Blazing into 2021 with Lessons from the Past | Greg Hebner, Arixa Capital

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In this episode, Kevin sat down with Greg Hebner, the managing director and portfolio manager at Arixa Capital. With over 20 years of experience in real estate, Greg has been on all sides of the private lending business from origination, loss mitigation, accounting, and asset management. Listen in to learn more about Greg as a person, professional, and industry leader.

Mr. Hebner joined Arixa Capital in 2012 and serves as Managing Director and Portfolio Manager.  In this capacity, he has primary responsibility for investment strategy, originations and operations of the Firm’s vertically-integrated lending platform.

Mr. Hebner brings nearly 20 years of real estate experience having invested in more than 1,600 transactions deploying over $1.7 billion in capital on behalf of investors and partners.  Prior to joining Arixa, he was Founder and Chief Investment Officer of Community Rebuild Partners (CRP), a California-based real estate development firm that acquired, renovated and sold residential real estate properties.  Prior to CRP, Mr. Hebner was President of NuView Financial Services, a provider of loss mitigation services for the residential mortgage industry, and served as Chief Operating Officer of NuView’s parent company, Sorento Capital, a private asset management firm focused on consumer-related financial services.  Previously, he held senior leadership roles with web-based moving and relocation companies including as CEO of Relocation.com and as Senior Vice President of Consumer Media Services at Move, Inc.  Earlier in this career, Mr. Hebner worked in financial, strategic and operational roles for The Walt Disney Company, Premark International and PricewaterhouseCoopers.

Mr. Hebner received his Bachelor of Science degree in Accountancy from the University of Illinois and his Master of Business Administration degree from Harvard University.  He is a frequent contributor and speaker on real estate investing and mortgage lending at various industry events and regularly teaches residential real estate investing courses at UCLA Extension’s Real Estate Program.  Mr. Hebner is a California licensed real estate broker and holds the NMLS mortgage broker designation.

Episode Transcript

Kevin Kim:
Welcome everyone to another episode of Lender Lounge with Kevin Kim. Thank you for joining us. Today, we’ve got one of my favorite clients and a good friend of mine, Greg Hebner with Arixa. Welcome, Greg. Thank you very much for joining us today.

Greg Hebner:
Thanks for having me, Kevin.

Kevin Kim:
The usual format for this podcast is we’re just going to have some fun, talk a little bit about Arixa and get to know you a little bit better. Maybe talk about some current events and some issues, and get your thoughts on where the industry is headed.

Kevin Kim:
Let’s just jump right into it. First of all, give us who you are and what Arixa does, the usual intro. And then, I’ll start poking and prodding a little bit.

Greg Hebner:
Sounds good. Well, I’ve been working in the real estate industry since right out of college, off and on. Full-time started flipping houses in high volume around 2010 and was a very active flipper for about three years. Met Jan Brzeski, who had started Arixa actually back in ’06, his first fund in 2010.

Greg Hebner:
We met in 2011. Started working on a single-family rental fund in 2012, then started working full-time on the lending side in 2013. Then, full-time as a private lender since then. Hard to believe it’s been that long. We’ve always tried to come at it a little bit differently in terms of how we tried to build the platform.

Greg Hebner:
As a borrower who has borrowed from many, many, many other lenders, I’ve always tried to incorporate the things that I appreciated about the lenders I worked with, and tried to keep the borrower-friendly attitude to the extent you could. Thinking, “What do the borrowers really care about?”

Greg Hebner:
We’ve been an acquisition and construction lender since then. We added multi-family to the business a few years later, and mostly focus on the West Coast. As you know, as a long-term service provider of ours, the business has grown a lot over the years. That’s Arixa in a nutshell.

Kevin Kim:
Arixa has always been a lending company, but you guys have expanded your product offerings over the years. Did you guys start in the fix and flip space first? Or was it that you started adding … Because you guys do commercial real estate now.

Kevin Kim:
You guys do construction. You guys do residential. Has it always been that way or was it just residential only? How did that evolve?

