Kevin Kim:
All right. Welcome, everyone. Once again, I’m here, Kevin Kim with Geraci, here with one of my very favorite clients and friend, Noah Brocious from Capital Fund 1. Arizona. It’s hot. It’s August. We’re still in a pandemic so we’re doing this via Zoom. Welcome, Noah. Thank you for joining us.
Noah Brocious:
Yeah, absolutely. Thanks for having me today.
Kevin Kim:
Oh, yeah. I’ve been trying to find guests, and one of the things that I’ve been doing is asking clients to join us who have built a sizeable company, who manage a fund, been in lending for some time now. And it’s interesting. A lot of folks… You’re one of the sleeper funds out there, the bigger funds out there but still considered one of the sleepers. A lot of the guys in California still don’t know who you are. I think you like it that way.
Noah Brocious:
Fly under the radar.
Kevin Kim:
Right, right, right. I know about the company, and I know how you guys have grown it. You guys manage a sizeable [inaudible 00:00:59]. I want you to join us today and give the guys a little insight into who you are, the company, and your partners, and give us your story. It’s been what? I haven’t seen you in about six months, right? We’re usually in conferences together every other month.
Noah Brocious:
Yeah. The last one was out in Newport. [crosstalk 00:01:18] when that was.
Kevin Kim:
That was a good one. Since then, the world’s turned upside down for a lot of different reasons. How have you been? Have you been safe? How’s the family?
Noah Brocious:
Yeah. Been great. Family’s good. My son turned five yesterday.
Kevin Kim:
Oh, congrats. Nice.
Noah Brocious:
Yeah, so that was cool. We ended up giving people the option to work from home. I don’t know when it was. Mid-March. Something like that. I worked from home for two days, and then my wife looked at me and said, “You got to get the hell out of here.” Been in the office for pretty much this whole time. Obviously things have been interesting and strange, but it’s probably been a little bit more normal for me than a lot of other people.
Kevin Kim:
So you basically came back into the office right away, but the office is ghost town, I’m guessing. Most people are working from home. Some guys choose to come in.
Noah Brocious:
No. We’re pretty much at full strength. I mean we have some-
Kevin Kim:
Oh, nice.
Noah Brocious:
Yeah. We kind of, I don’t know, end of April had about half of the staff in to start, and then brought everybody back in. But like I said we’re spread out and trying to… putting our masks on when we can, social distance, things like that.
Kevin Kim:
Right. Right, right, right. I heard Arizona, much like here in California, there was the double spike, because you guys had another… Has it caused anything recently for you guys?
Noah Brocious:
No, not really. We instituted some more rules and been more strict with people being in the same office and masks and things like that. But yeah, I think part of it was a function of more testing, and part of it was a function of idiots going to bars and parties and stuff.
Kevin Kim:
Yeah, overdoing it.
Noah Brocious:
Yeah. I know a couple people that got it, and everybody knows why they got it, that I know.
Kevin Kim:
Right.
Noah Brocious:
Nobody’s like, “I don’t know. I was staying at home.” It was like, “Yeah, I went out, or I went to a party.” But anyways.
Kevin Kim:
Right. It feels like to me at least it hasn’t… We’ve been talking about this for some time privately and it seems like the pandemic hasn’t necessarily affected you guys company too much. Things seem to be booming, right?
Noah Brocious:
Yeah. Fortunately not. March was our best month in company history because the pipeline was already full. We really didn’t go back and change any loans that we had committed to. [inaudible 00:04:03] be dependable versus overreact and piss off some borrowers. But March was super busy. We did 98 loans in March. April, May, June we slowed down a little bit, just because we made some adjustments like everybody. We increased our rates a little bit, lowered our leverage a little bit, and then started collecting prepaid interest on all of our loans.
Noah Brocious:
For the most part we were collecting three months of prepaid interest. So that just, we put some natural governors on it. So I think we averaged-
Kevin Kim:
Like most of the industry. But you guys didn’t go a complete right, left field. You guys didn’t start adding 12 months or [inaudible 00:04:45] on that, right?
Noah Brocious:
No. No, not too crazy. I think we averaged about 50 loans a month in April, May, June, so we still stayed pretty busy. But the thing that was interesting was payoffs accelerated. They didn’t slow down at all just because our real estate market’s going crazy in Arizona. So payoffs kept coming in, and then July, kind of mid-June we adjusted back to really where we were pre-rona as I like to call it. So yeah, July we had another record month. We did about 107 loans [inaudible 00:05:27] about 30 million.
Kevin Kim:
That’s great. I don’t think I have any other client that has such a positive story. Speaking of, we’ve been catching up, but I want to make sure the audience gets to know a little bit more about you and the company. So tell us a bit about yourself and about Capital Fund 1, a little bit about what you do, where you lend in, that kind of stuff.
Noah Brocious:
Absolutely. So I’m a Arizona native, born and raised, went to college out in California in Thousand Oaks. Went to California Lutheran. Needed a school that let slow, white guys play basketball. Basketball there for four years. That was fun.
