In this episode, host Ben Fraser is joined by special guest Dr. Adam Gower, founder of GowerCrowd and author of the book “The Reality of Distressed Real Estate.” With wit and wisdom, Dr. Gower discusses the origins of crowdfunding, its transformative impact, and potential pitfalls. Join us as we explore his perspectives on navigating market downturns, his recent insights on crowdfunding mishaps, and his bold predictions about distressed commercial real estate.
Get Dr. Gower’s latest book “The Reality of Distressed Real Estate” – https://learn.gowercrowd.com/the-reality/
Connect with Dr. Adam Gower on LinkedIn https://www.linkedin.com/in/gowercrowd/
Connect with Ben Fraser on LinkedIn https://www.linkedin.com/in/benwfraser/
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Transcription
Ben Fraser: Hello, Future Billionaires! Welcome back to another episode of your favorite podcast, invest Like a Billionaire. We’ve got a really fun guest today. This is a guest that I’ve been looking forward to for a while. Dr. Adam Gower. If you’re not familiar with him or haven’t heard him, he is a crackup. It is really fun to talk with him.
But not only that, he’s been in this space of all raising money for private, alternative investments since the eighties. He’s been around a long time. And he’s seen a lot of things. And so his perspective is just so valuable. And so we talk about the origins of crowdfunding. His whole business is called Gower Crowd, where he helps other sponsors raise money through crowdfunding.
We talk about just the downturns that he’s seen, what does it look like right now relative to other downturns? Also with crowdfunding in general. We recently released an episode talking about some potential bad deals that went down on a very popular crowdfunding website.
And just talk about, how do you avoid things like that, what are the real benefits of crowdfunding and how has it changed the landscape to the positive? But how has it created some obstacles that investors need to be aware of and think through? And so he has some great perspectives there I loved.
And then finally he wrote a book talking about distressed commercial real estate. And we’re gonna link to it here in the show notes so you can read it. It’s a quick, easy read, but really talking about where he expects distress to happen on commercial rules day when he expects it to happen.
He gives a pretty bold prediction at the end of the interview, and we’re actually gonna bring him back later, next year. To see what happened, transpired, and it’d be fun to see what happened. But with that, I think you’re gonna love this episode. It’s a little bit longer than some of our interviews, but it is just so much good information.
It’s hard to cut it short, so I think you’re gonna love it. Be sure to listen to the whole thing. ’cause at the very end he gives some pretty bold predictions and talks about any points in his new book. So with that, enjoy the episode.
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We focus on macro driven alternative investments, so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Welcome back to another episode of the Invest Like a Billionaire podcast. I am your host, Ben Frazier, and today we’ve got a really fun guest.
I’ve been looking forward to this conversation for a little while with Dr. Adam Gower, PhD 30 year real estate veteran. He has transacted over $1.5 billion of commercial real estate over his career. He’s seen multiple downturns and has really been on the forefront of the crowdfunding revolution for real estate.
And so just really excited to have him on just to talk about the landscape, how commercial real estate and investing into these types of deals has changed over time. And he also wrote a new book, so a little teaser, at the tail of this conversation we’re gonna talk about his new book called How to Buy Discounted Distressed Commercial Real Estate.
That might be the exact title, but that’s the topic. Very excited to get into this. Dr. Gower, welcome to the show.
Adam Gower: Thanks so much. It’s a real pleasure to be on the show. Thanks for having me, Ben. Yeah.
Ben Fraser: Give a little bit of background. For those that don’t know you aren’t familiar with your story, share kind of the origin story of how you’ve been in space and what you’ve been doing.
Adam Gower: I tell you what, let me expedite that because I know we, we’ve only got, we’ve got less than an hour and we could talk for hours. I know you and I have just chatted for a few minutes, so lemme accelerate really quickly. So I started in real estate pulling wires for an electrician in 1982.
I then went on to do investor relations for a ground up multi-family shop in Southern California, raising about 30 million in 1980s dollars. So that was when 30 million was actually quite a lot of money in those days. Then I immigrated temporarily to Japan and ran a division of Universal Studios.
I was president of Asia Pacific doing their real estate developments. Across the region based in Tokyo. And then I came back, did my own investment, sold out in 2007 and boom, here we are. Hope that only took about 30 seconds because that is the moment that really matters, especially in considering what you guys do.
That was when I was actually, I sold my portfolio in oh seven and was brought into East West Bank, one of the largest regional banks headquartered in California. And they had done a lot of real estate collateralized lending or lending to real estate sponsors. And all of those loans had gone bad.
Oh my goodness. Global financial crisis. And so I was brought in to do workouts on those loans and also to sell the loans essentially. After that, I went on to, I’m gonna cut a couple things out. I ran a fund after that $200 million debt fund and was actually brought into Colony Capital, who at the time were the third largest private equity real estate shop in the world, and they had done, by the time I got there, they’d done around 7 billion of acquisitions of non-performing loan portfolios and failed banks in partnership.
Not many people know this, actually. It was a nuance. People thought that they bought these loans from the F D I C. But they didn’t, they actually partnered with the F D I C and it was actually a brilliant strategy for the government essentially to not take huge losses. So they actually passed.
Ben Fraser: So basically they didn’t have to buy the loans and have a huge outlay of cash. They basically negotiated, Hey, you guys got all these non-performing loans in your balance sheet. What if we can go and generate a profit, we’ll split the profits top base, everybody wins. That’s right.
