Feb 26, 2024
Today’s Gust is Ben Spiegel.
Ben is a experienced portfolio manager specializing in niche lower middle market commercial real estate opportunities.
Show summary:
In this episode, Ben Spiegel, founder of Redwood Capital, discusses his transition from investment banking to real estate private equity, focusing on niche lower middle market opportunities. He shares his "asset agnostic" investment philosophy, in-house property management strategy, and his goal to build a premier outdoor hospitality brand. Ben also talks about the benefits of diversifying asset classes, the growth potential in the outdoor hospitality industry, and his success in developing luxury RV resorts, leveraging USDA loans for financing. He offers insights into selecting locations for RV parks and encourages engagement with his firm.
--------------------------------------------------------------
Intro (00:00:00)
Transition to Real Estate (00:00:57)
Future Goals (00:02:25)
Operating Different Asset Classes (00:04:09)
Bullish on Outdoor Hospitality (00:05:14)
Luxury Outdoor Hospitality (00:06:51)
Financing and Development (00:10:51)
Location Selection (00:18:38)
--------------------------------------------------------------
Connect with Ben:
Linkedin: https://www.linkedin.com/company/redwoodcapital
Instagram: https://www.instagram.com/redwoodcapitaladv
Web: www.redwoodcapitaladvisors.com
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
SUBSCRIBE and LEAVE A RATING. Listen to How To Scale Commercial Real Estate Investing with Sam Wilson
Apple Podcasts: https://podcasts.apple.com/us/podcast/how-to-scale-commercial-real-estate/id1539979234
Spotify: https://open.spotify.com/show/4m0NWYzSvznEIjRBFtCgEL?si=e10d8e039b99475f
--------------------------------------------------------------
Want to read the full show notes of the episode? Check it out below:
Ben Spiegel (00:00:00) - I don't think that it is that difficult to specialize in more than one asset class. And I think that when you when you don't subject yourself to specializing in one asset class, it enables you to really have a much more robust deal pipeline that allows you to source many more opportunities and therefore deploy more capital.
Sam Wilson (00:00:23) - Welcome to the how to Scale Commercial Real Estate show. Whether you are an active or passive investor. We'll teach you how to scale your real estate investing business into something big. Ben Spiegel is an experienced portfolio manager that specializes in niche, lower middle market commercial real estate opportunities. Ben, welcome to the show.
Ben Spiegel (00:00:45) - Thanks so much for having me.
Sam Wilson (00:00:47) - Absolutely. Ben. There are three questions I ask every guest who come to the show in 90s or less. Can you tell me where did you start? Where are you now and how did you get there?
Ben Spiegel (00:00:57) - Yeah. So I started on the investment banking side of things at Barclays. I quickly moved to the buy side, working at, uh, several, uh, special situations, hedge funds, uh, investing in, uh, distressed and, uh, stress, special situations, bankruptcies and restructurings.
Ben Spiegel (00:01:16) - Uh, I was there for about 4 or 5, six, seven years. And then when I, when I started working at those firms, I was smart enough to start taking half my bonus and buying real estate with that. And after being on the buy side for about 6 or 7 years, I was presented with an opportunity to buy a large non-performing loan, uh, and take it through bankruptcy and, uh, restructure it. And when I did that, I decided to leave the buy side, and that's when I started, uh, Redwood Capital, which is a boutique, uh, real estate private equity syndication firm. Um, so I, I have about 75 million under management, uh, right now, uh, fluctuates up and down. Uh, I invest really. I like to call myself asset agnostic and that I invest in everything from medical offices to, uh, to our to luxury RV resorts to multifamily. I don't really have a preference as long as it has, uh, cash flow and I can understand the drivers of it, I will invest in it.
Ben Spiegel (00:02:25) - And, uh, basically, where do I want to be? Uh, I want to be five, ten years from now. I want to have 1500 to 2000 pads, uh, under management or under my ownership, uh, in a private REIT that I'm currently forming right now. Uh, and to be a premier outdoor hospitality brand, uh, similar to a, a marriott or a Hilton, but, uh, of an outdoor hospitality style.
