JF2652_ CEO Reveals Exclusive Look on Managing a Multi-Generational Real Estate Investment Firm with Daniel N. Farber

Podcast Feature | Daniel Joins Joe Fairless on The Best Show Ever Podcast

Who makes the decisions in a family-run business? What metrics are used to evaluate the CEO? What kind of challenges do they face? Daniel N. Farber helps answer all these questions in episode 2652 with Joe Fairless by pulling back the curtain on what being a CEO for this type of investing firm is like. From what his KPIs are to who he reports to, Daniel gives the Best Ever listeners an insider look at how this multi-generational real estate investment firm is run.

Listen to it below and check out the transcript.

 
TRANSCRIPTION:

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. With us today, Daniel Farber. How are you doing, Daniel?

Daniel Farber: Very good. How are you, Joe? Thanks for having me.

Joe Fairless: I’m glad to hear that, I’m well, and you’re welcome. I’m grateful that you’re on the show. A little bit about Daniel – he’s the CEO of HLC Equity. HLC Equity is a multi-generational real estate firm. They’ve owned and operated real estate in over 25 states, and they’ve owned and managed over 7 million gross square feet of commercial residential and development land. His company is based in Pittsburgh, Pennsylvania. They invest, as I mentioned, all over the US. With that being said, Daniel, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Daniel Farber: Sure, definitely, 100%. So real quick on the personal side for me… I actually never thought that I was going to go into real estate, and much less a family business. I kind of started out in my career through journalism and then going kind of the diplomatic route, eventually becoming a strategic consultant to high-tech companies and some political organizations. Through that, I kind of touched upon business and several different factors that got me much more interested in going that route. That’s kind of where one thing led to another, and I got eventually involved in real estate first and then eventually into the family business, which is where I am today.

As you said, HLC equity is a multi-generational real estate investment company. We are a company that has gone through various iterations, having been around for decades. Basically, founded by Herman Lipsitz, who was my grandfather. He was just an ambitious entrepreneur, a child of the depression, just an all-around great, hardworking guy. He had a distribution business in the morning, a law practice in the afternoon, and with the proceeds, he would buy real estate in the evening. It was at a time when it was a little bit different of a market than it is today, so I guess you could do that, even though I often think about how did he do that when a fax machine was considered innovative. But he did it.

So basically, throughout the period of time, there was everything from land and development and residential shopping centers. Eventually, as he got older, really the strong focus became more neighborhood shopping centers, and eventually, just net leased assets was really a bulk of the kind of company holding.

That went for some period of time, until eventually, as I got into the business, and some other folks got into the business, we really wanted to make a shift and we said “How are we going to grow this thing? How are we going to take what we have and to grow it?” So what we’ve done is really shifted into the multifamily space, done a lot more in the multifamily space over the last, call it, seven to eight years… And then also, while our company used to be primarily just kind of deal by deal with partners, Pari Passu, or else just on our own, we built out the infrastructure and the wherewithal to be able to be stewards of investor capital and bring in investors of all shapes and sizes. That leads us to kind of where we are today.

Joe Fairless: It’s a multi-generational real estate firm, as you mentioned, and you are the CEO. I’m curious about the structure. Who do you report to as the CEO?

Daniel Farber: You have a very good question. Part of our growth was bringing in obviously really great people. We have a committee that’s kind of our executive committee, so that’s the management, and then we have the family, and we separate the two. At the end of the day, decisions are made by the family, but with heavy weight by the executive committee.

Joe Fairless: Interesting. Okay. How many people are on the executive committee?

Daniel Farber: Five.

Joe Fairless: Five people are on the executive committee. And how many people have votes in the family?

Daniel Farber: There’s three, at the end of the day, but they’re weighted in different ways. The actual ownership is somewhat proprietary, just because it’s family, but it’s weighted in different ways. But there are really three votes all at all.

Joe Fairless: Okay. What are the responsibilities of the executive committee, those five people who are not family members?

Daniel Farber: It’s really team members that we brought in, from CFO, head of operations, head of asset management, and head of investor relations.

Joe Fairless: Okay, I’m with you. So they’re not board members, they’re active employees in the business who make up a committee. And since they are on the ground and know the business, that’s why the family takes their opinion into account.

