CrowdStreet’s Darren Powderly is joined by Larry Taylor, Founder and President of Christina Development, to discuss the three stages of denial that real estate goes through when the system takes a hit and how sponsors and investors can behave at each stage, making moves to set themselves up for long-term success.
Darren Powderly, Co-Founder & VP Capital Markets
CrowdStreet
CrowdStreet
Darren founded CrowdStreet in 2012 after identifying the need to radically improve people's access to commercial real estate investments via technology. Over his 20+ year career, Darren has transacted billions of dollars’ worth of commercial real estate investments and enterprise software contracts. Darren is a driven leader who loves building relationships based on mutual success. In addition to building businesses, leading teams and advising a prestigious list of national clients, Darren has personally owned commercial real estate, syndicated investment groups and developed properties from the ground up.
00:00:05 Hey everybody, this is Darren Powderly, co-founder of CrowdStreet. Welcome to our next edition of StreetBeats, where we're interviewing industry Liebers and thought Liebers in the commercial real estate industry. Today I am really excited to have Larry Taylor, uh, the president and founder of Christina Development in on the west side of Los Angeles. Uh, Larry and I have known each other for multiple years now, and maybe like four years now. And, uh, I've seen him, uh, deliver, uh, for his investors and our mutual investors on his investment strategies in West la. So, Larry, welcome to StreetBeats. Thank you so much for being here. Please introduce.
00:00:43 It's my pleasure. Thank
00:00:44 You. Larry. Tell us, uh, uh, just a little bit about you, sort of what your observations are, what, how you feeling, what are you seeing out there in, in your, uh, in the West LA market? Um, just give us a quick overview, please.
00:00:57 Well, the interesting thing about our market in West Los Angeles, which may sound small to people who don't know the geo geographical area, but it is, uh, a hundred square miles. But because the west side of Los Angeles was built in the concentric circle theor, the theory, which was, uh, you start from the central city core, which was downtown la, which was found in or around 19 18 50, uh, by the time growth got out to the west side, it was all lowrise. So it is a very, very spread out large region that's consists primarily of single family homes and Lowrise commercial and Lowrise multi-family.
00:01:38 You had mentioned something about, you know, the three phases. I, I read an article of yours recently. I, I, I thought it was really interesting about the three phases of what we're experiencing as a society and specifically for real estate companies. Can you speak a little bit to your theory there?
00:01:58 Actually, thank you for that. Um, it's not a theory, it's a reality, uh, that we, we've seen repeat. Uh, it's a pattern that repeats itself because real estate, unlike other investments is, is long term by definition. And as a result, uh, projects are conceived in one year. Uh, they receive the green light and some other year, and then by the time they're completed, another year or two has passed. And so it's a business and an investment that takes a long time to materialize. Mm-hmm. <affirmative>. So as a result, when something happens to sHieggelke that process up, the first thing that happens amongst the real estate investors and sponsors is it's the denial phase. Yes, things are bad, but they're gonna get better soon. We're not really worried. We've got plenty of cash, we've got plenty of credit. Um, we can get through this. That's the early of denial.
00:03:00 Then there's the mid stage of denial where we're in now, which is, wow, this kinda lasted a little bit longer. Our banks are getting a little nervous about keeping those lines of credit in place, and we're starting to have to, you know, give back money to some of these properties because some of these tenants aren't paying because they don't have to pay or they can't pay cause they've lost their jobs. And then you get to the next phase, which is the, uh, you know what? We've been through these things before. We know we're gonna get to the other side. You know, it's gonna look a lot better in a year from now. We just gonna keep going. We're gonna keep building, we're gonna keep buying, we're gonna keep investing, and it's all gonna be okay. Then there's phase three. You toughed it out. You went 12 or 14 months, and guess what your lines are?
00:03:54 Credit dried up. Your ran outta money, your tenants didn't pay, your banks were on you in, you're in bankruptcy. And that's called the O S H I T phase. That's what happens. And so, because it's real estate and, and not other types of investments where, you know, you can wake up in the morning and say, I'm getting out of the stock market. I'm out 30 minutes later, you sold all your stocks. You have to be in denial because you can't change it in that first phase. Mm-hmm. <affirmative>, what you can do in that first phase is there's still activity, there's still properties trading, there's still banks lending. So you can actually, if you are realistic about where you are in the marketplace and what's ahead, you can't actually make moves early on to prepare yourself for success rather than suffer the, the three phases of, uh, typical inve real estate investments.