Adam Gower: So actually the way that it worked, and I, I’m pretty sure it was across all of the portfolios I worked on, I dunno, probably six six, I dunno, 6, 7, 8 portfolios. There were a lot of them. It’s a long time ago. But the way it works was the F D I C went out looking for bidders for these large portfolios, so individual portfolios, and it was air.
An aggregation of failed banks bad loans in each of these portfolios, and they each had individual names and et cetera. And the F D I C picked the winning bid and provided 50% of the purchase price at 0% interest, but they became a partner with the F D I C. That’s basically what it looked like. It was.
It was very cool. Very interesting. Yeah, it was very cool. So I worked on a lot of those loans and what I did was re for Colony I, so at the bank I found investors. In those days it was strictly strictly sponsored. These were real estate professionals. There were no passive investors. Look, this was people that would, you know, like full-time.
That’s what they did with real estate. Or operators, et cetera. And so we, at the bank, I sold individual loans at typically at discounts actually with finance as well. It’s a whole long story to sponsor colonies while I did that as well. The difference was I packaged portfolios, small portfolios of loans and in the end ended up doing a lot of dealing and selling of these portfolios too.
So banks actually reperformed portfolios of reperforming notes through banks and then the economy picked up. I’ll tell you what I do now, I should get to that as well. Economy picked up and I started doing seed investing, venture investing, venture capital investing. It seemed to seed angel investing and that’s how an old fellow like me.
Came to learn the wonders of digital marketing. ’cause all these, I wanna say teenagers, but very early 20 year olds out of university, set up these startups, put these startups together. Were talking the language of digital marketing stuff that Ben absolutely had no clue about.
Really nothing. Google Analytics, SEOs, today these are these words that are. Part of my lexicon, but in those days it could have been a Greek or something, I don’t know, foreign language. So I learned it and found it fascinating. And then have over the last few years, been applying it at the highest levels to real estate sponsors who are looking to raise capital online from accredited investors.
So that’s primarily what we do. We build essentially what a crowdfunding platform bespoke. Crowdfunding platforms for individual sponsors, and we teach and advise passive investors on what to look for when they’re making investments in, and I would say commercial real estate. I know the term you like to use is alternatives but they all fall into the same bucket basically.
And now I need some more coffee. I need to take a deep breath after that.
Ben Fraser: It’s a long, very cool story and background. So talk a little bit, because I think it’s just so fascinating. We’ve been talking about this a little bit over the past year and a half doing the podcast.
But what I think a lot of people don’t realize as passive investors is that the landscape for these types of private investments, alternatives, whatever you wanna call ’em, was totally revolutionized with the jobs act, right? Because prior to that, you had to either know somebody who knew somebody who was doing the deal.
A lot of times it’s sold through broker dealer channels, which charged high fees and you had to be in the know, you had to be certain net worth usually, and it was a lot more limited access to these deals. But with the idea of crowdfunding, it really took off and you’re there at the beginning stages of it, when a lot of this went online versus kind of phone call to phone call or, boiler room type type approach, and it’s. Really good because as you and I would probably argue, we probably have a strong bias, but there’s a lot of really good reasons to have private alternatives in your portfolio.
There’s a lot of advantages, lower correlation to public equities, a lot of times better returns, direct tax benefits, et cetera, et cetera. But it also comes with the downsides of. Bad actors and people get into things they don’t know about.
Talk a little bit about, just as you, you started so early in this space, even raising money in the eighties, and compared to now. Talk a little bit about just the transition of what you’ve seen and witnessed and where do you think it goes from here? And then I’d love to shift gears and talk a little bit about the thing you just mentioned of how helping people determine, how do you find.
A good, reputable sponsor with good deals, et cetera.
Adam Gower: Alright, fine. So you covered a lot of ground there.
Ben Fraser: Sorry. I know I just came back, what you did here.
Adam Gower: No, that’s totally fine. I love it and I’m happy to talk about all these topics. Actually, I will talk about crowdfunding. We should talk about that.
That was something that I think you did an internal podcast. It was just, as I was just reading the transcript regarding the Nightingale. Yeah, on CrowdStreet and the term you just used was bad actors. So we should talk about that as well in the context of real estate investing period, actually, of any kind of investing, frankly.
But let’s back up a little bit and go to the job sites. What actually happened, and I have written a book about this, so I’ve written a lot of books. I’ve written seven books. Three of them have been published by a major. Publishers, Powell Grave, McMillan one and Ledge are the other kinds of top, top three publishers in the world.
And those are great and they’re really interesting. But I really like writing these short books, not these 60 to 120,000 word books that are easily read in just an hour or two. And so I’ve written about all these topics, so crowdfunding actually is a misnomer. You’re quite right, the 2012 Jobs Act.
What it did, the fundamental shift embedded in the job sites and all kinds of reasons for it, had nothing at all to do with real estate. Again, that’s a whole long story that’s in one of the leaders of the crowd. If you want to be interested, have a look at that. It’s a whole different story. It had nothing to do with real estate.
It was an unintended consequence in a good way. The real estate benefited from the jobs act, but the jobs act. The main fundamental shift that the Jobs Act caused was exactly what you said. It allowed capital raisers, let’s be precise, capital raisers from companies, any kind of company startups.
Actually Jobs, act jobs stands for Jumpstart our business Startups. It was designed for small companies to allow them to access liquidity from accredited investors. And it said basically, You don’t have to, if you’re a business, if you’re a small business or you’re a startup, you don’t have to do an I P O anymore, right?