Daniel Farber: Yeah. Not just take into account, but very seriously. I’ll give you an example. Let’s say we have some sort of building structural issue in a property in Dallas, which is typical for some properties in Dallas, as you know. Our head of operations and our head of asset management – they’re going to know much better what the situation is, and their opinions, for us, matter much more, because they’re on the ground, as you said. Much more than like if it was just important executives with fancy titles. That’s why their opinions count more when it comes to just daily operating this stuff.

Joe Fairless: What are the metrics by which you’re evaluated as CEO?

Daniel Farber: We actually use a system from the Scaling Up Program, if you’re familiar with it. Every quarter we have KPIs, and everybody on the team has KPIs, down to — everybody. Based off of it, for hitting those KPIs, that is definitely what I’m judged on. There are other factors obviously also, but that’s kind of how we really, from a numbers standpoint, keep track of it.

Break: [00:06:09] – [00:07:42]

Joe Fairless: Just to get an idea of your responsibilities, what are your KPIs for this quarter?

Daniel Farber: Annually, there’s a certain amount of acquisitions that we want to hit and there’s a certain amount of investor acquisitions that we want to create new relationships. Just as an example, one would be, per quarter, we want to do our kind of sweet spot acquisition, which is anywhere between 20 to 70 million dollar purchase price. That’s an example of, if we hit that. But then it goes to marketing and how much content we’re putting out, hence podcasts… There’s how many investors come into our portal operationally, are we hitting all of our KPIs? So on and so forth. It really touches every division.

Joe Fairless: What are your new investor goals per quarter?

Daniel Farber: Right now, we’re shooting for 40 new signups per quarter. We pretty much have hit that.

Joe Fairless: Nice, congrats. Well, no need to do any more marketing. You’re good for this quarter.

Daniel Farber: No.

Joe Fairless: [laughs] I’m kidding.

Daniel Farber: That’s the point.

Joe Fairless: I know.

Daniel Farber: I don’t know if we’re shooting too low, or the folks that are in charge of that are just doing an amazing job… But I’m happy that we hit it.

Joe Fairless: Is a sign-up someone who signs up for your portal and shows interest? Or is that someone who actually puts money in a deal of yours?

Daniel Farber: Great question. No, the 40 is that we build a relationship with them by them signing up.

Joe Fairless: So 40 new people who fund, invest money with you per quarter?

Daniel Farber: Yeah. You’re asking a really good question, because there’s a huge difference between somebody who signs up and somebody who invests. And I don’t mean it in the sense that there are so many people who can sign up and very few invest. I mean it in the sense that it’s touchpoints. So I’ve had conversations with folks, and it has led to nothing for three to four years, but then in year five, it has led to something significant, whether it’s a large investment, a large partnership, or whatever it may be. So it’s very hard to quantify that stuff. I think it’s actually maybe a little bit too transactional to say like, “Okay, you got them in. Did they invest?” Obviously, you have to have forward momentum. We talked about this a lot, because it comes down to networking also. At the end of the day, we just want to build meaningful relationships with great people that we can work with over the long term. So if they invest that quarter, or two quarters, or in five years, or not at all, that’s just a matter of [unintelligible [10:03] if you get what I’m saying.

Joe Fairless: Mm-hmm. What have you seen is your conversion rate from people who sign up to learn more to people who actually fund?

Daniel Farber: I don’t have an exact number for you, honestly. I would need to kind of dig deeper, because we actually just completed a transaction in which we saw, thankfully, a lot of traction, and that literally just closed this week.

Joe Fairless: Congrats.

Daniel Farber: Thank you very much. I think that in order to get a real solid number, I would need to get back to you on that. I don’t have the exact rate as of the last kind of quarter.

Joe Fairless: Taking a look at the people who did fund the new leads, what are the top three lead sources for those individuals?

Daniel Farber: I would say the top lead sources…

Joe Fairless:  Where did they come from?

Daniel Farber: No, I got you. I’m just trying to think. So we fund these deals in different ways. We have relationships with wealth management groups that bring their clients into our deals, and those are significant checks usually. We have our own friends and family-accredited investors who bring in anywhere between 100 to 500,000. Then we have our own HLC Direct which is our direct to investor platform. Those are really our three routes. We do work with some private equity groups when it gets to the larger deals as well.