Sam Wilson (00:02:54) - Man, that's really cool. I love that you mentioned a lot of different asset classes there. Are you guys coming in just on the capital side on those or you actually operating the deals yourself?
Ben Spiegel (00:03:04) - No, we're we're we're we're operators as well. We have in-house property management. And uh, actually I just actually was talking to somebody about this the other day. I think that's really one of the most important and overlooked things in this business. I said that, uh, in real estate, if an asset is managed by a third party, it really will never reach its full potential.
Ben Spiegel (00:03:24) - Uh, because coming from the private equity world, incentive is being incentivized and having a sense of ownership is everything. So in every deal I do, I give my property manager internal property a piece of equity. And I also put them on a quarterly, uh, bonus structure, uh, that's tiered based on, uh, profitability of, uh, how the building does in terms of if it's clear, certain NOI hurdles, they get an incrementally higher bonus. And I have found over the years that that had the return on investment for that amount of money has been ten x.
Sam Wilson (00:04:02) - How what's that process been like, and how does your team juggle all these different asset classes?
Ben Spiegel (00:04:09) - So I guess, um, real estate compared to corporations where you have fluctuations, commodity price fluctuations, it's it's relatively straightforward. I mean, you have your revenue, your expenses. Uh, I mean, uh, there's some obviously variables related to the tenant structure, uh, the longevity of it, but I don't think that it is that difficult to, to specialize in more than one asset class.
Ben Spiegel (00:04:38) - And I think that when you when you don't subject yourself to specializing in one asset class, it enables you to really have a much more robust deal pipeline that allows you to source many more opportunities and therefore deploy more capital.
Sam Wilson (00:04:57) - Interesting. Okay. Very very cool. And the one thing that one focus of yours and you mentioned this here and kind of what your 5 to 10 year plan is, is that you are incredibly bullish on the outdoor hospitality space. You want to grow that side of your business. Can you give us some insight as to why?
Ben Spiegel (00:05:14) - Yeah. So just to kind of give you some quick four facts and a lot of people are really aware of. But right now the average age of an RV owner in the US is 32 years old, right? Last year, our 2022 460,000 new RVs were shipped, but only 17,000 new pads were built. The average age of the existing RV destination is over 40 years old, and 92% of which are owned by single owner Mom and pop that do not have the necessary resources to invest back into their businesses.
Ben Spiegel (00:05:54) - To bring the, uh, their destinations up to the level that the new generation of RV owner needs, such as even most. Most don't even offer Wi-Fi or cell service on their on their sites. To kind of give you an idea of how behind the industry is and what really, uh, makes things exciting is Covid just changed everything post-Covid, 60% of uh, uh, permanent office worker or office workers are now permanently remote. So you have this whole new lifestyle, this new nomadic lifestyle that's being embraced. And it's, uh, it's really catapulted the industry into a stratosphere that nobody really thought it could ever go.
Sam Wilson (00:06:40) - Buddy. And you're specifically focusing though on the luxury outdoor hospitality spaces. What does that mean and why is that?
Ben Spiegel (00:06:51) - Yeah. So luxury in terms of outdoor hospitality. Me it's more of an amenity focus. Uh, that it's luxury is it's certainly a lower bar than you would think of when compared to most other asset classes. Uh, luxury basically means you keep a clean site. You have a pool, you have a pickleball court, a gym, maybe a gym.