To raise money. You can actually just raise money directly from people. The term of our, or the legal term is general solicitation. You can now ask anybody to invest with you. And the reason that it impacted real estate is because, as every real estate sponsor. When they do a deal, what’s the first thing they do?
They form a company. It’s called a single purpose entity. S P V, single Purpose Vehicle, whatever. It’s an L C, some kind of company that they set up or a limited partnership, but they set up and found a company and then what are they selling stock in that company? They’re selling shares.
They are suddenly in the securities business, and that’s exactly what the job site was geared to, was allowing people to sell securities without having to do. An I P O. Alright, that’s basically it. So what did that, okay. If you wanna stop me at any point,
Ben Fraser: I see you. I was gonna say, part of the good of that is for these smaller businesses, which was probably the initial intention of this act, it’s pretty cost prohibitive, right?
To do an I P O, you’ve got a huge amount of legal to set up. You have a huge amount of ongoing reporting and things you gotta send to the S E C. Lot times you gotta go do a road show, right? So you gotta go hire broker dealers, you gotta go and spend an amount of capital and travel and time, yeah.
To raise money. And then now you have. Publicly traded company.
Adam Gower: That’s exactly right. That’s why the only way you could raise money before was with people that you knew. Yes. And so you were very limited. So the way that you would raise money before, and you’re a young fellow, I’m hundreds of years old, over years, a lot.
But the way that you used to do it was that you could, or the only way that you could raise money really practically speaking, is you’d ask your lawyer for introductions. You’d ask your financial planner for introductions, or your accountant. Or you’d join a country club. Seriously, you join a country club.
Part of the process was to meet people that you could solicit, get to know first, and then when you’re on the ninth hole and that you’re letting them win the hole. You can say it, by the way. I’ve got this deal at the corner of Walking Cross. Look, now you’re in a good mood. Why don’t we talk about that?
So that was basically what it was. Yeah. Ended up with these kind of isolated cliques of high net worth individuals around the country that didn’t communicate with each other. There was no transparency. All you knew as an investor, as a passive investor, Was what the guy at the country club was telling you and this very small network.
So what the Jobs Act did was it took the lid off that suddenly now you can go online and right now you could look at a hundred deals if you wanted to. Not only that, but you can look at all the offering documents for all of those deals. And what does that mean? Now you know what the market is.
Now you know what the market is for preferred returns. You know what kind of standards there are for fees, what kind of standards there are for the promotion structure, what kind of returns do you expect, et cetera, et cetera. It’s all open before 2012, actually, subsequent to 2012. 2012 was the act, the laws were promulgated in 2013, 14.
So it’s not really that. But before the jobs act anyway, you didn’t have access to that. You just didn’t. So all you knew was what one person might have given you at the country club. That’s all you knew. You didn’t know if it was Mark. So basically the industry became very transparent. Now there is a misnomer.
It’s not really crowdfunding it’s just the mis note. The term crowdfunding is inaccurate. Applied to, investing in real estate, investing in the notes that you have, for example, on your site. Again, that might be, I’m not sure if you use that term, but Cloudstreet, for example, they don’t do crowdfunding.
Crowdfunding is a very small part of the jobs act. Regulation, CF regulation, crowdfunding, SS e C and FINRA regulated extremely complicated and cumbersome to do. Very tiny parts of the real estate world.
Ben Fraser: It is generally probably more for startup businesses that are doing some product or service-based business, or is it also applied to real estate?
I’ve actually applied it to regulation.
Adam Gower: Yeah. It is applied to real estate. There are a few websites, small changes. One e-picker shop does crowdfund regulation crowdfunding. You have to go through a funding portal. Suffice it to say, Ben, he is tiny. Almost insignificant part of what actually ended up happening to the commercial real estate industry.
The big shift was there was a regular, I don’t want to get too much into the weeds ’cause it’s a little bit boring, but there was another part of the jobs act that was that, that was a regulation D 5 0 6 C, and this allows a sponsor now to solicit from anybody The correct term really is just syndication.
They’re just real estate syndications. That’s all they are. And what the job site did was it allowed you to syndicate a deal online. That’s it. Basically. You can advertise, you can literally advertise on Facebook and say, buy my securities. You don’t say that. You say invest in this real estate deal, but really what you’re doing is you’re inviting people to invest in securities.
So you do it on Facebook, you do it on your website, you do it on LinkedIn, Twitter, wherever you want to do it, it suddenly becomes legal. It’s real estate syndication online, and that is, A synonym, really, if that’s the right word for crowdfunding, crowdfunding, and syndication. You should, in real estate, commercial real estate, you should really think of these two things as being the same.
Ben Fraser: And would you consider Kickstarter or some of these other, those figures are actually by, those are more crowdfunding. Even Fundrise, you, they’re using Regulation a lot of times.
Adam Gower: Yeah. Similar is also a little bit different because Fundrise is not really, it’s a platform, but really they’re just a spot, they’re a single sponsor that does their own deals and raises money for their own deals.
And you’re correct, they use Regulation A also parts of the Job Act regulation A plus actually. Called a mini IPO. So it is an IPO it’s not as onerous as a full scale i p o, and that allows Fundrise to raise money or anybody that uses a reg offering to raise money from non-accredited investors.
However, again, just to make this clear, it is a tiny fraction of the overall market for real estate. Investments. Really, by the vast vast majority, I wrote again one of the books, it’s called Unleashed. It talks about this industry and we quantified it. We actually scraped the SEC database.