Joe Fairless: Got it. Okay, fair enough. So going back to the goal of 40 new people who are funding…

Daniel Farber: Our social media platform is not as robust as many others and it’s probably an area we should put more focus on. We definitely get a lot of traction to our newsletter. So we get people to sign up to our newsletter, a lot of times that does come from social media, but it also comes through other venues which I can discuss. Through that newsletter, frequently, we get a lot of signups onto our investor portal. We run a Global Real Estate and Technology Summit, and I can get into what that’s all about. But interestingly, the most amount of kind of signups to our newsletter comes from that.

Joe Fairless: Okay. How many people on your newsletter?

Daniel Farber: I believe we have roughly 3500.

Joe Fairless: Wow, that’s a good chunk of people. Let’s talk about this. The reason why I asked these questions is most of the listeners are active investors, and they’re looking to do similar things or are currently doing similar things.

Daniel Farber: I think it’s great questions. I don’t have all the answers because it’s stuff that we’re constantly switching. Because I don’t think that there is the magic formula. I think different groups kind of like to attract in different ways, but I’m definitely happy to discuss it.

Joe Fairless: Just for my own clarification, a couple of things. HLC Direct, you said that’s direct to investor platform. What’s the difference between that and just working directly with friends and family?

Daniel Farber: This allows us to expand. Our whole thing is we want to expand our relationships and we want it to be direct with us. The more direct we can be, I just feel, the stronger the relationship. Forget about the broker fees, or if you work with other platforms there are fees, that’s not really what I’m interested in. What I’m interested in is having direct relationships with investors. So it’s allowed us to grow that because people are either receiving our newsletter or seeing stuff on social media. They frequently like what they see and so they sign up for our platform for HLC Direct. Through that we’re able to build more relationships.

Joe Fairless: I get that. But what I’m trying to understand is you mentioned the three groups, wealth management groups, friends and family, and HLC Direct. So what’s the difference between friends and family and HLC Direct?

Daniel Farber: Friends and family are people that I would say that we have relationships with, and we’ve had relationships with for some time. The traditional friends and family route. HLC Direct is exactly what I said of the lead source. This goes back to your question, the lead source being either a newsletter, or social media, or some other form of third-party ways of getting to them. Again, we have our summit, which is helpful as well.

Joe Fairless: Got it. Okay. The Summit, Global Real Estate and Technology Summit, when’s the last time you did it and how many people attended?

Daniel Farber: First of all, it’s global because we actually don’t do it in the US. Even though we’re fully US-based, we actually host this in Israel. The last time we did it was in 2019. We were obviously in the planning stages of 2020, and then we were unable to do it. We hope to do it this coming spring or summer. The last event that we had, we keep it an international but pretty high-level event. The focus is on quality over quantity. We have 350 people, I think, the last time, we have several sponsors, we have everybody there from the family offices, VCs that are interested in investing in technology, technology companies, real estate owners, and operators. It’s really in order to build an ecosystem around this phenomenon that is now mainstream. But when we started it, it was less so of the convergence of real estate and technology.

Joe Fairless: Are you hosting it this year?

Daniel Farber: I very much hope that we will be able to. Hopefully in the beginning of June. Are you coming?

Joe Fairless: How can I and others learn more where do we go?

Daniel Farber: 100%. On hlcequity.com, under Our Brands, one of the brands is Proptech 360, that is the event. Or you can just Google Proptech 360 Israel and it’ll come up.

Joe Fairless: Nice. As CEO, you said you’ve got the acquisitions, focus, new investor focus, among other things also, what’s been the most recent challenge that you’ve had?

Daniel Farber: I think that the challenge is by far the acquisitions environment, the competition, and just finding deals. I guess we got spoiled buying deals in Denver and Dallas for seven or eight cap. The readjustment in mentality, that’s hard, and also just getting comfortable in making sure that you’re buying right because real estate is all about the buy. That’s very challenging to be confident in today.

Joe Fairless: Taking a step back, what’s your best real estate investing advice ever?

Daniel Farber: I think I just said it, the buy really matters. Because from there, you have so much room if you can buy right. I really do think that that is great. The next one is just buy stuff that you can hold for a long time. Because I’ve seen, over the decades, if you’re able to buy right, and then you’re able to hold, you can do well. It appreciates, you can depreciate, you can refinance, you can do lots of great stuff, and it really is powerful.

Joe Fairless: Let’s pretend tomorrow, you’ve got a closing, would you rather be buying a 300 unit or selling it tomorrow?

Daniel Farber: I would rather be buying it.

Joe Fairless: Why?