Kevin Kim:
Nice.
Noah Brocious:
Yeah. Then came back here, started my career. Tried to sell insurance out of college and that was a failure in progress. I’m no good at selling the last thing that people want to talk about to them. Realized that wasn’t for me and I got into real estate in late 2004, and have really been in real estate since then. Started out doing some land development, buying and selling some land out in Arizona. [inaudible 00:06:41] pretty crazy back then, pretty great recession. Then 2007 I went and worked for a commercial developer, Panattoni Development, actually based up in Sacramento.
Noah Brocious:
So I worked in the Arizona office until I got laid off in February of 2009. So the world kind of stopped in real estate. And then I hooked back up with my buddy Justin who I’d gone to high school with, who I worked with, he and his dad Mike Anderson, from about 2004 to 2007. Mike is the founder of Capital Fund 1. They had started really they were buying properties at the trustee sale auction. So they needed some help. They were doing some flips. They needed some help with that.
Noah Brocious:
And then while we were doing that we met some investors down at the foreclosure auction down at the courthouse steps. We made a couple loans and then just decided that we liked the lending business a little bit more. So we started to focus on that. Started the fund with about two million dollars of Mike’s money back in 2009 and have just grown it from there.
Kevin Kim:
You came out right at the birth of what we consider hard money. Right on it.
Noah Brocious:
Yeah, absolutely. It started and it still is asset based. So we don’t check on it, we don’t get third-party appraisals. We have a good solid team that-
Kevin Kim:
Was Arizona as strict as they are now back in ’09?
Noah Brocious:
On the lending side?
Kevin Kim:
Yeah.
Noah Brocious:
No, they tightened up. They started to require licenses in I think it was late 2010, early 2005.
Kevin Kim:
Dodd-Frank on its way.
Noah Brocious:
Yeah. We weren’t licensed to start but then got our banking license in 2008.
Kevin Kim:
Right. Yeah. So fast forward to 2020. You guys had your 10-year anniversary last year.
Noah Brocious:
Yeah.
Kevin Kim:
You’re actually the same age as the law firm. We’ve been around since… We started in ’07. We’re a little bit older. Yeah, a little bit older, but still we started right then. Anthony started the firm during the recession and hard money just took off. Cool. So you guys started with the fund right away.
Noah Brocious:
Yep. We did.
Kevin Kim:
No trustees, investors, none of that. Just started right away.
Noah Brocious:
No. Yeah, it was Mike’s money to start, and then he just started reaching out to friends and family to raise money, and then their dollars were just added to his dollars. Everybody had a share of all the loans in the portfolio.
Kevin Kim:
And this started it was a three-man team? The three of you?
Noah Brocious:
Yeah. So it was Mike, Justin, and I and then one other person, Kristin, and she joined us right after we started.
Kevin Kim:
Are they all still active in the company? Are you now partly in charge?
Noah Brocious:
Yeah, so just myself. I’m the president of the company now, and then Mike is the CEO. So as far as the original team, we’re the only two that are-
Kevin Kim:
Nice. That’s so good to hear. Right now… You started a fund right away. Fast forward 2020, you guys have how much under management now?
Noah Brocious:
We’ve got about 200 million out. Of that, we’ve got about 135 million in equity. Then we have a line of credit with Western Alliance Bank-
Kevin Kim:
And that 135 in equity was organically raised locally through you guys networks, not like big capital partner or anything like that.
Noah Brocious:
No, just all friends, family, and referrals.
Kevin Kim:
That’s crazy. When you guys started, were you doing what everyone else did, like just fix and flip, and residential construction, and that kind of stuff? Or was it a little more diverse back then? Because you guys are pretty diverse now. You guys entertain…
Noah Brocious:
Yeah. It was really just purely fix and flip stuff to start, and when we started we were only lending on properties that were purchased at the trustee sale auction. So it was good because in Arizona it’s a little bit different than California and some other states, where if you win the bid today you have to put down a 10,000 dollar deposit, and then you have till 5PM the following day to pay in full. So had a little window as long as we [inaudible 00:11:12] quickly.
Noah Brocious:
So we cut our teeth on 24-hour funding, which was good.
Kevin Kim:
You learned the skills then, how to move quickly, how to underwrite. Yep. Yep.
Noah Brocious:
So yeah, it was all six-month term for the first probably 12 to 18 months, and then we added longer term loan, 24 months, for some rental properties because back then you could buy a house in Maryvale for 35 grand, and we’d make a loan of 25 and the investor could rent it out for $700 to $800 a month. So it’s a good cash flow even at 16%, 18%. We did that, then we added some ground up construction loan program. Then we started lending out land in commercial as well. [inaudible 00:12:02] as long as it’s-
Kevin Kim:
How fast did that evolve though? Were you guys all of a sudden adding them year by year? Or was the construction stuff more recent? How did that evolve?
Noah Brocious:
Yeah. For the first probably 18 months it was just the short-term fix and flip, and then we added the two-year rental program, then a year later we added the construction program. Then probably within six to 12 months we added land in commercial. So we didn’t add them all at once, but-
Kevin Kim:
You guys have a skill set in the construction. I mean, development company and all that so makes sense.