Don’t tell ’em that. But to scrape the s e C database and Reg A, which is what fundraise, use and Reg CF on minuscule parts of real estate investing in commercial real estate. The really big one is regulation D 5 0 6 C. Syndication, I’d say accredited investors, unlimited number of accredited investors.
Unlimited raises, almost no restrictions, almost no regulated disclosures. That’s the world that I inhabit, basically raising money or real estate deals. So
Ben Fraser: Let’s take it back to investors. So how in your mind, has this benefited passive investors, and also potentially created more challenges or hurdles?
Adam Gower: I love that you asked that question. Of course, I don’t want to turn this whole podcast into a pitch fest for all of my books, but there is another book that I wrote called Real Estate crowdfunding.
Ben Fraser: We’ll put the links of the show notes after the fact.
Yeah,
Adam Gower: So the and I’m, the only reason I mention it, real estate crowdfunding, secret World of real estate and crowdfunding. The only reason I mention it is because I can’t remember everything that’s in it. But there are, so Sam is trying, I’m trying to stimulate my own memory, right? Again, I’ve not quite had enough coffee this morning to be super effective.
All right. So there are a few major benefits for passive investors, the one that actually I talk about the most. And there are a lot of those tax benefits. There’s the benefits of investing. There’s a few that are really profound, that are hidden benefits. You don’t really think about them.
People don’t talk about them. And two that immediately come to mind, but I’ll probably talk about more of them in the book, are one, anonymity. And two is transparency, right? So anonymity in the past I gotta write this down, otherwise I will forget. In the past, Before the jobs act. What you would have to do if you wanted to invest in real estate, right?
And you’re a doctor or you’re a businessman, or right, you’ve got a franchise chain or whatever it is, you’ve got a real day job and you want to invest in real estate, you’d have to. Know somebody, you had to know a real estate guy because you couldn’t go online and suddenly find all these opportunities to invest in.
It was illegal for anybody to do that, so it didn’t exist. So you’d have to get to know people and do your own networking, right? So you might see, meet somebody at the golf club, but then what happens for heaven’s sake, Ben, the next thing that happens is for heaven’s sake, what else? Maybe You don’t want to invest, but you end up sitting with somebody or playing golf with somebody and all they do is talk about their deals and how much money they’re making and that you should invest.
And you’re sitting there thinking, oh my goodness, I gotta listen to this guy blagging on about all his deals. I’ve got no interest. Or if you do have an interest, but you don’t, you might not want to sit down with the guy. At a meeting because why? All that’s gonna happen is they’re gonna pitch you. You are going into a meeting where you are going to be pitched, right?
You don’t want to do that. Who wants to do that? I haven’t got the time. You’ve got a business to run and then you’ve got to go through this process of, okay, that was very interesting, two hour lunch, you’ve told me everything, but can you send me this information? I need to check with my accountant or this, that, the other.
It’s just a very long, tiresome process. So what crowdfunding did, was it done properly, by the way? And this is what we do for our clients, just fyI, our clients, being on the sponsor side, it allows a passive investor to do what? Oh my goodness. Research a sponsor anonymously. You can actually go online, you can look them up on LinkedIn, you can look at their website, you can read news articles about them, you can listen to them on podcasts, whatever it is.
Suddenly now, This whole wealth of data that this sponsor, if they’re doing their job properly, is pushing out proactively. So that you as an investor can do your research anonymously in your own time on whatever device you want, right on your phone, on your laptop, on your computer. You can screen mirror it to your TV and show the kids whatever you want to do.
You could do it in your own time however you want. So that’s the, that’s one of the biggest benefits is the ability to do research anonymously without being pitched. The second advantage, and this is really profound or as profound, is this idea of transparency. And I talked about this before in the generations before the Jobs Act, and I lived those, at least one of those generations before the Jobs Act.
If you were presenting a deal, Or if you were being presented a deal by a sponsor, all you knew about real estate was what that one sponsor told you, and you had to do it in person, so you had to go through this whole process. But if they were offering you a 6% preferred return, or an eight preferred and a 20% 80, 80 20 split, 70 30 split, 50 50 split.
How did you know if those were. Reasonable. You know the only way to know that, to know anything, like if you wanna hire somebody, right? You want to bring somebody in, let’s say you want an investor relations person, or you want a sales person on your team, or you want a personal assistant, right?
An executive assistant. What’s the first thing that you do? The first thing you do is you establish what is the market rate for these positions you find, all right, what’s market? How much do I have to pay somebody? You don’t guess. You pull out your ear, you look and you figure out, okay, what’s market rate? Now I know what my, I need to budget for this.
It’s the same with real estate. How did you know what the splits were or the preferred return? You didn’t, there was no way of knowing because. Information was always contained in these little isolated cliques around the country that didn’t communicate. Now, a local lawyer might be able to give you some insight, but for the most part it was a black box.
With crowdfunding, suddenly everything goes online, so now industry standards can be set. You can understand what fair feeds are. What is a fair co-invest? What is a reasonable preferred return? What are reasonable promotions and splits at the end? Suddenly you’ve got transparency. So those are the, yeah, from the top of my head, the two things I can remember are not anonymity and anonymity and transparency.
Those are two big advantages. Love it.
