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Bruce Kirsch Interviewed by Whitney Sewell
Transcript and Links
Our guest is Bruce Kirsch. Thanks for being on the show, Bruce.
Thank you for having me. I appreciate it.
Bruce is the Founder of REFM and the Creator of Valuate Software, the fastest growing property valuation and investment analysis platform in the world. REFM is a premier financial modeling solutions provider for Excel-based financial spreadsheet models, financial modeling training and financial modeling consulting for real estate transactions of all types. REFM provides its customers with the advanced financial modeling knowledge, tools and skills they need to successfully model their transactions and present them with confidence. Bruce, it sounds like a lot of stuff we need to know about in this business and what you’re doing. Give the audience a little more about your background and your focus right now.
Generally speaking, we provide tools, solutions and training that relate to financial modeling for commercial real estate transactions. For instance, if you want to go out and acquire an apartment building or you want to develop a hotel or you want to develop a major mixed-use project, we have templates and tools and provide consulting services for all of those endeavors. As you and your audience likely know, pro formas are a way of organizing information and setting up a checklist of sorts for your financial due diligence and for feasibility to see at what price do I like a particular transaction. Every investment is good at a particular price. We help people to zero in and solve for what they find to be an attractive price, given a certain perception of risk to go and present that information in an attractive manner so that they can raise capital, bring on other financial stakeholders both on the debt and the equity side.
What got you into this business, being able to create a template like this for us to help analyze deals possibly or be able to present them? I’d like to get into the ways that we present them to help in raising capital as well.
I got into this in a roundabout way. It’s funny how life can take you in different routes. You might end up somewhere where you didn’t anticipate. The short version is when I was growing up and when I was entering college, I wanted to be the next Steven Spielberg. Naturally, that did not pan out for me. I did work in Hollywood for a little bit after I graduated from college. I decided that it wasn’t the right fit for me. The thread that is important here is that when you’re a filmmaker, you’re telling stories. When you’re putting together a pro forma, you’re telling a story about a property, about money and opportunities and risks. That’s the narrative mindset that I’ve always had. I did some decent amount of photography when I was in college. This is when photography still involved chemicals in a dark room. Digital was starting to come out. I used to spend hours upon hours in the dark room. Sometimes perhaps even skipping some other classes or other subjects to try to perfect these fine art-type photographs that I was doing.
You might say, “Why is he telling me about this?” The reason I’m telling you is that it’s about presentation. When somebody takes a look at a photograph or even a printout of a spreadsheet, they make an instantaneous judgment about the veracity, trustworthiness and the attractiveness of that. The combination of this narrative mindset, very high regard and discipline for perfecting presentation. An interest in business and an interest in the physical world and the real estate business, it’s all come together in this perfect fitting profession for me. It is fortunate for me that I found this and this is effectively what I help people do. I help people put together stories about money that looked pretty.
Tell the audience what’s important when we’re making this presentation. What are some key things or maybe problems that you see time and time again? Obviously, you’re creating a way to fix those problems. What are some things in the industry that you see over and over that people do wrong that we need to make sure we have it correct in our presentation?
First and foremost, you always need to consider the audience whenever you’re making a presentation. If you are perhaps a principal sponsor of a potential transaction and you are out there looking to raise potential equity and debt, naturally you want something that looks juicy, something that looks good. You need to consider that any sophisticated group, whether it’s a debt group or an equity group, is going to take whatever you give them and they’re going to chop it off at the knees. If you go to them initially with something that looks mediocre, you’re not going to get a phone call back. Your reputation will then be, “He doesn’t have a good eye for opportunities.” It’s a little bit of a lie in a sense in that when you go out initially, you have to present something in its best possible light, knowing that the person on the other side of the table is going to give it a haircut. It’s something which I don’t have much need for anymore these days.
As my four-year-old daughter says, “When you cut your hair off, it didn’t come back. When is your hair going to grow?” I said, “That ship has sailed.” You have to consider the audience. You want to come out with a strong presentation. With that said, you can’t fool yourself because if you’re fooling yourself, you’re probably not fooling other people. You don’t want to fool other people but you want to entice them. There is that. From a technical perspective, the number of mistakes that we can and do make in our spreadsheets, whether it be a faulty assumption or formulas that are incorrect or wired up correctly, it’s enumerable. We are our own worst enemy when it comes to analyzing transactions, both with respect to sloppiness, laziness, oversights, mistakes, arrogance and conceit. “My transaction, my building, my development is going to be better than all the rest.” If every developer thinks that, 99% of them must be wrong because there is only going to be one best in class.
We are fallible. The best that we can do is to be honest with ourselves and to be able to move quickly and nimbly. You need to know where to focus your energy. You need to know where to focus your time. I’m sure a lot of people are feeling a lot of pressure to put capital out and to get transactions tied up. It’s not a quick moving business, especially for transactions of a particular scale. You’re doing 90-days due diligence or 120-days due diligence. If you’re developing, you have to design and get permits. It can be a glacial process in terms of the speed of execution, which can be very frustrating or it can be quite quick. If you’re going to on the other end of the spectrum, go out and flip up a single-family house or a townhome or a condo or something like that.
