Implementing Systems in Your Business

"I had to get out of my own way", that's how our conversation started when I asked my show guest about putting a system in place for his business. He mentioned that he was seeing all these deals come through, but he didn't have time to underwrite them and so he thought, "well, I can set up my systems and pay someone 15 bucks an hour, an undergrad at USC to under ideals" because himself was either working full-time or had other things going on the business.

So he had to get out of his own way, that was a sort of first key piece of advice that he can give to people. His underwriting evolved tenfold since when he started, he went through a ton of analysts. He has been through it for many many years, the typical 70/30 split with a preferred return and he just sees in today's market that it's really hard to make those sort of deals pencil these days, the preferences do 80/20 splits and no preferred return, so now they are changing up their structure a little bit, where they are doing a 70/30 split on the equity or the ownership of the deal and they had carved it off the equity into two different tiers, that they call it, tear A and tear B.

If ever been involved in ground-up construction, the capital stack you have your debt, you have what's called a mez equity, and then you have the actual equity sitting behind that, you'll have the GP on top of that, sort of four levels, so if you think of a PI and seventy percent of that equity, the equity owns 70% of the deal, 25 percent of the equity is sitting just behind the debt and they get what's called a preferred return over ten percent, which is paid current, but they get paid none of the back ends if he hits the park, they don't get to participate in the upside, the rest of the other 75% of that equity gets paid an accruing preferred return of a particularly, but anywhere between 7 to 8% and they get 70% of the upside once the asset in five, seven, six years time.

So what that does that means, that he can take away 25% of the equity from the back end the IRR to the remaining what he calls, Class B investors and it also gives investors options to place some money at 10% accruing paid, current pref or more the long-term game and equity multiple types of game and really from him it's a great way, they just roll it out that on a deal in Austin Texas that they were about to close and it's a great way to see who wants to be in which bucket.