Ben Fraser: Yeah. Say that five times fast, no I think those are great points. And the first one I love. It’s so true, right? Instead of being pitch tar, in a, be in the corner of an office or something and make a decision right now, the scarcity or urgency tactics, you can comfort your own home, do a lot of research and get a pretty good sense of someone’s track, record their background, do background checks.
Have they been convicted of any kind of crimes and transparency? And I think this is so interesting because. A lot of people knock alternatives in private real estate investments as not having much transparency relative to say, publicly traded, stocks or REITs. But it’s funny to me because how are you defining that?
Because if you’re looking, if you’re investing in REITs, do you know what fees they’re charging? You actually know what assets are in the REIT you’re buying, have you looked at how much your advisors are charging on top of, any kind of REIT fees and what’s the structure there?
What, could you tell me the exact promoter structure? 99% of people that invest in REITs couldn’t tell you that information. But at the same time, that’s pretty clear and it’s created the standard in the private, commercial real estate market of here’s the expected standards for our promotions.
For kinda different waterfalls and fees. And the flip side of that is, sponsors like us, like we’re seeing what the market is, and if we veer too far outside of that, it’s going to be a red flag for investors. They, to your point, are creating a standardization, which is actually a benefit to investors and the same kind of transparency that they’re quote unquote saying you have in public markets.
It’s, to me it’s more of a blind trust of, just because it’s publicly traded, it’s now less risky and it’s a better deal than this. And it takes a little more work to maybe read through a private memorandum. ’cause hey they’re boring reading. They’re a little bit long sometimes if you don’t know what to look for.
Adam Gower: Yeah. But there are ways to expedite that. And if you are looking for very specific terms you can do searches of. Ppms and you get to the core things. It depends on what really drives it, but they, here, look, here’s the point, right? Your business, Ben, what do you, what’s your role there at Aspen?
What’s your job exactly? Chief Investment Officer. So your c i O. Okay. When somebody comes in and they want to invest with you, there has to be a process of education. Mortgage notes are not understood or known. So you have to educate people about what they are, right? And that everything in the world that you and I inhabit is education.
It’s just education. You want to educate people and tell ’em what they are and allow your prospects to understand, is this something I’m interested in? And I tell you what, one of the biggest challenges we actually had was actually an investor in one of our clients’ deals. Funnily enough contacted me the other day.
I won’t tell you what they’re working on. There’s some really interesting FinTech finance solutions that they’ve put together for whatever in their industry. Again, not being too precise, and in the first 10 minutes through, I hope I’m not like this, by the way. And maybe I am, maybe I’ve become too used to this language that I just, everything I say flies over the top of people’s heads, but in the first 10 minutes he explained, I’ll tell you something, Ben.
I had no clue. What he was talking about, and you were talking about something, but he was so familiar with the language of the industry that he was engaged in. And this is true with notes as well. You can become really so familiar when you talk about it.
Ben Fraser: You start talking, you talk to people as though they know the same vernacular and all that.
Adam Gower: Yes. And what you end up doing is trying to articulate yourself in a way that is impressive. To people who already know what it is that you’re doing. And when you do that, people have got no clue, and end up still with no clue. So you have to educate, you’ve got to, you’ve gotta teach. It’s not like you, you’re patronizing people or speaking down to people.
No, but you’ve got to simplify it and understand that they really don’t understand the terms of art. And so you start at a 1 0 1 level, and because your investors are highly educated, for the most part, they got a degree, advanced degree, or professional qualification. So they’re highly educated. They might not know your asset class, but you start at a 1 0 1 level and then you dive deep, right?
They have the capacity to understand, but you can’t start at that deep level. You gotta start at a really simplified level and then dive deep. Yeah. And that’s the whole process to be successful with crowdfunding or syndication of any sort.
Ben Fraser: It is funny because I think human nature tends to overcomplicate things and, hey, I could seem really smart if I use big words that are common to my industry.
But if somebody’s written seven books and is a great marketer, some of the best way that you communicate something is to try and ride it to a fifth grade reading level, right? Or a third grade reading level where you’re using smaller words, using more simple concepts and. That is, proven to be some of the most powerful, from a market standpoint way to communicate with people because you’re not trying to have this big ego at your show of how smart you are.
It’s not about you. It’s trying to communicate concepts that people can understand in a meaningful, impactful way. And yeah. Great little point on the communication side of it. Let’s talk, on the downsides here, this is funny, we’re having this conversation right now.
’cause you and I talked about a month or two ago about having this conversation. We didn’t have our podcast, we just released this week or last week, and a little bit of the kitschy title. And maybe we’re misusing your term that you so well defined first crowdfunding. But when crowdfunding goes awry and talking about, one of the biggest platforms in our space for commercial real estate, and there’s.
We’re not pointing blame, we’re just trying to show the downsides and the things that can happen when things aren’t done correctly. And there are some pretty big errors made. And it’s unsure of what exactly happened, but, talk a little bit about, we have this transparency, but then there’s also some things that, and just human nature, in, in crowds, streete, which is, the platform we’re referencing.
They were really good marketers. I envied some of the, the landing pages they had and they’re selling out of deals in five minutes and it created this urgency and this like scarcity in fomo, right? If I don’t click the button and that is right now and I can make an investment decision on this brand new deal in five minutes I’m gonna miss out.
But you can’t do the research in five minutes. You can’t do the things you need to do to make a decision that quickly. And talk a little bit about. Your experience with from a past investor standpoint, what do you recommend as you’re, you have a lot of information, but not to get caught up in the human emotion of, maybe a really good marketer or platform or these kinds of things.