Noah Brocious:
Yeah. Absolutely. Yeah, the other partners in the company got some great skill sets too. One of the partners, Buddy Satterfield, was the Arizona president of Shea Homes for about 20 years. He’s got ton [inaudible 00:12:56] background.
Kevin Kim:
He knows all the builders too. No one’s going to mess around with him.
Noah Brocious:
Yeah. Yeah, and then Mike Anderson has land development background. Dean Bloxom started imortgage. They merged with loanDepot back in 2014, so he’s got a strong lending background. And then Mike Lofton has a framing company called Loftco here in town, so he understands-
Kevin Kim:
A lot of expertise. Are those gentleman that you describe, are they on the board? Are they all principals of the company?
Noah Brocious:
Yeah. They’re principals of Capital Fund 1. They act as an advisory board. And then one of the reasons we’ve been able to raise capital is that between the four senior partners as we call them, they’ve got about 30 million invested in the fund. So it’s not a situation where we’re going to investors and saying, “Hey, give us your money. We promise [inaudible 00:13:55].”
Kevin Kim:
Yeah. Put your money where your mouth is, and you believe in your product. That’s capital raising 101. If you don’t believe in your own product then…
Noah Brocious:
Exactly.
Kevin Kim:
So I’m trying to picture the industry, because I remember the industry back then. Were you active in the space as you are now? Or was it more local in Arizona only?
Noah Brocious:
Yeah, really we just had our heads down. We were making as many loans as we could. We were staying busy, especially at the beginning. There just wasn’t that much capital available.
Kevin Kim:
Sure. And real estate deals, values were lower back then and you didn’t need as much capital. Arizona’s evolved over the years.
Noah Brocious:
It has. Yeah. And we just… back then we’d lend until we ran out of money, and then we were out of business until we got some payoffs or we were able to raise some more money. But I would say putting that line of credit in place with Western Alliance in 2014 really helped because that [inaudible 00:15:03] the ability to grow even further.
Kevin Kim:
Oh, yeah. They provide us a valuable service to the industry. They allowed folks to grow organically. Also, they encourage folks to [inaudible 00:15:16] you have, control their own business essentially. You’ve seen this cycle essentially from start to finish, because you guys started in ’09. Let’s talk about the company. You guys started with just the three of you. How big are you guys now? How many employees do you guys have now?
Noah Brocious:
There’s 15 of us that are-
Kevin Kim:
You’re still lean and mean?
Noah Brocious:
Yeah. We try to keep it as lean as possible. So yeah, there’s 15 of us full time, and then the four senior partners that I mentioned.
Kevin Kim:
How many of those are more like LOs, and how many is the back office?
Noah Brocious:
Yeah. We’ve got, what do we have now? Four loan originators, well, five now. We actually just hired somebody out of Colorado and opened an office out there. So yeah, five originators. We have four people that are in the underwriting, asset valuation, default REO management department. Two people in marketing, and then the other five, excuse me, six in more back office, so processing, closing, servicing.
Kevin Kim:
Nice. Still very lean considering the amount of volume you guys do. That’s great.
Noah Brocious:
Yeah. We created a pretty good little assembly line system. Everybody knows their role and sticks to that.
Kevin Kim:
I imagine that was a challenge at first, figuring all that out, building all… stepping over yourself. You were probably wearing, what, six hats at once, probably. Right?
Noah Brocious:
Yeah. But it was good because we were forced to learn every aspect of… It was fun for a while, but then you get to a point where you start to get burned out a little bit.
Kevin Kim:
Right. When was that? When was that moment where you started to focus on highest and best use, if you will? Stuff like servicing and asset management shouldn’t be your day-to-day responsibility.
Noah Brocious:
Yeah. Absolutely. We ran really lean until about 2016, 2017. We still only had I think six people back in 2017. But then yeah we realized, okay, this is a business we’re going to be running for a while. People that are here can’t keep doing what they’re doing or else we’re going to burn out. So we got to allow people to specialize a little bit.
Kevin Kim:
Right. That’s when the market really started to take off. ’16 was like just the market just exploded.
Noah Brocious:
Yep. Yeah.
Kevin Kim:
Let’s talk about… You mentioned Colorado, so you’re not just an Arizona lender. You lend in multiple states. Western states, I’m guessing. Right?
Noah Brocious:
Yeah. Yep. Arizona primarily. We’re getting Colorado up and running. We’re making some loans through participation loan agreements up in Oregon and over in west Texas.
Kevin Kim:
Nice. Nice, nice, nice. Great markets. Oregon stopped the licensing rules there. Any vision to expand beyond that? My home state sucks. Pricings are ridiculous out here.
Noah Brocious:
Yeah, your state scares me.
Kevin Kim:
The state scares me.
Noah Brocious:
I mean, isn’t it some new tax?
Kevin Kim:
Oh, they’re trying to pass all kinds of taxes right now, because they’re out of money so they’re trying to… There’s talk about a retroactive tax now. How are you going to do a retroactive tax? Are you going to send me a bill?