Daniel Farber: Because I’m sure, similar to you, every single day I have people knocking on our door saying we have this great off-market offer, we’re going to offer you a premium, and so on and so forth. Then the question is, right away, what are we going to buy? I think that in my opinion, again, we just bought a brand new 330-unit deal and we have other deals under contract. Obviously, it’s a great seller’s market but at the same time, if you’re thinking long term, which is what we always try to do, at the end of the day, holding hard assets right now, I think, is going to be beneficial.

Joe Fairless: What deal have you made the most amount of money on?

Daniel Farber: You know, it’s funny. The deals that we make the most amount of money on are deals that we do on our own, and there are what I call quirky deals. We don’t do them with investors because it’s more risk than we’re willing to take on responsibility for investor capital unless they’re highly sophisticated and are willing to basically lose it all. We do the best on deals where we don’t care about the cap rate. But we know there’s some sort of intrinsic short-term value that distorts what the cap rate is. We’ve done deals in Brooklyn, New York where we bought smaller multifamily buildings for, call it a going in of one and a half to two cap. But we were able to add value in specific ways on that deal, we kind of knew it going in, and we went around and sold it for great returns a year or a year and a half after that.

Joe Fairless: What was the value-add play there?

Daniel Farber: With that specific deal, we knew that we could buy certain stabilized tenants, we knew that there were renovations that we could make. This was going back in 2012, we could see that the market there was just becoming super hot. So a mixture of our tenant buyouts that we were able to do our renovations, and then the market taking off was helpful in that. But again, like going in, it’s not a sure thing. It’s very nerve-racking buying in a low cap like that. We did something very similar, and this wasn’t multifamily. But we did something very similar right around April, as COVID is hitting. We’re contacted by a broker to buy an occupied Veterans Association Clinic. Here on the deal was there was one year left, the upside was it was a development deal, and assuming that the VA left, there was development rights to build 80 to 90 units. We looked at the deal and we said, “Okay. The VA, they’re paying way less than they should. If we want to, we can develop it even though we’re not developers. We could partner with a developer and build a bunch of multifamily units in this prime neighborhood.” But going in, again, we were paying a two cap. In the end, we ended up being able to work out a deal with the VA, which was my preferred route because it was safer. We got a brand new 10-year lease with the government, around three times higher than what our original rent was. We were able to over double our money within a year, and then not sell, and finance it, and just enjoy. Those types of deals are the deals that we do the best on financially, but that’s not where our focus is in terms of growing our business.

Joe Fairless: On the flip side, how much have you lost as far as the most money you’ve lost on one deal?

Daniel Farber: For me personally, since I’ve been heavily involved in the business, on our new acquisitions, there have not been any. I don’t say that because I think they were amazing, just that we’re lucky because it can happen. Definitely, with the firm, especially in the shopping center business which is a whole other animal, there have been occasions where let’s say a major tenant leaves and that causes a huge financial hit. The exact largest one I can’t point to, but it definitely has happened. Frankly, if it’s a group that’s been around for a long time, then they should have some sort of losses, or else they haven’t been doing enough real estate.

Joe Fairless: We’re doing a lightning round. Are you ready for the Best Ever lightning round?

Daniel Farber: I hope so.

Joe Fairless: I know you are. Alright, first a quick word for our Best Ever partners.

Break: [00:20:34] – [00:23:22]

Joe Fairless: What is the Best Ever way you like to give back to the community?

Daniel Farber: Because I’m so involved in real estate in a built environment, I’m involved with an organization that’s very similar to Habitat for Humanity. I just really think that that’s something that speaks to me because we’re able to provide decent housing to people who really need it.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Daniel Farber: I think the best way is either to connect with me on social media, which I’m always happy to connect with new people. Or to sign up for our newsletter and you’ll be able to see all of the activities that we’re doing. We don’t necessarily publish everything out on social media but we do put a lot more in our newsletter. You can do that by going to hlcequity.com, and just to connect, and you can see how to subscribe to our newsletter.

Joe Fairless: Your website will also be in the show notes for everyone. Daniel, thank you so much for being on the show and sharing…

Daniel Farber: I really appreciate it. This was great. Thanks for everything you do for the industry.

Joe Fairless: Yeah. Interviews like this are helpful for everybody involved. You gave some insightful information about your business and I sincerely appreciate that. I hope you have a Best Ever day and we’ll talk to you again soon.

Daniel Farber: Great, thanks a lot.

 

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