Yeah.
Adam Gower: Alright. So, you look, the power of FOMO is something that is impossible to resist. At the end of the day, it’s what we all fall for. Fear of missing out, right? For that one person in your audience doesn’t walk. FOMO is fear of missing out. And so that fear of missing out is triggered.
And by the way, these are, it’s actually fascinating. I’m a historian. I love history, and so I’ve looked into this. These are tactics and techniques. I won’t dwell on this now. So we’ll talk about the Real Estate Bad Act.
Ben Fraser: This will be your eighth book that we’ll read next year.
Adam Gower: No, it’s actually my first book. Oh no it isn’t. I should write about this. But anyway this, these ideas, the idea of missing out and sales and marketing tactics. They’ve been around since time in Memorial and some of ’em are the best books are things like Looking at my bookshelf here.
Let’s see, scientific advertising. John Hopkins, the Robert Collier letter book. They talk about fomo. They don’t use this term, but they talk about it. They talk about this, these books were written a hundred years ago, Ben, and they’re talking about marketing, direct mail marketing campaigns that they ran in the early 1900s.
Nothing has changed. Why? Because human psychology is always the same. From an investor perspective the best way to. To beat fomo, that fear of missing out, not to err, especially in investing on these sites. Start your homework early. Don’t wait for that webinar to make your decision.
It’s like going to an auction. I used to go to auctions when I was first, first in, not first in California. I bought my first home and I furnished the whole thing. I had no furniture. I just came back from Japan. I used to go to auctions to buy all the furniture. It was really cool, and I walked around and I decided in my mind, how much am I gonna bid on each one of these items as it comes through?
Hard stop. I’m not gonna get caught up in the damn thing and end up overpaying for something I don’t want. In other words, do your homework first. And when you go into that moment where they are pitching, they are launching a deal. Be ready to make your investment or not. Don’t go to the webinar Mal.
Yeah. Already decided you’re gonna invest. So this is like the final step, not the first step, but let’s talk more about your primary question, which is this idea of how to avoid making mistakes. You talked about bad actors and what was it when crowdfunding goes awry, It is, it’s a, that was, I think that was a, an article in the Wall Street Journal actually, wasn’t it?
Correct. Yeah. Yeah. A title or headline. Okay. If this is how real estate works, real estate, there’s a cycle that is always a downturn. It absolutely is. Inevitable, right? Period. Things, what goes up must come down and always does, period. The golden rule, end of story. And what that means is that when the market is going up, there’s usually a slow build for the market to go up, and then there’s often, it appears to be a fast downturn, right?
Comes off the cliff quickly. When things are going well, it’s very difficult to make a mistake. All you need is a down payment and a heartbeat to make money in commercial real estate during an upcycle, right? You buy, you sit on, this is it. You see it happening all the time. You buy a house, let’s just say think about a house.
Think about your own house. You buy a house, you live in it. Before you know it, it’s gone up. I’m in California, so values have gone up stupid fast, but you don’t do anything. Just the market momentum carries it up. When that’s happening, sponsors, there are two types of sponsor. There are three basically.
There are those who have been through it before, have either made mistakes themselves or have seen people making mistakes and who have err on the side of caution going in. Those are the ones most likely to survive. Now, they’re also the ones most likely to offer the lowest returns. That’s what gives you this, unfortunately, that’s this other mentality.
You gotta be careful of. Don’t chase the shiniest objects. That’s the biggest. Yeah, exactly. We could talk for hours about that. That’s also probably something you have to deal with with your kinds of projected returns as well. But conservative investment. But basically you’ve got the season sponsor, the season pro.
So I’m gonna just disconnect from the season pro. They know what they’re doing and they’re gonna survive the downturn. Then you’ve got the amateur, the person that’s just come into the, or the no, the novice who’s just come into the industry and things start going bad. Things start going wrong, and what they do is they start panicking.
And what they might end up doing is they might try to shore up their portfolio and end up making bad mistakes that could ultimately be seen to be illegal. One example might be, let’s say you’ve got two deals just to make it really easy. Deal A and deal B deal A starts to run outta money, but you’ve got somebody that says, yes, I’m gonna put the money in, but.
That person is taking too long. So you go to D, b, and D. B has got all kinds of cash, so you take money from d b, you put it into d a, just to make sure to deal up until you get this investor to come in. The investor doesn’t show up and what happens? Deal B’S money has now been sucked up by D L A and you just broke the law.
You just combine funds. That is a criminal offense. You cannot do that. But if the market is going down and you get caught, this is Warren Buffett’s side idea. When the tide goes out, you see who’s swimming naked. Now suddenly people who, with good intent, Made bad decisions end up losing everything and losing all their investors’ money.
So that’s the second type of failure or bad failure, right? The third is the criminal. The person who rightfully steals money and fakes returns and lies in their updates and uses Photoshop to fake bank accounts and who knows what that is. The hardened criminal. Those people. You simply cannot protect yourself from those and all of these characters and there’s, there’s variances within this range as well, right?
But they all become exposed when the market goes down. That’s exactly what happens, right? When the market collapses, ev this is what exposes So it’s not crowdfunding that’s gone awry, right? It is inevitable. Of the losses being incurred when the real estate market goes down, it is the nature of the business.
That’s all. It’s the nature of the business. You just gotta accept it.
Ben Fraser: Yeah, and to your point, it’s really who’s behind the deals that you know, and managing through the challenges because its character is revealed in times of difficulty. And sometimes it’s difficult to ascertain character when things are going well.