Ben Spiegel (00:07:15) - Uh, we have gyms. And, uh, we like to incorporate a work center, maybe, depending on the location. But, uh, there's two different, really, uh, main kinds of RV destinations. You have communities and resorts. So resorts are located very close to a major attraction, uh, close to Disney World, or they're right on the beach. Uh, and they're able to charge a higher average ADR average daily rate. But the downside with them is you have a lot of higher turnover. Your average day is 3 to 5 days max. So there's a lot of turnover, a much larger vacancy rate as opposed to a community where you're probably located. Still in a very convenient location right off the highway, but probably about 30 or 40 minutes away from like the beach. So I, I only focus on the Gulf Coast, more specifically, uh, Alabama, Mississippi and Louisiana. And, uh, so we're we a community would be about 30 to 40 minutes from the actual coast, uh, right off a hot, you know, a main highway.
Ben Spiegel (00:08:22) - Um, it would it still have, uh, not as many amenities as a resort, but but close to it. But the main difference is your average stay is 45 to 60 days. And, uh, you also need less, uh, staff to, uh, run it. So you're, uh, you're basically your your net operating margins are about 60%, compared to about 45 to 50 for a resort. And instead of operating at like a 30% vacancy or 30% vacancy, you're probably closer to an 18 or 20% for a community. So they both they compliment each other. Well.
Sam Wilson (00:09:03) - Got it. Okay, that's really interesting. And I guess how far how many of these do you own currently? And has your model evolved as you have bought different resorts over time?
Ben Spiegel (00:09:15) - Yes. So, uh, when I first started to get into looking at getting interested in the business, it was during Covid. And at that time, uh, existing RV destinations were trading at all time high valuations. I mean, I'm talking three, 3 or 4 caps for some of these and that were for that were like 30 or 40 years old.
Ben Spiegel (00:09:36) - And, uh, what really occurred to me is I could build at a cost per pad, brand new, at almost a similar cost, if not less than what what I would have to pay for a 30 or 40 year old one. So that got me, uh uh, on the path to starting a joint venture with a existing owner operator of RV destinations, who's also a feasibility consultant. And, uh, basically we formed a joint venture and, uh, we went off to start building, uh, luxury RV resorts and communities, uh, in, uh, mobile, Alabama, Biloxi, Mississippi, and even, uh, Gulfport. And, uh, so now we have two we have two sites, uh, combined, probably about 172 pads. And, uh, but we have, uh, we have land under contract to build, uh, 300 pads right now, uh, which is the by far the largest development we've ever done. And, uh, something, you know, really interesting about this industry that kind of even makes this whole dynamic even feasible.
Ben Spiegel (00:10:51) - There not a lot of people are aware about is, uh, the US Department of Agriculture has a very unique niche loan program called the Rural Business Development Loan Program, where they will lend 75 to 80% loan to construction cost, uh, to build an RV destination. I mean, think about it. So you're paying like we're in contract on a piece of land for $1.5 million. 40 acres. Uh, you know, about 35,000 an acre, you know, and our construction budgets? 15 million. What kind of lender in their right mind is going to lend you $15 million on a $1.5 million piece of collateral? No. So it's just, uh, without this program, it's just, uh, it's not unless you're a family office with, you know, so much cash that you can afford to fund the whole thing with cash and then refinance once you season the cash flow after, um, the USDA loan credit program is is critical to being able to to build these, uh, in most locations.
Sam Wilson (00:11:54) - Yeah. That's a that's crazy. I knew that the USDA had programs like this. I've not ever applied indoor. Um, actually work my way through that process. Especially not on an on a luxury RV destination project. That's, uh. But that's crazy. Yeah. That's crazy loan terms. I mean, does it ever, um, is there any, I guess, any concern as you look at that and you go, oh my gosh, like, we're almost over leveraging and or this is like, I don't know, I guess when you think about that, what are what are some what are some areas of concern. Because this allows you to do things that maybe otherwise wouldn't make sense. Right.
Ben Spiegel (00:12:29) - Yeah. Well, I mean, I guess one of the scariest things is you have to you have to show 1 to 1 asset coverage on a full recourse basis. So if something does not work out, uh, they're coming for me or they're coming for us. Uh, right. They're going to.