Anything else in the presentation that is most important for us to remember?
The eyes eat before the mouth. It should look beautiful. It can never look too good. It needs to be readable. Taking so much information and condensing it down into a letter-sized piece of paper that nobody can read it without a magnifying glass isn’t useful and it makes you look like a rookie. If you want or have to or need to print out and format things for legal size or tabloid size, do it. Someone can’t evaluate the deal if they can’t read the numbers. They’re squinting to see what is happening here. Imagine you go out and you buy a book at the bookstore and you can’t read the story. That’s pretty frustrating. You’re probably going to put it down after about ten seconds. It needs to be communicable and easily digested.
Labeling is a very important thing. It needs to be intuitive. If they stumble upon a printout of your pro forma, the executive summary page or the assumptions tab or something, they should be able to read it from the top left corner to the bottom right corner and glean the story, “What is this transaction? Where’s the property? How big is it? What’s a property type? How are we buying it with what percentage debt and what percentage equity? How are our rents and operating income going to grow over the holding period? At what point are we going to exit? Are we going to do a refinance in between? What are our net returns on an equity basis?” Those basic things, if you cannot glean those rapidly from whatever the presentation is, whether it’s on the screen or printed page, you’re shooting yourself in the foot. You have to make it easily understood in about 25, 30 seconds.
You’ve got to be able to understand it. If it can be done in 30 seconds, that’s even better. What else about the presentation, to make it look the best, to gain the trustworthiness and attractiveness like you were talking about and present the best possible and anything else that makes it stand out above your competition? What are those things going to be?
Formatting is half of the battle. Things should be consistent. If you’re showing percentages and you’re going to do two decimal places after the period for one percentage, all percentages should be formatted that way for the sake of people being able to process things. If you’re going to use prefixes or suffixes, is it PSF or is it per SF or is it something else? Keep it consistent. Most of the numbers that are going to be on these presentations are currency values, in our case, it’s dollar values. If it’s not a currency value, that unit of measure needs to be evident. You don’t want people saying, “Are they talking about rentable square feet here or gross?”
Custom formatting of some sort where you’re putting on a suffix like GSF, PSF, RSF, those types of things is very helpful for people so they can process the non-currency value items and read through the story in a fluid manner. They’re looking at the left-hand column of the page and by the second number down they’re saying, “What is this?” It needs to be very dummy-proof to use an expression that some people might take offense. It needs to be foolproof. You want to be able to present to someone, maybe they have a certain level of sophistication. Maybe they don’t. They can walk away and say, “I learned about this real estate opportunity.” They can repeat the narrative of the situation.
You talked about presenting them with confidence internally to potential partners, lenders, investors. You had mentioned that you all do training. What type of training helps people to be able to present things like this the best?
There is no substitute for practice and good habits. Adapting good habits and then implementing them and sticking by them, staying consistent with your presentation and taking the care to format. There are two parts to it. One is do your numbers make sense? Do you have formulas that are sound and are producing values that are reasonable? Is the math correct? How does it look from a presentation perspective? You think about a PowerPoint presentation where things are slapped onto the slide or as opposed to a beautiful PowerPoint presentation. People are going to make these judgments instantaneously. It could be a terrific opportunity. If you slap something together, you’re not communicating that. It’s unfortunate. Humans are superficial in that regard. It only takes a millisecond for someone to either say, “This strikes me as interesting or this strikes me as a mess.”
Give us a little inside as far as how somebody in this syndication business works with your platform. What does that process look like?
Let’s say you have an opportunity to acquire a property or develop a property. You want to be able to attract capital. You have all of the raw data. You need a way to present it. I met with somebody. He’s a hotel developer. He’s been doing it for a long time. He’s not pleased with his Excel template. We talked. I showed him what we have. He said, “This looks terrific. I want to get this so that I can present my deals in this format.” That’s a very basic way. It’s like, “I provide that template. You’ve got a deal. You have local market knowledge. What rents are going to be? How are things going to grow? What debt financing can you get at what rate?” You’re plugging in all of those inputs. It’s data variables that you’re plugging in. Calculations are being carried out by the math. You’re getting outputs. We provide a plugin place solution, whether it be our Excel templates or the Valuate Software platform to allow people to get something presentable very rapidly and to share it to gauge interest and move conversations forward.
As far as photos and maybe maps of the area and things like that, is that something you can also put with it to create an investment summary or something like that?
We don’t do so much with pictures personally because there’s so much to account for and present on the numeric side. If you’re putting together an investment memo or something to raise capital, you have to set the scene. You need to tell people where this is, what does it look like and all of those types of things. Those are the basics of getting somebody oriented to what is the property, where is it, what state is it in, when was it built? The physicality of the real estate, which is very important. We don’t tend to add value quite frankly on that front. We pair that with all of the financials.
Tell me about the financial modeling training, financial modeling consulting and why that’s important?