Greg Hebner:
In the beginning, we went to the people who bought at the trustee sale. It was very average loan sizes in the 100 and 200,000 dollar range. It was very much a way a lot of folks got started in the business. The one thing we always did is, we’ve always come at it as an investment management firm. An alternative investment management firm.

Greg Hebner:
We wanted our own balance sheet from the very first day. It was obviously very constricting when you didn’t have a lot of money to lend. What really transformed our business was we partnered with a commercial real estate investor and launched another vehicle called Crosswind in 2013, which really allowed us to do larger loans. Bigger construction loans. We were doing one to five million dollar SFR loans.

Greg Hebner:
We were probably one of the very few companies in the space back then who could do that. And I think it really became the catalyst to be able to do a lot more. We’ve always done a lot of renovation. That’s my background, and construction has always been an important part. We had our first ground-up in 2015, Kevin, if I remember that right.

Greg Hebner:
And then, multi-family we might have done one in ’15, and then by 2016 and 2017 added. By last year, it was nearly half of our business. We have a pretty nice mix now between multi-family and residential, with a little bit of other commercial assets. But mostly single-family and multi-family.

Kevin Kim:
Our audience would like to learn more about how you came up as a builder first. You were in real estate right out of college, you said?

Greg Hebner:
No. Actually, I was an accountant out of college. Calling me a builder would be a far-cry, because I don’t know which side of the hammer is up. But I was actually … It’s funny. My affinity for real estate started … I got a VA loan on a property. I was in the Marine Corps and got a VA loan out of college to buy an $81,000 house in the city of Indianapolis where my first job was.

Greg Hebner:
I think I put down two grand and I was hooked. I was like, “Wait a second, I get to borrow $79,000?” I’m a 22 year old kid. That’s a lot of money back then. And if it just goes up by a couple percent a year, I’m doubling my money. As a math guy, that math worked for me very well. So I bought and sold probably 10 or 15 homes, had a bunch of rental properties. Actually sold some rental properties to pay for Harvard Business School, to fund my tuition. And then, went into corporate America for a very long time.

Greg Hebner:
I had a small, little real estate fund that I had on the side. I was always in SFR, always fixing things and leasing things and renting things. I’m not a very good stock market picker, I’ve decided over the last 20-plus years. I can get my arms around real estate and values. The math made sense to me. It’s always been something I’ve had a great affinity to. It wasn’t until 2010 it became a full-time career as an investment manager, if you will. But 20 years prior to that, doing it just as I could with my full-time work.

Kevin Kim:
It was basically a side hustle while you were working corporate America for a while? Just private investing.

Greg Hebner:
I don’t know if I’m cool enough to have a hustle, but it was not my full-time job. It was not my W-2 paycheck.

Kevin Kim:
Were you a CPA for a while? Were you doing that or …

Greg Hebner:
My exciting job out of college. My dad was an engineer and basically his lesson was, “If you’re going to spend the next four years of your life getting a degree, you better get a degree where you’re going to get a job. You can be an engineer like me, or do something in business.” I was better at math than I was at science, and I liked business and had an affinity to that.

Greg Hebner:
I got an accounting and finance degree, went to work for Pricewaterhouse, went to work for a big corporate group in internal audit, process improvement. I did a lot of traveling before I went to business school. I actually came back after business school, and I was a CFO for a small period of time in the late 90s. I know enough to be dangerous, but not enough to actually do those jobs anymore. But it’s a great trade.

Kevin Kim:
Well, you recruited a pretty strong staff. A pretty strong accounting staff. And your internal … All those people that I know, who work on the tax and accounting, and your CPA team and your audit team. They’re all really strong players. I’m sure you had a say in all that. Right?

Greg Hebner:
They know a lot more than I do, Kevin. But we’ve surrounded ourselves with, as we did with you guys, people who know a lot more about their subjects than we do.

Kevin Kim:
Well, that’s so great. Right now, currently what is your official title with Arixa?

Greg Hebner:
I’m one of the two managing directors.

Kevin Kim:
Managing director.

