What’s the Deal? | Max Sharkansky & Trion Properties | $42M Bay Area Multifamily Deal

Background on $44 Million San Leandro Deal

We were starting to get active in the East Bay. It was still pretty early. We had bought a few properties so this was either our third or fourth. The investment thesis was, with San Francisco and Silicon Valley booming and rent skyrocketing, most people, even people that make $100,000 a year, can't afford to live in those places.

This part of San Leandro, it's only about 20-25 minutes from downtown San Francisco. There's a BART, which is the metro. It's in the Bay Area. There's a BART [transit] right by the property. So, you could go to the BART, take the BART, and you're in downtown San Francisco in under half an hour. And we wound up targeting that property [in accordance with our investment thesis]. We had been trying to buy it off market since early 2016. The seller was an old school Bay Area guy. He had been buying for 30 or 40 years. Great guy. We have a relationship with him to this day. We bought properties from him afterwards, too. He just decided he wanted to take it to market after trying to sell it off market, unsuccessfully.

It was November 2016, which is a key date, because the election happened that month. Trump won and people got really spooked. That's also generally a bad time to take a property because a lot of people are folding up shop on the acquisition side for Thanksgiving and the holidays. And so, you have the election on top of that timetable.

They awarded the deal to us on, December 23rd, a couple days before Christmas, and a lot of people just didn't show up to bid. We won the deal because it fell to us and we wound up closing it a few months later. So that's the beginning.

When you first walked through the property, what were the first major stuff that just stood out to you? Were there any attractive deal metrics on paper?

Everything. The way we conduct our business is we look at what's the in-place cap rate, which is a lot of the time for us, secondary. We were very experienced buying 3.5% and 4% caps, especially being from the west coast where from 1990 to 2020, you had an unbelievable amount of rent growth and we don’t mind the low cap rates because we're solving to a return on cost.

1. What's the un-trended return on cost?
2. What's the trended return on cost?

On that deal, I think the way we looked at it is it’s 6% return on cost with growth, with some market growth at around 2.5% to 3% a year, we get to a 6.5% return on cost and revert at a 5.25% / 5.5%. And that's the way we thought about it. And we're very comfortable with the growth assumotions because the Bay Area was just exploding with growth.

How did the deal structuring, like debt and equity, work for this deal?

Yeah. So, the debt was a debt fund by the name of NXT Capital, and the equity was one of our old equity partners. It was a joint venture, not a syndication. My partner and I rolled $4 million of our own money out of 1031, and the equity partner came in with the balance.

What issues did the team face after closing?

California started changing many things politically during that time, and they passed a rule by the name of AB 1482 that capped all rent increases statewide at 5%+CPI. And then the city of San Leandro passed a rule where if you give somebody a large increase, I think it was 8% or 10%, you have to pay them a $6,000 relocation fee. Ultimately we were able to navigate the political waters, and we turned over almost the entire building, almost every unit in the building, and I think we increased the NOI by 60% and the top line by 40%.

In terms of sales and refinance, how did the exit strategy go for this property?

We bought out our equity partner because we wanted to be in the deal alone to protect our exchange. That was the most important thing, was to protect our exchange. So, we bought them out. They did great. They made a 20% return on their money. And then my partner and I held and operated the property through COVID. We sold it in early 2022. It closed, and we did 1031 on a deal in Miami called Art 88, which we own today.

Early career and Commercial Real Estate

I started out as a broker. I worked at Marcus and Millichap for five years.

My partner, who's my best friend, childhood friend. I went to his bar mitzvah when we were kids. We were having dinner one day. We were talking about brokerage. We said, it's a great business, but we want to be on the principal side of the business. He was working at HFF. He was working on the finance side, and I was working on the brokerage side.

He said, do you have anything? Do you have any deals that you're working on? And I said, yeah, I've got a couple off market. We bought one, then we bought a second one, and then we raised some money, and then we got the bite. We really wanted to keep doing it so we bought a few more in 2006 and then by October of 2006, we left and started our company.

We bought one more property in 2007 and then we saw the writing on the wall, and we started selling everything in 2008. Not only were we selling, but we changed our strategy from value-add multifamily to buying non-performing debt secured by multifamily. And during that period in 2010, 2011, 2012, we did not buy a single property from a private organization or individual. Everything we bought was from banks, lenders, Fannie, Freddie, CMBS. So, we did about 20 deals during that period. About 15 of them were nonperforming notes. Five were REOs.

Coming out of the GFC, we went back to the value-add business and started crossing state lines. Between 2015 and 2019, we were the largest buyer of multifamily in Portland based on transaction volume, not dollar on transaction. Our next state was Colorado, and then in 202 I moved to Miami to open an office to cover the Southeast, so now the Miami office covers Florida, Georgia, and the Carolinas...for now. The LA office covers California, Oregon, Colorado, and Dallas. We now own about 6500 units of fully vertically integrated self-managed property management, in-house construction management, in-house acquisitions, and accounting.

How did you choose those specific markets like Portland, Colorado, and Texas?

Well, Texas came way later. We bought our first property in Texas last year. But I would say a big reason would be strong economic growth, high population growth, and move-in markets as opposed to move-out markets. Portland was one of the most moved-to markets in the country at that point in time; between 2014 and 2019, it was booming. And it was the most affordable market on the west coast. So, if you think about it, going south to north, you've got San Diego, Orange County, LA, the Bay Area, Portland, and Seattle. Of the major markets, Portland was the most affordable. So, you had a lot of people moving there for affordability. Small tech companies were starting to grow there and it's the sports apparel capital of the US; a fact that a lot of people don't know. Everybody knows Nike is there in Beaverton, but because Nike's there, a lot of other companies move there to poach. Adidas has a headquarters there. Columbia Sports Apparel has a headquarters there, and Under Armour opened a campus there.

Future Plans?

We entered Dallas last year. We love Dallas. It's a great market. In terms of new markets, something we'd be looking to enter in the next 12 to 18 months, I think, which is a no brainer for us given where our west coast office is would be Phoenix. It's exactly like what I just talked about with Portland. It's a very high growth market, population is booming. It's got tech, it's got healthcare. It's got just a tremendous local economy, and it's continuing to grow every year.

 

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This interview was conducted through Traded’s Ambassador Program in collaboration with Johnny Tran of New York University.

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