00:04:51 How do an individual investors benefit from some of the CARES act tax benefits? Um, and we don't need to go too deep into it, but what the statement is, is that there are benefits to investing, uh, courtesy of the CARES Act for individual investors as well as for the Wall Street Journal headline developers that a lot of people, you know, assume, oh, you know, a billion, another billionaire BA bailout. It's like, well, actually it's for individual investors to incentivize them to invest. Correct.
00:05:22 Well, it's a hundred percent. Historically, uh, since the Great Depression, the United States government has used, uh, uh, income tax stimulus for real estate to create jobs into spur the economy. Right? This was a, from 1933 until 1981, the exclusive methodology used by the US government to stimulate economies out of recession was to stimulate real estate. If the other change was in the 1986 act, even even sponsors could not use their losses against their ordinary income. So if you're in the real estate business and all your money is earned from the real estate business, you couldn't even use your real estate losses against the income that you were earning from your management business. The 1993 on the bus budget Act changed that rule. So sponsors can deduct all their losses against any form of income, but investors can use all of the passive losses that they get from holding real estate against any future gains.
00:06:30 Now, investors are getting these K one s from, from us and from all of your other, uh, you know, companies that, you know, offer their investments through, through your, through your business. Right? They don't understand, unless they own investments that generate passive income from other sources, that they're getting a K one and it shows, you know, maybe a hundred thousand dollars worth of losses and they go to their tax man and the tax man's doing their return, and he looks at that and he goes, well, you don't have any other passive income, so we're just gonna suspend this loss.
00:07:05 Mm-hmm.
00:07:06 <affirmative> mm-hmm. <affirmative> until someday you can use it. And the taxpayer doesn't know what that means, but what it means is when that investment that you made that threw off those losses is sold and you have a taxable gain, all of those losses will be used to reduce your gain and reduce your tax. So there are, these are brilliant in, you know, incentives under the CARES Act. You can carry them back five years and I believe forward 20. Now, why are they doing this? Because this puts money in the hands of, of individuals mm-hmm. <affirmative>, that gives them the money that they need to see themselves through this difficult period. It's a very quick way for the government to put money back into individual's pockets. Right? So these are tremendously beneficial opportunities for real estate investors.
00:07:55 I wanted to bring up one thing that I thought it would be fun to, uh, to bat around with you, cuz we're looking at opportunities on the forward basis. Now shift forward, like here we are. Uh, you have often said West LA is some of the best real estate in the world. I don't disagree with you. Location, location, location is the age old adage. And I think it applies to what you do better than, um, most any other, you know, uh, sponsored in any other market. Uh, but I have also heard, uh, an age old adage from some very smart and wealthy real estate investors who said, yeah, it's actually not location, location, location. It is timing, timing, timing that is more important. What do you think about the timing of what we're about to end to? When do you start to go on the offense and what do you look for, uh, as you, you know, try to put some of this dry powder that you've raised to work?
00:08:49 Well, actually that's a, actually a very good topic. I would agree with the other set folks that you speak with to talk about timing because without luck and timing, you're probably not gonna do very well. Luck and timing played a key role and I always say, uh, success is the crossroads of, uh, uh, luck and opportunity. Yeah. And so, uh, and timing and luck play a key role in a lot of the successful investments that have happened in our career, uh, and our company's history for more than 40 years. You need a, you need a capable sponsor and you need great real estate because a capable sponsor will know how to take advantage of timing and with a little bit of luck could actually exceed expectation.
00:09:37 Any sort of closing remarks on where you see opportunity?
00:09:42 Well, number one, I think that opportunities a abound right now. Uh, but we can't be certain that those opportunities are the best opportunities that we'll see. Mm-hmm. <affirmative>, but with interest rates at or near zero, the government printing money more than ever before, we're not gonna run outta toilet paper. We're gonna run out of money paper the way they're printing it. So the excess capital, which is propping up the stock market, but there's a tremendous amount of money and money is very, very cheap. And so long as money is cheap and available, which it is mm-hmm. <affirmative>, uh, but it's gonna become less and less available to those who don't have a, a defined track record and experience. So I think that for us, because we've been in business for so long, we've been so successful. We've never failed to make a loan payment. We've never failed to make a profit.
00:10:34 We've taken tremendous advantage of the tax tax laws and tax regulations, and we would never invest in any real estate that didn't have tax benefits. So I think that, you know, we are cautiously optimistic that we're gonna see some opportunities, uh, become available, but not because they're in trouble due to covid 19, we're just gonna see opportunities where people say this environment is difficult for us to operate in, and maybe it's time for us to consider liquidating price to properties. Hmm. Not because they're having trouble with it, it's just, it's just the difficulty of having to deal with government regulations that are being imposed every day.