Greg Hebner:
Jan Brzeski, who is the founder, and myself run the business. My primary focus, although we both do a little bit of everything, is really running the day-to-day lending platform, which we can talk more about what that involves. We get more involved with investors and some of the institutions we work with and capital markets.

Greg Hebner:
But day-to-day, you’re most likely to see me with a borrower, talking to borrowers, working with the team. I describe myself a little bit like an air traffic controller. I’ve got lots and lots of planes to land. We’ve got to bring them all down, get them done on time, and make sure the ride isn’t too bumpy. Keep it going. It’s a high-volume business, a lot of trades.

Kevin Kim:
Oh, yeah. Especially, considering you guys are a balance sheet lender … You have to do a lot more work than most of your competitors do to evaluate, maintain, and also keep those borrowers happy. Let’s talk about that. Describe Arixa’s current structure right now, and about how we got there.

Kevin Kim:
My understanding … You mentioned Crosswind, but Arixa is a balance sheet lender. You have two funds, I believe. They’re using the REIT strategy. Have you always been … Has Arixa always had funds? Or has there been any other strategy before?

Greg Hebner:
No, when Jan first started … Jan’s background, he started his career at Goldman Sachs. And I think some of his mentors and advisors said, “If you can build a fund and develop a track record, you can really create a very viable, sustainable enterprise.” He’s always been track record focused in terms of the investments we made. If you wanted to go pull our track record, you can see the first loan he did in March of 2010.

Greg Hebner:
We’ve done a couple thousand since then, but every single loan, the track record is there. It’s documented for the world to see. It’s been very much part of his message since the beginning. We have one more fund that is not a REIT actually, it’s an unlevered fund. Our largest vehicle is a levered REIT with a subsidiary REIT.

Greg Hebner:
You and I have been at panels to discuss this before. The Crosswind vehicle is a full-on REIT. It’s not a subsidiary REIT, it’s a top-level REIT. Those are similar-sized vehicles and both use leverage. Warehouse lines from banks. And then, we have a capital markets arm that selectively works with some counterparties on some loan sales. That’s been a smaller part of the business, but it’s important as well.

Kevin Kim:
When did you guys add that component? I know the fund has always been there, but when did you guys start adding loan sale and liquidity through capital markets?

Greg Hebner:
Let’s see. Our Crosswind fund, when we first started it … And I’ll give all the credit to that to our other partner, Bob Barth. He brought the concept of working with a commercial bank that he knew that was not in this space. This was 2013, mind you. This was a long time ago. We’re the only player in town with Wells Fargo.

Greg Hebner:
He said, “Look, you’re going to make a loan at this time at 10 or 11 percent, and you’re going to borrow the money at four or five percent … We can do pretty well.” Our first two years in Crosswind, ’13 and ’14, we were returning 13 and 14 percent into our LPUs.

Kevin Kim:
You guys were able to get a line of credit in 2013 from a bank?

Greg Hebner:
A substantial one.

Kevin Kim:
That was impossible back then. There were no banks doing credit lines back then in our industry. It was one, and they were charging eight percent. That’s amazing.

Greg Hebner:
Again, all the credit goes to him and his relationships and his ability to get that.

Kevin Kim:
Fantastic.

Greg Hebner:
We launched the Arixa leverage fund in January of ’14. We had a five million dollar line from a very small LA bank, [crosstalk 00:11:22]. I think we bumped them to seven and we reached their max they could do. And then, we started working with another bank. That line had grown from 15 into the nine figures now, over the course of the last several years. Our first loan sale was probably in 2017.

Kevin Kim:
Right around the time it started becoming a trend.

Greg Hebner:
Again, we sold a fair bit of loans last year. It’s always been … I think all your balance sheet coins have the same issue, which is either you have too much money or not enough money and it’s never quite right.

Kevin Kim:
Exactly.

Greg Hebner:
I think the one thing we did well … I don’t know if we’re going to talk about what happened in March of this year, that little kerfuffle that hit us early. But the one thing we did do … And I think we talked a lot about it, not knowing what was going to happen, is don’t have a single source of capital.