Ben Spiegel (00:12:45) - They're coming for everything. So you have to have a lot of faith in the project you're building. Um, one thing I'd say is that we we usually were never really we never really go above the 75% LTC level. And we have enough experience with our general contractor at this point, uh, that we. We know how the process goes. We know what to expect. We know what the costs are. We're comfortable with the bank. The banks that we deal with that are subsequently secured by the USDA. I mean, how it works is it's a 12 month draw. Schedule a draw once every 412, and then upon completion, it immediately converts to a 25 year amortizing facility. So there's like no refinance. It's it's it's a lot simpler than you think. As long as you can keep construction and think there's no vertical construction. I mean, the only vertical structure you're doing maybe is a single story clubhouse. Uh, you're just dredging. You're you're laying plumbing, electric fiber, and, you know, maybe doing some site work, uh, land moving, but that's really about it.
Ben Spiegel (00:13:55) - It's not high risk. You're not building a skyscraper. I mean, in my experience, you know, I've done ground up developments in Malta and in other areas. And, you know, usually the problems don't start. So you start going vertical and. Right, um, you know, so the fact that you don't really have to do any vertical, I mean, not only is your construction time cut by 75%, you know, it's a year versus four. Um, but it's just that's honestly the big kicker that makes it that makes you comfortable with it. Uh, I would not take on those kind of recourse terms to, to build, to build a regular multifamily building, that's for sure.
Sam Wilson (00:14:34) - Right. Yeah. There are there are certainly strings attached there. And I guess that when that 12 months is up, that's when that loan starts to a fully amortized fixed interest rate 25 year loan. So you don't really know. In the end, I guess you're underwriting a range. You're like, hey, you know, it could land here, could land there on your final fixed interest rate.
Ben Spiegel (00:14:58) - So basically it's usually a, uh, between a 25 and 50 basis point spread above the Wall Street prime rate, which right now is about, uh, seven, three quarter percent. So, uh, it's not it's not very cheap, but it's not insane. It's not like normally you'd have to go to a bridge lender and you'd be paying 13, 14% and three points upfront, and you'd only be getting 40% LTV if you're lucky, even full price. And then the cash on cash returns just do not make sense. So you kind of how are you going to syndicate a deal like that? Uh, the deal, you know, only really makes sense with these loans, so. And but and then there's on smaller and smaller destinations, like I'm going into contract on ten acres, uh, on the beach in, uh, in Long Beach, Mississippi, which is right down, down from Gulfport, uh, west of Gulfport. And, uh, it's going to be about 120 pads. And the development budget, there's about, uh, 6 million there.
Ben Spiegel (00:16:02) - You can you can get a local bank to get you to get you 65, 70%. Uh, it's recourse. But, um, uh, you know, you know, relative relatively similar borrowing rate. So you want to be very selective. And also the USDA has a max if you want to go above 25, you can't have more than 25 million outstanding at any one time. So once you hit that $25 million mark, you kind of have to start to, to, uh, try alternative sources, whether that's, uh, talking to a life insurance company, going to other private areas to borrow money once you have proof of concept or your track record. But, uh, they do have that $25 million mark. But then you're all there's ways around it to mix in some SBA or, uh, 500 sevens in there to kind of, uh, dilute it a little bit. There's ways to get around it, but you want to be very careful. It's not something you want to just take on very lightly.
Sam Wilson (00:16:58) - No, certainly not. And that that makes sense. And I think the other thing to point out here is I bet there's probably some multifamily investors who are listening to this right now and they're like, wait seven and a half or seven and three quarters plus 50 basis points, and now you're at 8.25% and they're going, oh my gosh, that's unsustainable. But the margins inside of the outdoor hospitality space that just want to point out are probably a lot more robust, maybe, than what you would find in a multifamily project.