Noah Brocious:
Yeah. What’s the one, there’s something about if you lived in California or made an investment they’re going to tax you.
Kevin Kim:
Oh, yeah. That too. Yeah. Yeah, yeah, yeah. And then there’s a lot of stupid bills about… There’s this really, really dumb bill about the foreclosures. Oh, gosh. The great republic of California. The socialist republic of California. A lot of guys where you are, a lot of competitors, they’re starting to expand. They’re starting to go to different states, explore some of the non-traditional [inaudible 00:19:38] states. Any plans to move out beyond that?
Noah Brocious:
Yeah, we’re looking at some other states. I think we like the western United States. Yeah, we’ve got our eyes on a couple other markets out there.
Kevin Kim:
Still same asset classes, right?
Noah Brocious:
Yeah. Same asset classes. We’re control freaks, so we don’t want to lend on stuff that we don’t understand. So we’re going to expand but slowly once we can find the right people. Because being an asset-based lender we have to know what the real estate’s worth and be able to value it [inaudible 00:20:18] portfolio. So yeah, we just got to make sure we have the right people in place.
Kevin Kim:
I heard something there that was kind of interesting. You guys are control freaks. You guys are lean and mean from before. Does that have anything to do… Has that influenced why you guys haven’t suffered so much during the pandemic? Because I’ve just seen so many different versions of this story. I’ve heard some folks just completely shut down. Some folks are on skeleton crew bare operations. And others like yourself thrive through it. What do you think it is? What do you think allowed you guys to really thrive or to maintain? Because you guys really didn’t suffer that much during the pandemic.
Noah Brocious:
I think that it’s easy to take your eye off of what your specialty is and what you’re good at. And also we’ve seen a lot of people, even borrowers that kind of get the God complex. They think, “Well, this has worked for so long. I can just do anything on the lending side. Maybe I don’t need to require a down payment from this guy because he’s doing such a great job, and things like that.” We just stuck to our guns requiring down payments, not getting overly aggressive with borrowers, really sticking to…
Noah Brocious:
Our bread and butter’s always been single family residential. So we’ve got about 650 loans in the portfolio, so our average loan amounts about 300,000. We’ve been a good, healthy low loan amount.
Kevin Kim:
Right. You guys didn’t change your parameters. You guys stuck to your parameters.
Noah Brocious:
Yep.
Kevin Kim:
It sounds like you actually stubbornly stuck to them. You didn’t ever make [inaudible 00:22:12] combinations.
Noah Brocious:
No. Yeah, yeah. I mean, we’ll make some subtle adjustments, but yeah, for the most part we’re really doing what we were doing from the beginning, just [inaudible 00:22:22] people.
Kevin Kim:
That’s an interesting way to look at it for a lot of the listeners out there, because a lot of people are like they want to know what’s the difference makers for the guys who are doing okay or doing well. I always tell them, well, number one they manage their own capital. They’re not reliant on somebody else’s money.
Noah Brocious:
Yeah.
Kevin Kim:
That’s been my kind of thing. That’s what I do for a living. I help them build funds. I didn’t really… The whole idea of really sticking to your guns and that proactive way to protect yourself. Because if you did that the whole time, then your portfolio is not at risk at all, even if the ground shifts underneath you. What about this though? Arizona’s real estate values have been significantly climbing, and people have been moving there. It’s become a haven for a lot of folks from my state. But also it’s become a very attractive place to live.
Kevin Kim:
Has that helped? I don’t know. I’ve heard multiple lenders from Arizona have different stories.
Noah Brocious:
Yeah. We see it as a positive, because yeah, people are continuing to move here in droves. Still, you compare it… Our median home price is still 300,000. San Diego, L.A., Seattle, even Denver. It’s so much more affordable. You got to deal with 115 degrees in the summer but as long as you’re not a roofer, most people can live through that.
Kevin Kim:
Or a suicidal golfer in the summertime, right?
Noah Brocious:
Yeah. But right now we have, last time I checked, I think there’s 8500 homes on the MLS for sale. And last month there’s 9500 sales. So we literally have less than a month of supply. And because of the natural governors in place for builders, pre-Great Recession, I think in 2006 I think we built 55,000 or almost 60,000 homes here. But with labor and material shortages, even if builders wanted to try to get back to those numbers, they wouldn’t be able to.
Noah Brocious:
We have an inventory issue, which as long as rates stay low and inventory stays low, the simple supply and demand says pricing is just going to continue to go up. But they’re still really affordable compared to other western United States markets.
Kevin Kim:
But there have to have been so many instances… I remember ’15 and ’16 were the years when this market started become very, very crowded. And a lot of folks, to compete, started to make that compromise. There had to have been moments where you guys had those meetings where maybe we should make these adjustments, or maybe we should make these changes, or maybe we should start selling to whoever. Tell me about that.
