you know, it's supply constrained. You can't, you know, you can't deliver new product, you know, at those rents. The rents are too high to support subsidy at the project level, but too low for the natural economics to support new delivery, right? So there's a lot of, there's a lot, lot, lot to like about that. But, um, Jack BeVier (20:07) . . Craig Fuhr (20:11) Sure Kris Garin (20:30) It's also the segment of our country that's really living on the edge, right? That, you know, they're one bad car repair away from not being able to get to work. And so supply constraint plus credit enhancement feels like a really good place to be in that world. Never want to be operating. in a completely government slash NGO economy without realizing it. So we do have demand for all of our units from market applicants. Frequently, a voucher beneficiary will be the first qualified applicant, particularly when we kind of ratchet up certain income qualifications three and a half times instead of three, things like that. Craig Fuhr (21:26) So, you know, on the one hand, we take certain steps in order to make sure that we're Kris Garin (21:28) Um, so, you know, on the one hand, uh, we take certain steps in order to make sure that we're participating in a real market. So if there is a pullback in those programs, we're not just completely telling ourselves a story. Uh, I think underlying your question is if the vouchers were to go away entirely, what is, what happens to that whole market? Right. And, um, I think a couple, a couple of thoughts there. First of all, I think being the quality provider helps. If we can actually pull that off because those markets don't all collapse, right? If you're the best product at the market rent and you're trying to capture the premium for being really good in service and quality through your resident quality as opposed to getting a higher rent for it, there's a little bit of resilience there. But we went back and looked at the last... Jack BeVier (22:13) . . . . . Kris Garin (22:28) budget to come out of the Trump White House, which is, you know, the baddest draconian as you could get, you know, I think would have been DOA and a completely Republican controlled Congress cut HUD by like 16 .2%. I want to say just wild, right? Jack BeVier (22:31) Mm Craig Fuhr (22:37) It's kind of hard violence. Kris Garin (22:42) vouchers were pretty much left alone in that budget. So even in that view, the... The big push was to get government out of the business of owning and delivering housing. I think there's a fairly broad support. If anything, I think as we continue to see automation, artificial intelligence, as we continue to see the employment landscape change over the next 10, 15 years, I think we're gonna move closer to... Craig Fuhr (22:57) Yes. Kris Garin (23:25) the government having to support broader and broader groups to population, because there's just not going to be as much employment, just full stop. Again, there's a little bit of science fiction there, but you can see it coming. And so how does the government know how to, short of just helicopter money, right? Which I think... Craig Fuhr (23:35) Yep. Yep. There's a trajectory that's unmistakable. So, I think there's not a lot of support for it. Kris Garin (23:55) there's not a lot of support for. What muscles does the government have to deliver resources outside of a paycheck? And housing vouchers and SNAP would be right on the top of the list. So who knows? And at a certain point, you got to have some appetite for risk in our business, but it feels durable. Craig Fuhr (24:06) Yep. Yeah. Kris Garin (24:25) to us. And then I think the last thing you got to is sort of the government, the debt levels, right? And at a certain point, at a certain point, the dollar is just worth 30 % less than it was, right? And that's how the balance sheet gets solved. And I think the people who own hard assets are glad they own hard assets in that environment. Jack BeVier (24:46) Couldn't have said it better myself. Kris summarized my thoughts on all those subjects quite succinctly. Craig Fuhr (24:47) I think I heard Jack say that just a couple weeks ago. Jack, before we jump into what you want to jump into, I'd really like to ask about sort of, you know, you obviously have a heart for sort of social impact as well. And I was wondering if you could just briefly sort of talk about that philosophy and how, you know, as a, as a landlord, you're, you know, as a real estate investment company, you're, you're sort of implementing, you know, your, your ideas on, on having social impact. Jack BeVier (25:21) you Kris Garin (25:24) Yep. A lot of nonsense out there. And we have a business to run also. So I think those are important to keep in the backdrop. I mean, our philosophy on ESG is still emerging, but I would say we want our social impact efforts to... to have the following three traits. One, they should be authentic. If we can't point to real value that's being created for either our residents or the communities we're operating in, we shouldn't be doing it, right? I think we don't wanna be just doing fuzzy marketing nonsense. I actually think there's a real risk associated with that in this political environment. And it's also just not who we are. Two, it needs to have a business rationale. So if we can't articulate why it makes sense for us to be spending time on from the perspective of our investors, our employees, our economic stakeholders, it might be a good thing to do, but we're probably not the ones who should be doing it. Now we're free to take a very long -term view on