00:11:16 Well, um, chance favors the prepared mind and I know that, uh, you are a long-term thinker. I know you're prepared, uh, even though we're may be in phase one of a three phase sort of, uh, downturn as it relates to real estate operators and sponsors. Uh, but I know you've been through the phases in multiple times and I know you're not afraid of phase three and kind of planning for it. So I wish you all the best. Uh, thank you for joining us here on StreetBeats. Larry, great to see you, uh, stay healthy and stay strong and, uh, we look forward to continue to invest with you, uh, for many years to come.
00:11:54 Thank you so much for the opportunity, Darren. I really enjoyed this.
00:00:43 It's my pleasure. Thank
00:00:44 You. Larry. Tell us, uh, uh, just a little bit about you, sort of what your observations are, what, how you feeling, what are you seeing out there in, in your, uh, in the West LA market? Um, just give us a quick overview, please.
00:00:57 Well, the interesting thing about our market in West Los Angeles, which may sound small to people who don't know the geo geographical area, but it is, uh, a hundred square miles. But because the west side of Los Angeles was built in the concentric circle theor, the theory, which was, uh, you start from the central city core, which was downtown la, which was found in or around 19 18 50, uh, by the time growth got out to the west side, it was all lowrise. So it is a very, very spread out large region that's consists primarily of single family homes and Lowrise commercial and Lowrise multi-family.
00:01:38 You had mentioned something about, you know, the three phases. I, I read an article of yours recently. I, I, I thought it was really interesting about the three phases of what we're experiencing as a society and specifically for real estate companies. Can you speak a little bit to your theory there?
00:01:58 Actually, thank you for that. Um, it's not a theory, it's a reality, uh, that we, we've seen repeat. Uh, it's a pattern that repeats itself because real estate, unlike other investments is, is long term by definition. And as a result, uh, projects are conceived in one year. Uh, they receive the green light and some other year, and then by the time they're completed, another year or two has passed. And so it's a business and an investment that takes a long time to materialize. Mm-hmm. <affirmative>. So as a result, when something happens to sHieggelke that process up, the first thing that happens amongst the real estate investors and sponsors is it's the denial phase. Yes, things are bad, but they're gonna get better soon. We're not really worried. We've got plenty of cash, we've got plenty of credit. Um, we can get through this. That's the early of denial.
00:03:00 Then there's the mid stage of denial where we're in now, which is, wow, this kinda lasted a little bit longer. Our banks are getting a little nervous about keeping those lines of credit in place, and we're starting to have to, you know, give back money to some of these properties because some of these tenants aren't paying because they don't have to pay or they can't pay cause they've lost their jobs. And then you get to the next phase, which is the, uh, you know what? We've been through these things before. We know we're gonna get to the other side. You know, it's gonna look a lot better in a year from now. We just gonna keep going. We're gonna keep building, we're gonna keep buying, we're gonna keep investing, and it's all gonna be okay. Then there's phase three. You toughed it out. You went 12 or 14 months, and guess what your lines are?
00:03:54 Credit dried up. Your ran outta money, your tenants didn't pay, your banks were on you in, you're in bankruptcy. And that's called the O S H I T phase. That's what happens. And so, because it's real estate and, and not other types of investments where, you know, you can wake up in the morning and say, I'm getting out of the stock market. I'm out 30 minutes later, you sold all your stocks. You have to be in denial because you can't change it in that first phase. Mm-hmm. <affirmative>, what you can do in that first phase is there's still activity, there's still properties trading, there's still banks lending. So you can actually, if you are realistic about where you are in the marketplace and what's ahead, you can't actually make moves early on to prepare yourself for success rather than suffer the, the three phases of, uh, typical inve real estate investments.
00:04:51 How do an individual investors benefit from some of the CARES act tax benefits? Um, and we don't need to go too deep into it, but what the statement is, is that there are benefits to investing, uh, courtesy of the CARES Act for individual investors as well as for the Wall Street Journal headline developers that a lot of people, you know, assume, oh, you know, a billion, another billionaire BA bailout. It's like, well, actually it's for individual investors to incentivize them to invest. Correct.
00:05:22 Well, it's a hundred percent. Historically, uh, since the Great Depression, the United States government has used, uh, uh, income tax stimulus for real estate to create jobs into spur the economy. Right? This was a, from 1933 until 1981, the exclusive methodology used by the US government to stimulate economies out of recession was to stimulate real estate. If the other change was in the 1986 act, even even sponsors could not use their losses against their ordinary income. So if you're in the real estate business and all your money is earned from the real estate business, you couldn't even use your real estate losses against the income that you were earning from your management business. The 1993 on the bus budget Act changed that rule. So sponsors can deduct all their losses against any form of income, but investors can use all of the passive losses that they get from holding real estate against any future gains.