Greg Hebner:
We have a really varied balance sheet and off-balance sheet, and it really served us well at that time. We can talk about that if you want. We were always really scared of having all our eggs in one basket as it related to capital.

Kevin Kim:
Well, let’s talk about that. For the listeners out there who aren’t in the industry per se or are on the sidelines. March, April, May was essentially … Some people would describe it as doom and gloom. I describe it as everyone had their heads down, popped their heads up and was like, “What the hell is going on?”

Greg Hebner:
I would describe it as, “Dazed and Confused,” for those old enough to remember that movie.

Kevin Kim:
It was like, what is this craziness going on all of a sudden? Because everything on there … A lot of my clients and you had said the same thing, “Nothing looks bad based on what I’m seeing, but the entire industry is losing its mind.”

Kevin Kim:
And so, talk about what happened. March hits, we go into lockdown. California goes into full lockdown. You and I are both working from home. I remember the phone call. I was in my living room.

Greg Hebner:
We actually talked. I was like, “Kevin, what’s going on out there? Tell me what’s happening.”

Kevin Kim:
You called me. I called you. I felt the same way. My clients don’t seem to be that worried, but for some reason there is a sense of doom and gloom out there. Tell me about how Arixa handled it. What was the decision you guys made, the timelines, and how you guys got out of it?

Greg Hebner:
I’ll tell you a funny story. On the 13th, the Friday before they closed our state down, we were finalizing a major, major increase in our primary warehouse line. Called our banker on that Friday, and we were supposed to have docs on Friday. He goes, “I won’t have them out to you until Monday morning.” Called him again on Saturday. I said, “Are you going to still have the docs?”

Greg Hebner:
He goes, “We’ll have the docs out.” On Monday, we got the docs out. We added many, many millions of dollars to our available balance sheet that week after COVID. Thank goodness, a bank that stood up and did what they were supposed to do, but that was a scary weekend. I was waiting for them to pull it.

Kevin Kim:
Right.

Greg Hebner:
Every reason in the world to pull it.

Kevin Kim:
You and every other lender out there that had a bank line was wondering, “Are we going to get pulled?” But you didn’t.

Greg Hebner:
We didn’t. Thanks to them. The first thing we did is immediately canvased our clients. Again, we’re not a national platform. We do some loans in some different states, but we have a pretty close, personal relationship almost like a private bank would have with our clients. We’re dialing on Monday, Tuesday, Wednesday, Thursday … We’re just calling. “Hey, Kevin. How are you? What’s going on? Everything okay?”

Kevin Kim:
I did the same thing. I called you.

Greg Hebner:
You called me. I think you and I had probably talked on Tuesday or Wednesday. “Are you okay? Is everything okay? Don’t lose your mind.” We never really shut down. A lot of our loans were active construction sites. So we were just going out. I just wanted to go out and meet … I met people. I didn’t really stop going out and interacting with people.

Greg Hebner:
Obviously, construction did not slow down at all, except a little bit up in the Bay area and in Seattle and Portland a little bit. I just wanted to make sure everybody knew we were going to fund their draws, and we’re going to be here. We had a lot of people that had some funny requests. “Can you pause all my interest for the next year and not charge me any extension fee?” “No.”

Greg Hebner:
We had some interesting conversations. We tried to work with the borrowers. If you were a borrower who was in contract to sell your property, and COVID pushed your sale or something like that, we tried to be as flexible as we can. That’s the biggest advantage, I tell all my clients. You don’t really care who holds your loan until you care. It’s not in a security. It’s not in some servicer who sold it to a sub-servicer who sold it to a sub-servicer.

Greg Hebner:
We service our own loans, we service our own draws. I did draws myself. I went out and did physical draw inspections in March when one of my guys couldn’t do it. We were going to make sure, if you need us, we’re going to get somebody out there. Without having that balance sheet, Kevin, it would have been really hard. The good news is we haven’t had a single loan go into default. Nothing has happened since COVID in our portfolio across our entire book.