Noah Brocious:
Yeah. No, we did. I’m not saying… When we started it was 20% down, no questions asked. That’s the best we’re going to do. But we’ve learned over time having to foreclose on properties and sell them as REOs, we’ve learned what’s liquid and what isn’t liquid. So we’ve definitely gotten more aggressive on single family residential under 300,000. We’ll do that loan to a good borrower with 10% down.
Kevin Kim:
Mm-hmm (affirmative). Mm-hmm (affirmative).
Noah Brocious:
We’ve definitely made some adjustments, but as far as our structure and the fund and continuing to raise money and not get distracted by, well, if we sell maybe make it more profitable, things like that.
Kevin Kim:
Right.
Noah Brocious:
We’ve been fortunate to just always have investors that want to give us more money too. So we’ve never… Knock on wood. I’ve never needed… we’ve never needed to raise money not been able to raise money.
Kevin Kim:
Let’s talk about that real quick, because that can be a significant challenge. I know a lot of people who were starting up or going into a more direct lender situation and they want to control the capital but they’re biggest… big question mark for them is the capital raise. Right? We can couch it as more of… if you’re advising someone who’s thinking about going out there and doing it. Let’s talk about that, because raising money is not easy. Right?
Noah Brocious:
No. It’s a grind, yeah. Mike Anderson was really the one that did the heavy lifting as far as that went, just because he had the connections and knew-
Kevin Kim:
The network.
Noah Brocious:
Yeah. Had the network. Still, in 2009 it was on the heels of Scott Coles and Mortgages Ltd. and Bernie Madoff, so people would… You try to raise money for a mortgage business back then, people looked at you like you had three heads. So yeah, it was a grind, but I would say if you don’t have a good chunk of your own money to put in the fund, it’s going to be that much more difficult. Like anything, skin in the game just goes a really long way.
Kevin Kim:
And for a lot of folks who come in, a lot of times they ask, “What about hiring folks to do it for you?” I get asked a ton of times. People ask me all the time, “Do you raise money?” I’m like, “I’m an attorney man. My bar card says I’m an attorney. I didn’t pick the series seven.” I can help you but I’m not in the business of doing that. And I always tell them, “Look, this is your first fund. You should also think about doing it yourself, because you know your investors.”
Kevin Kim:
Have you guys ever entertained that, like hiring a broker dealer, or hiring a real estate investment advisor, or just outsourcing in general to go out there and raise the money?
Noah Brocious:
Yeah. We’ve thought about it. We’ve considered more hiring somebody. Again, we’re control freaks [inaudible 00:28:47]. The less third parties we have, the better I sleep at night. And I just… I don’t know. We like being able to have those conversations with the investors to make sure that… Because as you know, unfortunately, everybody doesn’t read every word of every document.
Kevin Kim:
Oh, yeah. Right. And everyone has different sources of information. So they may interpret… they may freak out.
Noah Brocious:
Yeah. We typically get in front of our investors. If they’re interested, we meet with them. We make sure they completely understand the investment, and it’s good just to hear feedback from outside sources too, because sometimes you get so caught up in what you’re doing, just to have another person’s insight and opinion. A lot of times we’ve gotten ideas on how to tweak things just from having conversations in those meetings.
Noah Brocious:
Yeah. Maybe someday, but for now we’re going to continue to raise through our network.
Kevin Kim:
And the network being they’re all high net worth investor primarily.
Noah Brocious:
Yeah.
Kevin Kim:
Local? Local money? Is it primarily Arizona or is it spread out now?
Noah Brocious:
Yeah, for the most part Arizona. There’s some people that, like most high net worth individuals, they have a home somewhere else.
Kevin Kim:
Yeah. They move to Wyoming. Yeah.
Noah Brocious:
Anywhere but Arizona in the summer.
Kevin Kim:
Right. Right, right. Canada.
Noah Brocious:
Yeah. Yeah, we’ve got a pool of Canadian investors. Yeah, for the most part it’s all local people.
Kevin Kim:
That’s something I have to look over. From a lesson standpoint, I had an interview with Rodney over at Noble, and he kind of had the same sentiment. The majority of their capital comes from local money. That helps. You guys are able to actually go out there and meet. You can drive out and meet your investors. If they’re spread out in the United States, it’s going to be stuff.
Kevin Kim:
At 100-plus million, the size of a fund is always not indicative of the number of people you have to manage. How many investors generally, if you skip certain people, how many people? How many actual investors are you dealing with? Over 100 people?
Noah Brocious:
Yeah. We’ve got I think about 130. A few people have, they’ll have maybe a self-directed IRA and then a personal account. We’ve got about 130.
Kevin Kim:
That’s still manageable from I guess a messaging standpoint and a meeting standpoint.
Noah Brocious:
Yeah. And again, having people that are local, they understand what’s going on, listening to the news. I don’t know if anybody reads the newspaper anymore, but reading the newspaper or searching on Google or whatever.
Kevin Kim:
Right, right, right, right, right, right. They’re feeling the same thing you’re feeling. Not too far away.
Noah Brocious:
Yeah. And we’ve really been… One of the things that’s been really important to us is educating our investors.
Kevin Kim:
How do you guys do that?