00:06:30 Now, investors are getting these K one s from, from us and from all of your other, uh, you know, companies that, you know, offer their investments through, through your, through your business. Right? They don't understand, unless they own investments that generate passive income from other sources, that they're getting a K one and it shows, you know, maybe a hundred thousand dollars worth of losses and they go to their tax man and the tax man's doing their return, and he looks at that and he goes, well, you don't have any other passive income, so we're just gonna suspend this loss.
00:07:05 Mm-hmm.
00:07:06 <affirmative> mm-hmm. <affirmative> until someday you can use it. And the taxpayer doesn't know what that means, but what it means is when that investment that you made that threw off those losses is sold and you have a taxable gain, all of those losses will be used to reduce your gain and reduce your tax. So there are, these are brilliant in, you know, incentives under the CARES Act. You can carry them back five years and I believe forward 20. Now, why are they doing this? Because this puts money in the hands of, of individuals mm-hmm. <affirmative>, that gives them the money that they need to see themselves through this difficult period. It's a very quick way for the government to put money back into individual's pockets. Right? So these are tremendously beneficial opportunities for real estate investors.
00:07:55 I wanted to bring up one thing that I thought it would be fun to, uh, to bat around with you, cuz we're looking at opportunities on the forward basis. Now shift forward, like here we are. Uh, you have often said West LA is some of the best real estate in the world. I don't disagree with you. Location, location, location is the age old adage. And I think it applies to what you do better than, um, most any other, you know, uh, sponsored in any other market. Uh, but I have also heard, uh, an age old adage from some very smart and wealthy real estate investors who said, yeah, it's actually not location, location, location. It is timing, timing, timing that is more important. What do you think about the timing of what we're about to end to? When do you start to go on the offense and what do you look for, uh, as you, you know, try to put some of this dry powder that you've raised to work?
00:08:49 Well, actually that's a, actually a very good topic. I would agree with the other set folks that you speak with to talk about timing because without luck and timing, you're probably not gonna do very well. Luck and timing played a key role and I always say, uh, success is the crossroads of, uh, uh, luck and opportunity. Yeah. And so, uh, and timing and luck play a key role in a lot of the successful investments that have happened in our career, uh, and our company's history for more than 40 years. You need a, you need a capable sponsor and you need great real estate because a capable sponsor will know how to take advantage of timing and with a little bit of luck could actually exceed expectation.
00:09:37 Any sort of closing remarks on where you see opportunity?
00:09:42 Well, number one, I think that opportunities a abound right now. Uh, but we can't be certain that those opportunities are the best opportunities that we'll see. Mm-hmm. <affirmative>, but with interest rates at or near zero, the government printing money more than ever before, we're not gonna run outta toilet paper. We're gonna run out of money paper the way they're printing it. So the excess capital, which is propping up the stock market, but there's a tremendous amount of money and money is very, very cheap. And so long as money is cheap and available, which it is mm-hmm. <affirmative>, uh, but it's gonna become less and less available to those who don't have a, a defined track record and experience. So I think that for us, because we've been in business for so long, we've been so successful. We've never failed to make a loan payment. We've never failed to make a profit.
00:10:34 We've taken tremendous advantage of the tax tax laws and tax regulations, and we would never invest in any real estate that didn't have tax benefits. So I think that, you know, we are cautiously optimistic that we're gonna see some opportunities, uh, become available, but not because they're in trouble due to covid 19, we're just gonna see opportunities where people say this environment is difficult for us to operate in, and maybe it's time for us to consider liquidating price to properties. Hmm. Not because they're having trouble with it, it's just, it's just the difficulty of having to deal with government regulations that are being imposed every day.
00:11:16 Well, um, chance favors the prepared mind and I know that, uh, you are a long-term thinker. I know you're prepared, uh, even though we're may be in phase one of a three phase sort of, uh, downturn as it relates to real estate operators and sponsors. Uh, but I know you've been through the phases in multiple times and I know you're not afraid of phase three and kind of planning for it. So I wish you all the best. Uh, thank you for joining us here on StreetBeats. Larry, great to see you, uh, stay healthy and stay strong and, uh, we look forward to continue to invest with you, uh, for many years to come.
00:11:54 Thank you so much for the opportunity, Darren. I really enjoyed this.