Kevin Kim:
Really?

Greg Hebner:
Which is crazy. Right?

Kevin Kim:
Not even in the commercial stuff?

Greg Hebner:
No. Nothing.

Kevin Kim:
Wow.

Greg Hebner:
We had people that we worked with in March and April and May … A lot of it was just trying to assess. Going through every loan and saying, “What are we worried about?” We met every commitment we made prior to March 15th, but we didn’t do any loans for a few weeks.

Kevin Kim:
Sure. That makes sense.

Greg Hebner:
We really tried to figure out … We had some redemption requests from investors, which a lot of them actually ended up after time pulling the redemptions, once they saw that the world did not implode. I’m sure you saw that across your clients.

Kevin Kim:
Yeah.

Greg Hebner:
And then, gradually started opening up the door again.

Kevin Kim:
When was that? When did you guys make the realization, “Okay, it’s time to stop with the whole …”

Greg Hebner:
Well, you know Jan. I think he was probably a little later than I was in terms of that. We turned away some loan requests. I was joking to some of my clients, “It’s like it’s 2013 and ’14 again.”

Kevin Kim:
Mm-hmm (affirmative).

Greg Hebner:
Pricing was …

Kevin Kim:
Double digits, right?

Greg Hebner:
I never tried to do that to people. But we definitely cut leverage for a while, because it was like 2014 pricing all of a sudden. We did a few loans to repeat clients at a little lower leverage. I didn’t charge them more money, it just didn’t feel right to do that.

Kevin Kim:
That’s great. That’s great.

Greg Hebner:
But I said, “Hey, I can’t go to this leverage attachment. Let’s go to this one.” I think, late June, there was a lot of demand. And then, July was a normal month. August was a great month, and it’s kind of going back. I’m sure a lot of your clients … January and February were amazing months.

Kevin Kim:
Oh, yeah.

Greg Hebner:
I’m like, “2020 is going to be a kick ass year.”

Kevin Kim:
I came into ’20, I’m like, “This is the year. This is going to be the year. Everyone is going to kill it this year.”

Greg Hebner:
By March 15th, I’m like, “This year is going to suck.”

Kevin Kim:
Yep.

Greg Hebner:
But we’ve been lucky. I think a lot of it is good clients and good communication. A lot of clients showed stripes. You saw clients who were unbelievably humbled by what this had done to other parts of their businesses. Maybe they had a construction business. Maybe they had a lot of commercial property.

Greg Hebner:
We’ve never been very heavy in retail or office. We have a few. I have guys who I would never have thought would ever be of an issue, Kevin. Huge portfolios. They’re like, “Greg, I collected 15% of my retail rent this month. I’m $250,000 short of my normal monthly cash flow.”

Kevin Kim:
Let me ask you a question about that, because you have these relationships with the owners and the developers. My understanding has been, the biggest impact has been actually not the small business retail, but the big box retail. They’re basically saying … Best Buy is basically saying, “No. We’re not paying rent.”

Greg Hebner:
Yeah, I think it’s across the board, Kevin. I’ve got one loan down in San Diego, the guy has got a Mexican restaurant and a bar.

Kevin Kim:
Oh, really?

Greg Hebner:
I mean, what do you do?

Kevin Kim:
That’s true.

Greg Hebner:
I think the strip mall owners have had it bad too.

Kevin Kim:
Mm-hmm (affirmative).

Greg Hebner:
If you just think about businesses that are walk-in service businesses, those have been hit.

Kevin Kim:
That’s true. Brick and mortar retail. Any kind of brick and mortar retail is tough right now.

Greg Hebner:
But imagine, offices are coming up on renewals or earn revenue through other things like parking. It’s pretty tough out there. We don’t do hotels, thank goodness. I think that’s been as hard hit as anything.

Kevin Kim:
Of course. The hospitality industry.

Greg Hebner:
We have one in downtown LA, where it’s got a mix of office and retail. But I think the retail is like … I won’t get this right. A coffee shop, a gym, and a juice bar. They signed all these leases and then nobody wanted to move in. I think they now subsequently have, but … My sponsor is like, “Okay. Wait a second. That wasn’t my business plan.”