Noah Brocious:
We disperse to our investors monthly. We send out a monthly newsletter. So it just updates them on the portfolio, what it looks like. Every month we pick a topic just to discuss. Sometimes it’s the market, the real estate market. Sometimes it’s a new concept we’re coming up with. But yeah, we’re always just trying to do the best we can to educate our investors.
Kevin Kim:
Is it done in person, in writing, both? Video?
Noah Brocious:
We do it in writing. Yeah, we do it in writing. We have an annual, we have a meeting every year. This year probably not going to happen. But yeah, we get together at least once a year with our investors.
Kevin Kim:
Doing a state of the fund kind of meeting.
Noah Brocious:
Yeah.
Kevin Kim:
Hotel banquet hall, drinks, dinner. Yeah. That’s great. And that’s some of the things that’s overlooked. I always tell folks when it comes to managing a fund, not just about can you raise the money and can you put it to work, but are you managing your investors? Are you communicating with them, managing them, because at the end of the day it’s their money. Right?
Noah Brocious:
Oh, yeah. Absolutely.
Kevin Kim:
And let me ask you this, with that as a backdrop, when corona hit, and Arizonans, the response was kind of right there in the middle. Let’s not over blow it. Let’s not overdo it on the other end. Let’s not lock everything down. What were your investors’ response? Because a lot of people in California, the investors lost their minds for the first month, and same with some other states.
Noah Brocious:
For the most part, we didn’t hear from too many of them. So everybody stayed pretty calm. We had a handful of people that reached out. Nobody really freaking out. Just, “All right. How’s it going?” We had a couple people that had, just because of the industries they were in, revenue went to zero overnight.
Kevin Kim:
Hospitality?
Noah Brocious:
One investor, he owns four daycare centers.
Kevin Kim:
Oh.
Noah Brocious:
Those were immediately illegal. So yeah, we had a few people that were in tough situations. But for the most part, again, I think it helps with the education. They understand, okay, borrower has got skin in the game. Portfolio is at 65% loan value. Real estate is still selling. I think really understanding it better helped our investors stay pretty calm for the most part.
Kevin Kim:
And that’s really… If you think about it, you just dissect that statement, because they are getting monthly statements about what your lending parameters are, what your underwriting parameters are, how the fund is performing. All this great stuff. So they know what you’re doing, and the transparency and the communication, that’s important. Then they’re not going to be asking questions. They’re not going to… They’re not asking questions that they should already know.
Noah Brocious:
Right. Yes.
Kevin Kim:
I want to ask you about the life cycle of the company now. We talked about you got started in ’09. You guys started adding people. You’re at 15 employees now. Has there been anything… Was there any specific episode in the past 10, 11 years now that really shaped company culture? The defining moment for Capital Fund 1.
Noah Brocious:
I think Mike set out from day one to really just put the culture in place of being responsive. Always my thing is just to always do what you say you’re going to do. It seems so simple but nobody does it. We had a couple challenging bankruptcies that we had to go through. Really, two at the same time. Back in 2014, 2015. Those were interesting. We learned a lot, that’s for sure. But yeah, I think it was Mike’s intention from the beginning just to be a dependable source. I think I’ve carried that on, since he’s not as active.
Kevin Kim:
I was just kind of surprised how simple that is, but a lot of times supremely overlooked.
Noah Brocious:
Yeah.
Kevin Kim:
Just integrity, answer the phone, respond to email. You’d be surprised. I can echo that. We do that. We have the same values here at our company. It’s surprising how… I find that it’s those simple things that really define a culture. It’s really cool.
Noah Brocious:
My wife still gives me crap about it but we got married, we just had our five year anniversary, but at that point, I was the loan originator. There was four of us, and I had to work.
Kevin Kim:
Yeah.
Noah Brocious:
I couldn’t not answer my phone. I couldn’t not respond to emails. It’s just doing what you say you’re going to do, and no slow no’s. If it’s a no, just give them a no.
Kevin Kim:
Straight shooting. Yeah. There’s not enough of that in this space. A lot of… kind of drag on… I think they can figure it out, and try to make it happen, and eventually it’s not going to work. Most folks should be able to know right away if it’s not going to work. It’s just not possible.
Noah Brocious:
Yeah.
Kevin Kim:
That’s cool. All right. You guys have been around long enough, so I can ask you guys this question. I get a lot of people coming to this space. It doesn’t matter what time of the industry it is. It was very, very busy in ’16 when a lot of the lenders showed up. But it’s still busy today. We still have a lot of folks that are former LOs, or come from a different industry and love this industry, and they’re investors or their builders and they want to start doing it.
Kevin Kim:
And then they want to start up a new business. They want to become a lender. I’m going to ask you, with your experience in both real estate and finance, what kind of guidance do you have for these folks?
Noah Brocious:
I think the more… Again, going back to being a control freak. The more aspects of the business you can control, especially to start… A lot of people say, “Okay, well, I can outsource this, and I can outsource that.” Even to this day we service all of our loans. I’m sure there’s some great servicers out there but I wouldn’t trust anybody else to [inaudible 00:38:59].