that. We can be very broad -minded on that. Craig Fuhr (26:29) of our investors, our employees, our... Kris Garin (26:48) And nice thing about being a private company is like, we don't have, we don't have anybody saying, you know, what's the payoff on that next quarter, but you still need to be able to articulate the business rationale. And then, you know, ideally, and this is more of a, I think probably less, if I had to drop one of the three, it'd be something that we're better positioned to do, you know, than others, right? Something that leverages our capabilities because otherwise, you know, there's so much need out there. Craig Fuhr (26:53) anybody saying, you know, pay off on that next boiler. Kris Garin (27:18) Um... you know, why would we do something that we couldn't do better than others? So for us, you know, I think clearly there's a lot, the low hanging fruit is, you know, eviction prevention, rental assistance, you know, working with residents to make sure that they've got access to all the resources, you know, that are available. I think most landlords would do that. I don't think that's controversial. I think scale helps you staff that a little bit better. But, There's nothing special about that. Everybody would do that if they could. I think there's really interesting opportunities around workforce development that we're just starting to think about. I think two things I could tell you will probably be true 10 years from now is the average age of the American construction worker is going to be about 10 years higher. And the employment opportunities available to our residents and the communities we operate in are going to be fewer. And so, you know, you look at those things together and there's an opportunity to really do some cool stuff around workforce development, apprenticeship programs. We have our own skilled trades in -house, right? We do a lot of renovations. We do a lot of repair and maintenance, you know, property management. So, yeah, that's, we haven't executed on that at all, just to be clear, but we think about that a lot. And that feels like a win -win, some kind of apprenticeship. program that helps us with our workforce development internally, but also provides benefit. And then I think there's a lot of opportunity out there around mitigating the harm of displacement. All right. I mean, just because we say we're preserving affordable housing, it's affordable. It's not affordable for everybody. Right. And it's just it's a... very difficult part of our business. There are some folks who end up being pushed out of our units who we are not sorry to see go, right? And have not been in good faith, right? And are not, and make it a very, very easy decision. There are other people who, you know, they've done everything right, but they're into these units that are rent that, you you can't, they're going to fall out of the housing supply at those rent levels. You can't justify reinvesting in them. So you've got competing social needs there. We can't lose that housing supply. Craig Fuhr (29:49) I was actually I was actually really interested on the last episode you mentioned food access for anybody who lives in an inner city it's obviously you know a problem for folks to get access to decent grocery stores and things like that and so I was just wondering if you could comment on that quickly. Kris Garin (30:17) Yeah, so we started a nonprofit and unfortunately, we had almost 10 year run. And after a couple of years of trying to hand it off to a local, a local stakeholder to run with it, we've had to wind it down. But we, we set out back in 2014, we to try to figure out a concept of just a break even. you know, nonprofit grocery store, you know, that, you know, could do fresh food, you know, healthy prepared food, all, you know, all that stuff. And it worked pretty well, actually, we got a pilot store open in Northeast DC, we actually did something in partnership with Boston Medical Center, and got something opened in Roxbury in Boston that Craig Fuhr (30:49) Mm -hmm. food, um, to help us with that food. Kris Garin (31:16) we handed off to local operators and they're still making a good go of it. But what we found was, is operationally very demanding. And I could take up all of our time here with it. So I'll just be really quick with this one. But we figured out that there was really a path to make it work, but it had to be volunteer led. It either had to be very large and have economies of scale, or it had to be volunteer led. Craig Fuhr (31:39) I see. Kris Garin (31:45) And at a certain point, we couldn't find the funders and we couldn't find the volunteers. So, but we, I think, you know, like a lot, you know, in the same way that the third owners of certain real estate developments are really happy. You know, I think, you know, there's some built out spaces that I think, you know, somebody could step into, you know, a mom and pop kind of proprietor and get those up and running. And I think some good stuff could happen. Craig Fuhr (31:48) All right. Kris Garin (32:15) who's for me a real education in the world of nonprofit finance, in the challenges of navigating kind of community development dynamics where you're trying to just go out and do something that in your opinion is a good thing to do, you know, and fairly altruistic. But for a lot of really good reasons, you know, the community is very suspicious, looking for the angle. And there's all kinds of friction. associated with that. And it was a really great experience. And I'm very proud of a lot of things we did there. It affirmed for me that