Greg Hebner:
I signed all these leases, I’m ready to bring everyone in, and nobody could actually come in. I don’t know if we want to talk about how the SFR market has been performing, but we’re probably better lucky than good as it relates to the asset classes we’ve been in. Just because they’ve been …

Kevin Kim:
Well, talk about that. Right before all this happened, what was the ratio? What percent were you in SFR versus commercial? That kind of stuff. Because that’s something that a lot of people don’t think about. How do I balance my prop portfolio, if I’m going to be doing multiple types of loan classes?

Greg Hebner:
Obviously, our commercial loans are much bigger than our SFR loans.

Kevin Kim:
Sure.

Greg Hebner:
Our average loan sign is probably surprising to a lot of people. It’s well above two million, our average loan. That could be a 10 million dollar, multi-family, but it could also be a 10 million dollar single-family.

Kevin Kim:
Yep. Well, California.

Greg Hebner:
We still do $100,000 and $200,000 and $300,000 loans too, but we’re not the high-volume shop. We’re not the shop doing 150 loans a month. That’s just not our business. Last year, on a dollar value basis, we had pretty close to 50/50. Most of our sponsors starting in March just shut down.

Greg Hebner:
“I’m not buying anything else. I’m not refinancing anything. I got to make sure I can collect some rent.” We had a number of loans … I think the scariest part for us in March and April … I’m sure most of your clients … I don’t get it perfect, but I know what my payoffs are going to be, pretty much. I’m going to get X millions of dollars or tens of millions of dollars in payoffs.

Greg Hebner:
All of a sudden, there was none. Nothing paid off in April. Literally, nothing. Okay. Is this a one month thing? Is it a two month thing? Is this a year thing? A lot of our caution was we had to make sure we can fund all of our draws. We have to keep every commitment. I think that was our biggest caution flag was, “When are the payoffs going to start again?” They really didn’t start in earnest until June.

Greg Hebner:
A couple trickled in, in May. And then, all of a sudden, July … Anything on the market moved. This year, I will say that our origination volume is probably 80/20 SFR. Most of the multi-family is Bridge. We’re not getting a lot of … Last year, it would have been you buy and own a building, you relocate tenants, you fix it up, and you re-tenant it.

Kevin Kim:
Yep.

Greg Hebner:
Most of our sponsors took a break this summer. They wanted to see what was going to happen with the election. They wanted to see what was going to happen with evictions, which in California and some of these Pacific Northwest states … A lot of state mandates have been coming out as you know.

Greg Hebner:
It’s not an easy circumstance for them to operate in. What I will say is rent collections, which were down in April and May, are back up to pre-COVID levels for most of our clients, which again doesn’t make a lot of sense.

Kevin Kim:
No, it doesn’t.

Greg Hebner:
We’re not in the high-end space. We’re not doing downtown LA amenity buildings. We’re also not in the really low rent. We’re kind of working class. I think a lot of those folks have been able to cobble together their rent. I’ve been constantly surprised.

Greg Hebner:
I have a couple of guys with buildings where they haven’t missed a single rent. Like, “Come on, I don’t believe you.” He’s like, “Yeah. The tenants that we have, they’re doing things. They’re working like you and I are doing today and they never missed a beat.” A lot of things … If you and I had talked about what would happen if we shut down the economy, I don’t think I would have expected to see some of the things that I did.

Kevin Kim:
We all expected multi-family to suffer in May. In April, I was expecting a lot of the SFR rental market and multi-family market to suffer significantly. Come end of May, we started realizing, “Wait a minute. This is 100% impacting commercial real estate only.” SFR is not skipping a beat. Multi-family is not skipping a beat. Everyone seems to be able to make their rent payments. Some people were like, “Yeah, it’s the stimulus.” But that was like $1,200. It doesn’t make a difference.

Greg Hebner:
Not in a $3,000 a month rent.