Ben Spiegel (00:17:26) - Oh, absolutely. And you also have to understand, uh, from an expense ratio standpoint, the taxes down there or nothing. And the reason why you're in that space is you you literally you just own the land. Uh, you don't have any repairs and maintenance. Uh, something breaks in the RV. It's not your dime. If anything, you sign an exclusivity agreement with a repair company, and you take a piece of all the money that they make repairing them. Right? So that's, you know, it's, uh, there's multiple, uh, you know, ways to, to generate incremental income.
Ben Spiegel (00:18:01) - And, uh, it is very sustainable at those rates. Uh, man, we're able we're I mean, we're throwing off I don't know if we were throwing off, you know, mid to high teens, uh, leverage free cash flow yields. And, uh, we target a 4 to 5 year over a 4 to 5 year hold, period. Uh, LP equity multiple between two one and 23X.
Sam Wilson (00:18:22) - Right. Oh, that's really cool. I love that last question for you here, Ben, before we sign off on this, how do you go about determining what a good location is to build an RV park or luxury RV park ground up.
Ben Spiegel (00:18:38) - Absolutely. So there's a few, uh, items on the checklist that you always have to abide by. Um, one, you have to be very close to a major interstate. I mean, within maximum of 1 to 2 miles. And that interstate has to be seeing at least, uh, a traffic count of, uh, you know, 50,000 vehicles per, you know, 50,000 plus vehicles per day.
Ben Spiegel (00:19:04) - Uh, number two, uh, you you need to be within ten mile, ten miles of a Walmart. Uh, I that's that's not an industry standard. That's my own. Our personal underwriting. I just feel that Walmart has the most, uh, advanced population analytics software, uh, in the real estate industry. And they're not building a supercenter in an area where the population is going to be declining, um, let alone it's definitely going to be steady if not growing. Also, I, I only choose to build along the Gulf Coast in the southeast where they're experiencing, uh, huge, uh, migration rush, uh, in terms of population and wealth. Uh, they have an abundance of water and electricity to things that are a lot of areas of the country don't have. You can't build a factory now in most areas of the country because they don't have enough water. Uh, you want to see, uh, you want to see the population growing at a certain clip? You want to pay attention to, uh, RV, uh, RV permits.
Ben Spiegel (00:20:15) - What? What they're going what's going on with how much they're rising by. And, uh, if you want, you want to be in a good school district and you want to be on a you want you want to have some frontage to a main road as well.
Sam Wilson (00:20:28) - That's fantastic.
Ben Spiegel (00:20:30) - And then on top of that, you pay a consultant a lot of money to do a robust feasibility analysis to give you an 80 page report just to back all that up.
Sam Wilson (00:20:38) - Right, right. So you take all the all the data you have, and then you also pay somebody a whole bunch of money. I love it. Ben Spiegel, thank you for taking the time to come on the show today. I've learned so much from you. I love what you're doing in the outdoor hospitality space. There's not many people who have the courage and the requisite skill set to go out and build new RV parks in the ground up, especially not luxury ones. So I love it, man. Thank you for saying that.
Ben Spiegel (00:21:01) - If I can do it, anyone can do it.
Sam Wilson (00:21:04) - I doubt that's true, but I certainly appreciate the humility. If our listeners want to get in touch with you or learn more about you, what is the best way to do that?
Ben Spiegel (00:21:11) - Yeah, absolutely. Uh, Redwood Capital advisors.com and website. Uh, I have Calendly book a call with me. Uh, I'm on LinkedIn. Uh, Instagram handle is Redwood Capital ADV. Um, I'm always, uh, always happy to chat about anything real estate related.
Sam Wilson (00:21:31) - Fantastic. Ben Spiegel, thank you again for coming on the show today. I certainly appreciate it. Have a great rest of your day.
Ben Spiegel (00:21:36) - Thank you so much, Sam. Thanks so much for having me.
Sam Wilson (00:21:38) - Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can, do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts.
Sam Wilson (00:21:49) - Whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show.
Sam Wilson (00:21:55) - It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.