You’re going to outsource a lot of things in your business. Maybe you outsource graphic design and you outsource your accounting. You can also outsource your financial modeling, which is a service that we provide. It’s best if you also have that capability such that you can validate and vet what you could get back. A lot of the times people will come to us for assistance. They have the skills. They have knowledge. They have savvy. They don’t have the time. They need more bandwidth. At some point or over quite a long time over their careers, they took training like hours. They work. They’ve been in the trenches, running spreadsheets until [11:00] PM and so on. They understand these things. It’s a language of its own.
Over time, you will develop judgment as to when you see something presented to you, does it look right? Generally speaking, if something looks too good to be true, there’s been a mistake somewhere. A prime example is you have this ridiculously high IRR on multiple on equities. It looks phenomenal at this price. What’s happened in the model is there was some programming error and the land was never purchased. You put the deposit on the land but you never closed on the land or you closed on the land, but you paid off the senior debt but you never paid off the Mezz debt or you never paid off any of the debt. Those big types of things are usually what are missing or awry if things look way too good to be true.
Bruce, other than maybe how they present their deal to investors, what’s a way that they could improve their syndication business?
There’s a saying which is, “Bad deals chase money and the money chases a good deal.” First and foremost, you need to get your pipeline to the best possible state. If you’re a principal, generally speaking, your value add is not bringing capital. It’s controlling transactions, getting something under control that you can then get financed with debt and equity. If you want to have a thriving business as a sponsor or principle of real estate transactions, that’s where you should be spending your time. Quite frankly, that is another reason why folks who do have thriving businesses and the skills to do financial modeling come to us because they don’t want to spend. They can perhaps spend the time fiddling around in spreadsheets.
Their value add is not, “Let me make this column not twelve pixels wide, but ten and a half pixels wide, because it prints out a slightly better,” or “Let me figure out how is it that I’m going to model this waterfall, which is a little bit different than anything I’ve done in the past.” Their value add is, “When a transaction becomes in play, I get the first call. Why do I get the first call? Why does someone reach out to me?” First of all, because they know me. You certainly can’t get that phone call if nobody knows you. Secondly, because they hopefully like you. That never hurts. The second layer of them knowing you is that also knowing that you have the capacity to do that type of transaction.
There needs to be an awareness and confidence that you could pull it off. People, if they’re shopping a deal, whether they’re doing it privately or they’re going to bring it to the market, they don’t want to spend time having conversations about it with people who can execute on it. Your biggest asset as a principal, one of the biggest assets is deal flow. That’s what I would say, “Focus on your deal flow.” How do you get more opportunities to come your way? It’s awareness, the building of confidence in the people that you do know, letting them know what your strategy is, what are your capacities, what types of deals are you’re looking for. You have to be out there in the mix. You have to be known and perceived as active.
What would you say is the number one thing that’s contributed to your success?
It’s my stubbornness. I don’t like not being able to do something that I want to do. You have to be persistent. I’ve made so many mistakes and I failed in a lot of minor ways, not major ways. Most businesses don’t make it past a year or maybe even six months or what have you. You have to be willing to keep doing it even if you skin your knee. My daughter learning how to ride her scooter, ride her bike and try to do car wheels reminds me of these things. If you fall down, get up. You have to get up. You have to keep at it. Otherwise, you’re not going to be able to accomplish what you’re doing.
Being persistent and stubborn about what you want to achieve is critical. Treating people in a way that they will want to work with you more than once is important. There are all sorts of people out there in business and real estate. Real estate is a part of the business world. Some people will walk away from the relationship and say, “That was awful.” Other people will walk away from relationships and say, “That was a positive experience.” It doesn’t mean that you have to be a pushover. Being fair, respectful and protective of those that you’re doing business with and consider is a key thing. God willing, we’re all going to live long lives. With modern medicine, we will all still be talking about real estate 40, 50 years from now and still hopefully doing some deals at that ripe old age. Your reputation is key. That comes from how you carry yourself.
Tell the audience how they can learn more about you and your platform, how they can get in touch with you and also your book.
The website is GetREFM.com. REFM stands for Real Estate Financial Modeling. You can find everything there, including the book. I co-authored this book with Dr. Peter Linneman, Founder of the Real Estate Department at the Wharton School. I was blessed to have Peter as a professor when I was an MBA student. Naturally, we’ve stayed in touch. We are collaborators on this. We are also bringing out a dedicated certification program that ties to the textbook, which is going to be coming out. It’s going to be terrific. We have other certification programs for hard technical skills. We have our software. We have private coaching. It’s all on the website. We would be happy to hear from you, assist and appreciate the opportunity to be on.
Thank you for your time, Bruce. I appreciate you being on the show. I appreciate the audience being with us. I hope you all will reach out to Bruce. I hope you will take him up on the services he provides, the training and the book as well. Also, go to LifeBridgeCapital.com and connect with me as well as the Facebook Group, The Real Estate Syndication Show so we can all learn from experts like Bruce and grow our businesses together.