Kevin Kim:
Right.
Noah Brocious:
So I think getting started, even if it means working 20-hour days, you got to control as much as you can, because overly dependent-
Kevin Kim:
It’s not a part-time job, ladies and gentlemen.
Noah Brocious:
Not even close.
Kevin Kim:
It’s two jobs really.
Noah Brocious:
Two or three. Yeah. So yeah, just not thinking you can just hire somebody to go raise money, hire somebody to service, hire somebody to underwrite or value properties. You got to live it, eat it, and breathe it to get started. And then over time, I think you can do some of those things, but yeah, if you want to-
Kevin Kim:
And why is that? Is it expertise? Is it so you can actually step in and fight those battles even if you’re not in the trenches with the new employees you have covering that?
Noah Brocious:
Yeah. Partly that, but also because if you’re dependent upon a bunch of other people to do things, you can’t control how quickly… You can tell people, “Yeah, I’ll get back to you in two days.” But if you have three people that you’re depending on to get back to you, you have no control over your responsiveness.
Kevin Kim:
Right. Right, right, right, right. Too many cooks in the kitchen, too many levels of communication that need to happen. It’s true. That’s true. I hadn’t thought about it that way. That is very true. A lot of times what happens with me sometimes, you have a system and then I can quickly get back to the person real quick. It’s kind of interesting how that plays out.
Noah Brocious:
Yeah. Yeah.
Kevin Kim:
Anything else? How about business-wise? A lot of guys come out saying they’re just going to do it by themselves. You had a team with you. You had partners. If someone came, if I came to you and said, “I’m going to start this by myself, just me,” what do you think about that? [inaudible 00:41:02] something like that.
Noah Brocious:
I think unfortunately we had a lender here in town who was one-man show, had no checks and balances, nobody to tell him what he was doing was stupid, and unfortunately the guy ended up losing a bunch of money to one investor in particular and ended up killing himself. So I hate to bring up such a terrible example but-
Kevin Kim:
I know.
Noah Brocious:
-I think you have to have checks and balances. You’ve got to have at least one other opinion, somebody to bounce things off of. I don’t know. I wouldn’t be a proponent of a one-man show. You start drinking your own Kool-Aid. Yeah, I would definitely try to stay as lean and mean as possible, because that way you learn everything that much more quickly. And like you said, if something comes up you’re already familiar with it, you’ve already worked on, you can jump right in. But yeah, I would say you still want to have a small team, even if it’s just two people.
Kevin Kim:
Yeah. The idea of basically not believing your own bullshit sometimes is important. You may lose sight of things. Entrepreneurial spirit can get the best of us.
Noah Brocious:
Absolutely. Yep.
Kevin Kim:
Let me ask you this. Another question I always ask to more seasoned lenders is the industry is in a weird place right now. It just went… 2008, 2009, ’16, from ’16 to now it’s just been expanding, expanding, expanding. This is the first what I would consider substantial challenge the industry has ever faced, because it’s a relatively young industry. Where do you think we’re headed? Where do you think we’re headed as an industry? And what thoughts do you have I guess where we’ll be next year around this time, 2021? Hopefully we’ll be in Vegas having a drink.
Noah Brocious:
Yeah. I think there’s always going to be a need for short-term capital. That’s a little bit easier to secure than going to a bank or a cash lender. I think real estate as an investment option for people in the U.S. and the world just continues to get more and more popular. What? The stock market’s been overvalued for 10 years now or whatever. I think that there’ll always be a demand for what we do. And I think my crystal ball’s foggy. The world’s weird right now. We obviously have an election coming up.
Noah Brocious:
I think on November 4th or 5th, I’ll probably be able to tell you a little bit better where we’re going to be.
Kevin Kim:
See where things go. Right, right, right, right.
Noah Brocious:
Yeah. Either way, definitely not going to get into politics here, but no matter what happens, our industry is still going to be in good shape. We may be a little bit better or a little bit worse depending on what happens in November. It’s like anything. This whole pandemic has been interesting because you just see all these businesses that some of them just bury their head in the sand, close the doors, they’re gone. Others have gotten creative. There’s trampoline gyms that have computers set up for kids to do school in.
Noah Brocious:
There’s just all these different… It’s just been really cool to see people get creative, and just see how hard people fight that really care.
Kevin Kim:
It’s a necessity. I remember very early on, there were a handful of restaurants that were doing the outdoor dining thing. They started doing the outdoor dining thing, and now every restaurant’s doing it.
Noah Brocious:
Right.
Kevin Kim:
And there were a handful of barbers that were starting to do the outside haircuts. Now everyone is. All types of creative ideas to make money and survive. Our industry is no different. You’re right. I agree with you. The asset class is always going to be needed. It’s always been needed. It always will be needed. I just wonder was that blip between, what was it? When did Wall Street jump into our space heavily? Was it ’15, ’16 when they were all here?
Noah Brocious:
Yeah.