I belong squarely in the private sector. Very hard to get things done by committee in those environments. Craig Fuhr (32:56) All right. Jack jump. Right. Good Jack. Jack BeVier (33:06) So with the time that we have left, I want to make sure we don't miss this topic because it's something that we talked about in that kind of prep call that that I really I really perked up about. So you've been growing the portfolio through continued portfolio acquisitions. You guys don't buy one house at a time. You got you buy 150 houses at a time or 75 houses at a time. And and I was wondering, I was like, so how did you finance that? Like you. you guys I know you guys are raising always raising money for additional portfolio acquisitions, but I would think that, you know, you never know when that one's going to come across. And so like lining up the money with a new portfolio, like I'm like, ah, God, I got to ask Kris about that. That seems like that would be clunky, particularly in a high interest rate environment, like we're in right now. But you guys have, you know, found some ways to continue to acquire quite aggressively. Talk to tell us about that structure and what you guys have been doing to continue to grow. Kris Garin (34:08) Yeah. So I really think this is the future of our pipeline and the company. We see it as a generational opportunity. I'm going to ask you to just hit pause on me if I jump too quickly into the tax minutiae here and need to take a step back. So we all know kind of 1031, right? 1031 is, you know, like kind of exchange of real estate for real estate. And provided you qualify with the eligible replacement properties, you can kind of do that forever. And so for folks who have a lot of, they're staring down the barrel over a lot of depreciation recapture, right? We've got a lot of capital gains or both. Obviously that's, the 1031 has been the order of the day forever. And I think most people, if they could get a good cash price, and have those tax constraints would want a 1031 because nice thing about a 1031 is you can 1031 into a property, sell that property, 1031 again, so on kind of forever. Ultimately pass onto your heirs at a stepped up basis and that recapture goes away, capital gains go away and good things happen. It's a tale as old as time in our business. So 721 is a very similar dynamic. It's known as UPREIT, although you don't have to be a REIT to do it. And we're not a REIT. The way that works is instead of real property for real property, you're exchanging real property for partnership interest. And you're able to get the same tax deferral on the way in, identically as 1031. The thing about 1031, is you can't participate in all of that infrastructure, all those DSTs out there, all the, you know, there's so many easy ways to 1031, all of that stuff requires cash, you know, and if you're having a challenge monetizing your asset, you can't really participate in all that. And so the 721 addresses that. The main drawback of the 721 is from a tax perspective, it's kind of like Hotel California. You cannot exchange out of that security. And so I think it's helpful to break out 1031, which I think we just covered plenty, seller financing, which a lot of the time, by the time we've gotten into the conversation, we're talking with a seller who's sort of at peace with the idea that there's going to have to be some kind of seller financing component. And then 721 and how that works. So seller financing, you've got a note and that note is no longer real property. So once you sell that property, you've conveyed the real property, you now have a note. You've got some cash in your pocket, you're recognizing that gain. You might, if you've got a good accountant, Craig Fuhr (37:10) you Kris Garin (37:31) be able to structure that note so that you're deferring the tax to the extent of that note. But once that note gets paid back, three to five year balloon, whatever it is, all of your recapture is getting recognized. All of your gain is getting recognized. That's if you get paid back. You've also sold an operationally intensive asset to somebody who doesn't know where any of the bodies are buried. You got no diversification, all of that stuff. But leave that aside. So 721. Jack BeVier (38:00) Yeah, taxes come due, cash needs to go out the door to the federal government. Kris Garin (38:05) Yeah, that's right. That's right. 721, you know, into and in obviously we'd like it to be to us, but to anybody for as long as you hold that security and as long as the underlying assets aren't sold, you deferred that tax. And so there's an opportunity to get some of the same kind of benefits with the seller, with the seller financing, but with much, much better tax treatment. The key thing that we've really spent the last six months reorganizing ourselves around. Well, in the same way we're trying to make ourselves the best possible counterparty for the best resident in our neighborhoods, we see a large opportunity to make ourselves into a really attractive counterparty for portfolio owners who their best case scenario would be to 1031 anyway, because their tax Jack BeVier (39:01) you Kris Garin (39:04) situation is kind of driving that and how do we make ourselves really attractive for them? And the big thing that you want to do if you're exchanging into a 721 scenario is you want to be able to control your exit and you want to be able to control your cash flows to some extent. And so we're shifting our fund to an open -ended vehicle where people can come in and out. at NAV, kind of similar to a non -traded REIT. We've got sort