And I’ve made the point many times in our podcast. Anyone that could fog a mirror and sell a commercial real estate deal in 2020 or 2021 made an outsized i r R. And so there’s almost this like we always say, you gotta look at the track record, right? But if they’ve only been operating a couple years and they sold all their deals full cycle and these couple years, it’s not that indicative of how good they are, right?
It was just indicative that the market was going up and they had enough intelligence to sell then. Which, Accounts for something, but it’s, it shouldn’t be the end all be all. And so not to belabor that this part of the topic, and we actually go in on that podcast, if you have listened to it on, three or four things that you should be looking at, to ascertain character.
I don’t know if you’d add anything to that on kind of some quick proxies or things that you would say to just, As an investor that you’re looking for. Yeah.
Adam Gower: Thanks for asking that actually. And I apologize. I was, as I was scanning the transcript. It looked like a very interesting podcast.
So I didn’t get through all of it. But there are all kinds of things to look for. There are some technicalities that you should look for, but probably the most important is the co-invest, the alignment of interest. You want to be sure that whoever you are investing with stands to lose money.
If you lose money. If you lose money and your sponsor is still making money, there’s a misalignment of interest and they’re not as motivated as somebody who stands to lose money alongside you. So I’ll give you an example. We’ve had, because what we do is we build crowdfunding platforms for sponsors.
We have a lot of people coming through the doors sometimes. We’ve done promotional programs for sponsors and we had a guy come through, a highly reputable, very visible guy in the industry, big assets under management, whatever. And he was looking at a $50 million raise, equity raise, and I asked him, how much go invest are you putting in?
He said, oh, we’re putting in 4 million. Alright, that’s. Big number. It’s a lot of money. That’s very interesting. What he didn’t tell me, what I didn’t figure out until afterwards, ’cause there were a couple of other things that he did, there were a couple things that he said that just made me think, I don’t, you are not being straightforward.
I didn’t trust him. It was something I didn’t like. And so I looked at his offering document and it turned out that his going in fees were, came to 5 million. So in fact, he was putting no money in and making a million dollars, putting the deal together, taking a million out. Yeah. Due diligence fee, marketing fee, had all these fees.
So on day one he was making a million dollars, but what he was putting out there was we have a $4 million co-investments. It was an all faced lie. I’m not saying names, so it’s okay that I say that, but if you didn’t dig deep enough or know what to look for, You would miss that. And so I actually canceled the, I canceled the I, I can’t, sorry.
I can’t. I didn’t tell him why. I didn’t want to be whatever. I didn’t want to get into a discussion, but I just canceled it and I said, no. Refunded his money to him like we got, can’t do it. Sorry. Yeah, but that’s what you gotta look for is an alignment of interest. Yeah. Make sure that whoever you’re investing with loses money.
If you lose money, they’re not motivated by fees. Or bonuses or whatever else. Just they have to be aligned with your interest and then you know that even if things go bad, which they will do the inevitability of a down cycle, they will do their very best though ’cause they’ve been tapping their own capital as well.
Love it.
Ben Fraser: Yep. You basically hit the nail of the head exactly what we said, so I love it. Alright. Good. Okay. So the last little section here. So apparently it sounds like you’ve written a book or two and you’ve got another one coming. And so tell us a little bit about this new book and we teased it at the beginning of the episode.
But I think it’s a very fascinating topic and what a lot of people are looking for. And obviously hails back to your time, post G F C. Working in some of the distressed assets there. So talk about that and what’s your perspective and are we gonna see discounted real estate and when are we gonna see it and where are we gonna see it?
So I’ll give some kind of context for that.
Adam Gower: Sure. Thank you again for asking that. Alright I’m actually not writing, I just finished writing another book. It’s called Reality. It’s the reality of Distressed Real Estate. It’s, again, one of these short, read it in an hour and a half.
Summaries, but it’s based on my experience of having gone through the savings and loan crisis in the early eighties and the global financial crisis and dealt with billions, literally billions of dollars of non-performing commercial real estate collateralized loans. And yeah I just break it down.
What is distressed real estate? How it’s not a, you get discounts, right? You can buy discounted real estate if it’s distressed, but it’s distressed for a reason. You’ve gotta know what you’re doing. It’s very complicated. There can be a lot of litigation if you buy notes, again, your shop, this is how your shop started, right?
Buying distressed non-performing loans. You gotta do workouts. And some of them work and some of them don’t. And I. It’s just a complicated task and understanding what is distressed and what makes something distressed is worth understanding. That’s what the reality of the book, the reality of Distressed Real Estate is all about.
Alright, so that’s number one. What’s gonna happen? I’m gonna date stamp your podcast, right? Everything we’ve talked about so far is Evergreen, but I’m gonna fight for the hundreds of people that are still here. Listening now, this is August, 2023 and this is where we’re gonna go. So during the global financial crisis, try to make this quick global financial crisis.
Banks, regulators insisted that banks mark to market. The effect of that was a lot of banks. So suddenly a lot of banks. Had huge losses on their books and failed. Just a super simple story. And so the economy and the e and commercial real estate basically went off a cliff and a lot of banks went off a cliff.
This time. This whole downturn is a managed downturn. It’s very different from the global financial crisis that was un, it was outta control. Nobody had control over it. This downturn is managed by the Fed increasing interest rates. And so what regulators have been saying to banks is work with your borrowers.