Kevin Kim:
From ’15, ’16 and somewhat last year, the market was just really, really frothy in our space. And I wonder, is it ever going to be as frothy ever again? Or did we scare off that kind of capital, or is that even a bad thing? I don’t have an opinion about it. I’m an attorney. I’ll have to deal with it as the legal issues come, so I want to get your thoughts on it.
Noah Brocious:
As somebody that has a fund and doesn’t sell our notes, I don’t mind it at all. I think it’s just reduced some competition. But again, I think most or all of those sources will be back. Maybe not as aggressively as they were before, which is probably a good thing. People shouldn’t be able to write junk loans with little to no money down and be able to sell them.
Kevin Kim:
Yeah. There were a lot of those out there for a while.
Noah Brocious:
You’re just asking for… What do you think people are going to do when it comes down to making their payment on their investment property or feeding their family? It’s not even a question. You got no equity to protect. And that’s what we learned. We always thought, okay, long as we require a down payment and the world doesn’t end, people are going to protect their equity. And that’s what happened. Our default rate went from 4% in March to we’re at 1.5% right now. Through corona our default rate went down significantly because-
Kevin Kim:
That’s because they have more down payment. They have more skin in the game right now.
Noah Brocious:
Yeah. Yeah, exactly.
Kevin Kim:
And they have the interest prepay.
Noah Brocious:
Right. Yeah, that definitely helped too.
Kevin Kim:
That’s a good way to look at it. I’ve always wondered about the outset of all that, how it’s going to play out. I’ve taken the same stance. They’re going to come back. There’s money to be made.
Noah Brocious:
Oh, yeah.
Kevin Kim:
There’s tons of money to be made. It’s a question of who and at what terms, and then how fast will it devolve is my wonder. Because it devolved pretty fast when they jumped in. In less than about a year, we were seeing 100% financing.
Noah Brocious:
Mm-hmm (affirmative).
Kevin Kim:
I guess my only hope is that it doesn’t devolve as fast. It’s interesting because a lot of the people in our space that came out of the last recession learned their lesson, and those guys built these big companies like yours and they’re not suffering that much because they’re pretty conservative. There’s a different breed of lender out there that joined the industry a little later. Now they’re learning that lesson again.
Kevin Kim:
So I’m wondering how that’s going to play out. I hope it does. I really do. I really hope a lot of folks take a more conservative approach, because you can still make a ton of money in this space and be conservative on term side, just as long as you don’t I guess chase that dragon.
Noah Brocious:
Yeah. No chasing the dragon.
Kevin Kim:
There’s a lot of dragons to chase, man. Easy money to be made. I see a lot of folks…
Noah Brocious:
No, it is hard. You see those shiny objects and it’s like, oh man, I really want to make that loan but then you just got to remember… For me, I want to be doing this for the rest of my life. I want my son to be doing this. So making an extra $100,000 today to screw up the future is definitely not worth.
Kevin Kim:
Long game, for sure. For sure. That’s a good place to put the industry. I hope it’s the way it goes. I really hope we don’t suffer too much. I mean, resi seems to be coming back pretty strong. Overall, I’ve heard positive things on the resi side. I just don’t know where we’ll land on the commercial side. This time it seems to be commercial, and I’ve been saying that for years. Commercial is going to have to have its own bubble burst.
Noah Brocious:
Yep.
Kevin Kim:
I think this might be it. I don’t know.
Noah Brocious:
Yeah, that’s one that’s tough, because do people continue to go to hotels?
Kevin Kim:
Right.
Noah Brocious:
Big question mark. Retail has big question marks. Even office.
Kevin Kim:
Yeah. There’s no reason to go to the office today. A lot folks are shrinking their offices down.
Noah Brocious:
Right. Yeah.
Kevin Kim:
Renegotiating those leases.
Noah Brocious:
Yep. If companies just start to say, “We’re fine. We don’t need office space…” Yeah, that one that’s anybody’s guess at this point. We got to see how it all plays out.
Kevin Kim:
Makes sense to me. Well, I think that’s all we have for today. It’s about an hour in. Noah, I want to thank you for joining us on the podcast today.
Noah Brocious:
Yeah.
Kevin Kim:
We’re going to put your website and your link on here. For those of you who are listening who are borrowers, this is the guy to talk to, honestly. He’s a good friend of ours. We love Noah at the firm. Also, a good friend of mine. Hopefully, we’ll see you soon in person, have a drink, hopefully. I think November. We were all talking about being in Las Vegas in November.
Noah Brocious:
I know. I’m signing up.
Kevin Kim:
If I can make it, I’ll be there.
Noah Brocious:
Yeah. Sounds good.
Kevin Kim:
Yeah, yeah. For sure, man. Well, I hope to see you soon, and you guys stay safe out there. We’ll make sure to put the firm on the after credits, and maybe we’ll do another one of these soon with some more folks.
Noah Brocious:
Yeah. I’ll be ready any time.
Kevin Kim:
All right. Thank you very much for your time today, and we’ll catch up soon, man. Take care.
Noah Brocious:
All right. See you.
Kevin Kim:
All right.
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