of an auditable... Jack BeVier (39:35) NAV is net asset value. So you have to, in order to do this, you have to come up with evaluation because people are coming in at different times and the value of what they're coming into changes over time. So that's just an administrative thing that you have to take on in order to be able to operate this structure. Kris Garin (39:41) That's right. That's right. We value it every quarter. We use an external methodology. You can't go out and get, you know, 1300 and hopefully soon to be 5000 and 10 ,000 and whatever homes appraised every quarter, right? But there are non -traded REITs out there. There are publicly traded REITs out there. We use the same methodologies that they do. And so all of a sudden, there's an opportunity to redeem, to get your liquidity from the security. from the sale of your shares at some point down the road, as opposed to from the sale of the underlying assets. But because we don't expect to exit, we're not a closed -end fund, we expect to hold this for the long term. I want to be talking about succession planning 10, 15 years from now, not selling the portfolio. There's an opportunity to defer that tax for much, much longer, maybe forever. that doesn't really exist with a seller note. And we still have the ability to put some structure around that contribution. So the last three portfolios we've done have all included the sellers exchanging some or all of their equity into our fund. And in all of those cases, they're not folks who were comfortable just blindly accepting our valuation and just giving us discretionary capital and just hoping everything goes well. Usually we do it as like a convertible preferred equity concept where they get a couple of years of a fixed interest rate. They have certain protections and then once three to five years out, they have access to a redemption program. and they can either redeem or convert to common. And so at that point, they get a date before you get married. And I don't mean to get too far into the minutiae here. But the idea is you can avoid a level of valuation risk because you're coming in with a nominal piece of paper. But then you've got an opportunity to turn that into, assuming you like what we're doing, you can turn that into a long -term growth equity investment where you're not capping your returns. Because if you're trying to defer taxes for the next 10, 15 years, you don't necessarily want a fixed piece of paper. These are heavily negotiated and fairly bespoke. It's a good day for the accountants because there's a decent amount of... work on RN that has to be done to maintain an additional layer of cost basis. Let me just say this and then I'll stop. So, you know, if you're invested in partnerships, you know, you probably and you've only contributed cash, you're getting a K one every year. And in the lower left hand corner of that K one, there's a space for built in gain. That's usually blank, because you don't have a built in gain because you invested cash, you know, in in in in a stupid, simple example here. Let's say you've got a $30 basis in an asset that we've agreed to buy for $100. From our perspective, you're investing $100 into the fund. But from Uncle Sam's perspective, you're rolling that $30 tax basis. And so you got a $70 built -in gain on your K1 that Craig Fuhr (43:34) Mm -hmm. Kris Garin (43:40) would in addition to whatever gain you have on your investment with us, you're down the road, hopefully substantial, hopefully we do a good job. You know, there's also that gain to whatever value you contributed with us. But until there's a transaction on the other end where that's realized, you know, you get to defer the tax on that gain. And particularly you get to defer the depreciation recapture, which for a lot of our profile of owner, it can be really, really significant. Jack BeVier (44:11) Yeah, I think it's an incredibly interesting structure. You treat like, as you mentioned, you trade off a little bit of liquidity for the tax deferral. But, you know, the tax deferral is really is super valuable, right? Like really, really, really valuable. And then, and then the cash that would have otherwise gone out the door, which you can, you know, what, you know, having that invested in inflation, hedged assets with the benefits of kind of all the workforce housing components that you mentioned previously. I think it's a really interesting structure. I think there's a lot of people and I think there's a lot of people who have gotten there. 15 years ago, there weren't a whole lot of people that had a couple hundred houses, right? That just was very rare, frankly, it was very, very rare. But it is particularly over the course of the past five years become much, much more common as. as financing products have gotten more liquid being able to grow a rental portfolio quickly has gotten easier than it used to be, which is great for lots and lots of real estate entrepreneurs all over the country. But as you said, like, after you know, 1520 years in, you get a little tired, and you've got the benefit of all that appreciation, but you don't want to pay the tax bill on it. And you're happy to continue to clip a coupon, you just don't want to get the calls anymore. I think this structure is a really interesting way that small and medium sized portfolio owners are going to opt for. I think that the advantages are pretty obvious. So very cool that you've been executing on this multiple times. I've heard of one -off transactions, but you guys have really made it a program and that's really cool. Kris Garin (45:51) Yeah, we. Yeah, so we brought close to including our contract pipeline, we'll have brought close to $30 million of seller equity into the fund in either common or structured format, you know, between kind of call it, you know, July 23. And, you know, May 24. And that's that's from a standing start. So we're now kind of getting to where we're trying to organize ourselves to go out and really do the outreach. I think what works really well for. are people who are going to 1031 anyway. Because if you were going to 1031 anyway, you're not really forgoing that liquidity. And we're not, James and I are like 20 % of our fund, right? So we're not just playing for fees. We have really good alignment with our investors. And so we're not just gonna buy everything just to grow AUM. Like the numbers have to work. Craig Fuhr (46:30) you And so we're very proud. Kris Garin (46:56) but we're comfortable that we can offer better pricing, particularly in a lower leverage acquisition where we're not as exposed to the elevated interest rates than a cash buyer would. And so, if you've been sort of saying, hey, I'm gonna get $100 for this asset, well, we're probably not gonna pay you $100 either, but if the cash buyer is like $65. you know, because, you know, their interest rates are just crazy. You're not going to do that. And somewhere between there, you know, there's a transaction with us, which by the way, you know, you can, you know, you benefit from, you know, all of the future contributions that we do with other people. So you're not capping your return necessarily. We can structure it however people want. So that's that. Jack BeVier (47:47) And you're getting your and you're also simultaneously achieving diversification because now you don't just own your 75 houses, you're going into a portfolio of 1400. So Kris Garin (47:54) That's right. That's right. Where it doesn't work as well is somebody who just did a big refi, took a ton of cash out of their portfolio, and then needs us to show up with a ton of cash at the closing table. We can be flexible. One of the nice things, 1031 tends to be all or nothing. And typically what we'll do is we'll pay off your debt. So you're off of whatever personal guarantees you're on. So you're not contributing your debt and staying on those obligations. Jack BeVier (48:13) you which is a huge deal these days. Like that's a huge deal for a lot of guys, right? Like that's the concern. Kris Garin (48:27) Yeah, we'll pay the closing costs so you're not coming out of pocket for anything. And we can generate some cash. It's a negotiated point, right? There's all kinds of trade -offs. But once we're paying off 60%, 75 % cash, we might as well be a cash buyer. And we're going to get to the same math that that cash buyer is getting on. So I think the folks who are really going to find this works well with us or with anybody else. Jack BeVier (48:57) you Kris Garin (48:57) By the way, if you have hotels, if you have apartments, if you have industrial buildings, there are entities out there that there's a well -worn structure for that. A lot of the larger public reads really grew this way in the 90s and early aughts. It's just in single family rental, scattered site workforce. There's not really a financial buyer because there's not really a depth of, you can't plug like CBRE or Greystar just into the management. Craig Fuhr (48:59) you Kris Garin (49:27) nationally, right? And so, you know, really need an owner operator to monetize these assets. And so anyway, I'm talking my book here a little bit, but that's that that's the pitch. That's the value proposition. Yeah. Yeah. Craig Fuhr (49:40) That's what we're here to do, man. Well, it's been a fascinating couple episodes. I'm sure that the listeners have taken a lot from the content here. So can't can't thank you enough for the time. We've been talking to Kris Garin, who is the principal and chief executive officer of riparian capital partners. Kris, you've been incredibly generous with your time. Thank you very much. Look forward to having you again. This has been amazing. I Jack BeVier (49:56) you Kris Garin (50:05) Total pleasure. Thank you guys for having me. Jack BeVier (50:07) Yeah, thank you, sir, very much. Craig Fuhr (50:10) we probably just touch the surface of what we could discuss. But we're going to wrap it there, folks. Thank you again for listening to Real Investor Radio. We thank you for all your comments. Jack, I get calls all the time now from guys who are listening and love the content. So today was no different. Kris Garin (50:14) you Jack BeVier (50:29) Yeah, by the way, yeah, shameless little plug here. All this content is also up on YouTube and there is a comment section there, put some graphs from calculated risk up there and request from folks to, if there's any kind of content that you guys want us to cover, use that YouTube channel as a forum as a way to let us know what you want to hear and we'll do more of it. So. Just wanted to plug the YouTube there as well. And of course, you know, like and subscribe and all that stuff. Kris Garin (51:00) you Craig Fuhr (51:01) Yeah, Kris, if anybody wants to reach out and learn more about Riparian how can they find you? Kris Garin (51:07) It's Kris with a K, so it's K -R -I -S at ripariancapitalpartners .com, one word. I'm up on our website, I'm easy to find, and you can find me via LinkedIn, and happy to chat. Craig Fuhr (51:10) Yep. Jack BeVier (51:18) you Craig Fuhr (51:19) We'll go ahead and wrap it there. Thank you so much, Kris. This has been Real Investor Radio. We'll talk to you again.