And the term that is used loosely is extend and pretend, but they’re not pretending anything. What the regulators are doing, in my humble opinion, is they are flattening the downturn curve. So instead of going off a cliff, Like we did in 2008, 2009, with marking to market. The feds are saying, or the regulators are saying, extend these loans.
They know that interest rates are not gonna come back to zero rates. So by extending, instead of having everything lapse all at once by marketing to market, suddenly by having everything drop through the floor. Flattening the curve, so you will continue to see distress. There will be more distress.
It will be metered out over the next few months, towards the end of this year, into the first half of next year. As soon as the regulators, as soon as the Fed reduces rates, which they may well do early next year, there will be a flood of capital to the markets, but it will not stem. Distress, you’ll just have to move even faster than you normally would because the end will be in sight.
The bottom will, people will know when the, when interest rates come down, investors sitting on the sidelines know that we’ve hit bottom. Now it’s time to start buying, ’cause it’s now, it’s just gonna start bumping along the bottom before it picks up again. So that’s what you’re gonna see in August. 23 say for the next nine months or so, middle of next year, ahead of the election, we’ll start seeing distressed opportunities.
Get ready to invest,
Ben Fraser: man. Oh man. Okay. We gotta have you back on early next year and see how this plays out and
Adam Gower: play that little bit back to me and see where we are. Exactly. Let’s throw my own words back at me. Let’s do that. I’ll be up for that. Sure. That’d
Ben Fraser: Be fun. I tend to agree with you.
I was still fresh outta school and tail end of school in the last, great financial crisis. So I was a little bit less involved in it. But it is so interesting how the Fed has really been at the core of what’s been happening over the past really 12 months and trying to manage through this and the managed downturn that’s a great way to encapsulate what we’re doing because.
Everyone, if you’re looking at past cycles, it’s generally this very big boom, big bust, right? It’s this kind of big up, big down. And we’re not seeing that. And now, as we stand today, August, 2023, a lot of these big investment banks are actually changing the probabilities of a recession to, and we actually might hit a soft landing, right?
It’s bumpy, it’s uncomfortable. There’s a lot of turbulence, there’s a lot of things that are blowing up here and there. You know it, sporadically within. Different asset classes, but those are probably the most highly leveraged, aggressive deals that were purchased at very low cap rates with inexperienced managers, to your point.
And our sense, what we’ve been saying is there’s gonna be some distress there. There may be a recession, there may not be, there is one. There’s probably not gonna be that severe that long because of the amount of capital that’s sitting on the sidelines waiting to bounce out these opportunities.
We’re still buying assets. We’re looking at different strategies, changing strategies, looking for, best yield for best risk adjusted returns. But I think a year from now people are gonna be wishing they had not sat on the sidelines because they’re the imaginary, oh, it’s gonna be the best time to go and buy things for half off, and the world’s gonna be in, in shambles.
I don’t know if that’s gonna be a reality, from an investor standpoint. Would you tend to agree with that or am I yeah, I think we,
Adam Gower: The thought that comes to my mind right now, Ben, is the same thing that we were talking about before. Don’t rush in. Start doing your homework now. Start learning.
Yes. What is Distress real estate? What does it look like? Who are the sponsors? Who are the players out there? Really know what they’re doing. Tap into those. Keep an eye on what they’re doing, listen to what they’re, listen to what they’re saying. Learn what’s going on, and when they move. Be ready to move with them, right?
Don’t wait until the last minute for somebody to say, Hey, we got this great discounted distress deal. Invest now. Don’t become a FOMO sucker and jump right. Do your homework now. So you know, when you see something, what you are looking at it, and you need patience. Now is not the time to be jumping into the market, but that time will come.
It will, and it will suddenly be upon us. Now is a good time to patiently start doing research and understand as an investor what this, that’s why I wrote Reality. Reality of distressed Real Estate’s Like here. This is a good starting point to understand what distressed real estate looks like, how it’s managed, and how you make money from it.
But, It doesn’t mean you need to invest now, just wait. Keep an eye on the market.
Ben Fraser: I think a great way people can do some education is get the book. We’ll put that in the show notes you just wrote. And what’s another good way for people to get in your sphere, get on the mailing list and hear more about what you’re doing?
Adam Gower: Alright the best thing to do is to go to my website, which is gower crowd.com. It’s my last name, g o w e r, crowd gower crowd.com. Subscribe to my newsletter. It goes out every Wednesday. It should have gone out exactly now at 10:00 AM but I was slacking off doing other stuff. This time we got to go out in about an hour but it goes out every Wednesday.
We have a list of all the latest headlines with links to all the articles and commentary, and it comes from me. And soon as you get one of those just. Reply and you’ll get me. So that’s that’s the subscription button, A big red button on the website, goer crowd.com. That’s the best way to get a hold of me.
Ben Fraser: Awesome. Dr. Gau, thanks so much for coming on. This has been really fun. And I would, I’m gonna hold you to it. We’re gonna have you back on Ear early half of next year and have you
Adam Gower: team seriously take that little clip. Let’s play it back and see where the heck we are. I might abandon the podcast immediately.
It’s that embarrassing. Exactly. Is like spot on accurate, in which case I’ll take all the accolades I can take. I Oh,
Ben Fraser: As you should. As you should. Awesome. Thanks so much. It’s been really fun and I look forward to having you back in the future. Ben,
Adam Gower: It’s really been a pleasure. You’re an excellent host.
It’s been a pleasure being here today. Thank you.