Kevin Kim:
Exactly. We’re in LA. Rent here is expensive. I think a lot of people found a way to make it work.

Greg Hebner:
I think everyone else would think that … I’ve also started to see now, there has been some transactions and a lot more refis. Multi-family values haven’t fallen.

Kevin Kim:
Yes. That’s interesting.

Greg Hebner:
That’s the other thing. I thought you’d see a 10% or 15% decrease. But with interest rates so low, cap rates have continued to stay super low. For the most part, I’m seeing some appraisals more and more that are coming in. They’re at or above our pro forma values pre-COVID, and in some cases are above the expectations of our clients and their pro forma values, which again defies a lot of logic.

Greg Hebner:
You hear about that in the SFR market. Obviously, it’s red-hot across the country. All your clients are seeing that. But the multi-family has performed … It’s been a much more durable asset than I think …

Kevin Kim:
No, a lot of folks have been re-concentrating into multi-family. And I always ask … It left myself scratching my head, because it ultimately boils down into what you said. Cost of money is so low on the refi, and the agency loans are still there. Everything is still available. There’s no reason not to do it. And rents are being paid.

Kevin Kim:
If you’re investing in B-class apartments, cap rates are good, interest is good. Values are still solid. We’re seeing valuations not only stabilize … We were worried about a dip in valuations. We didn’t see any until we came out of the tail-end of May, and we only saw it in commercial.

Greg Hebner:
Right.

Kevin Kim:
That happened to funds as well. We were waiting for corrections to happen in funds. I watched certain larger funds to see how they were going to perform as an indication of our client bases. None of them announced any losses or deductions until we saw the ones in the hospitality space start to mark things down. I was like, “Oh, that’s a hotel REIT. That makes sense.” It started becoming kind of a question mark, “What is going on?”

Greg Hebner:
It’s funny. You certainly saw the mortgage REITs. The mortgage REITs got crushed. Between March 15th and April 1st, the one asset class you did not want to hold was a basket of mortgage REIT stocks, because they had the dislocation, which hurt our industry a lot. You know a lot of your clients who worked with some of the publicly traded REITs, there was some real liquidity concerns in that space. “Are they going to make it,” kind of questions.

Kevin Kim:
Oh, yeah. It became a question mark. What is causing the crisis upstream, when at our level we feel things are doing well? Personally, I put the fault at the foot of the repo lines. A lot of bad repo lines out there. But it could also be the way they’re invested, the way they’re levered, the amount of leverage they have.

Greg Hebner:
We’ve always been pretty … We’re trying to operate at a one to one ratio. We’re not trying to triple or double, do three, four times onwards. It doesn’t take much of a move and three or four turns of leverage to really put that equity into bad shape.

Kevin Kim:
If you’re 3X leverage, then you’re really going to … Any spike is going to hurt you. Let’s talk about building the business, because you guys have a pretty sizable staff now. How many employees now?

Greg Hebner:
31.

Kevin Kim:
31. You guys are lending in about 10 states right now? Is it five or ten states, give or take?

Greg Hebner:
We’ve got loans probably in about 10 states, but really operating … Probably, I would say three that you would see us.

Kevin Kim:
Three core markets.

Greg Hebner:
That are active.

Kevin Kim:
Big name in LA. Everyone knows Arixa in LA, and in Orange County as well. Even in the northwest, some of my local lender clients have mentioned you guys doing very well up there. Having the amount that you guys have under management in your balance sheet, tell me about the hiring process.

Kevin Kim:
Who are some of the key hires you guys have had over the years? Because initially, it must have just been a skeleton crew, right? Just a handful of people.

Greg Hebner:
For far too long, Kevin, let me tell you. For far too long.

Kevin Kim:
Tell me about that.

Greg Hebner:
Jan and I both had a similar history, that we both started … Or he started and I joined very early, high-tech companies in the late 90s. He sold his company to a public company that then got caught in the boom. I was pre-IPO, ready to go on a roadshow in April 2000. I canceled all those flights, as you can imagine.

Greg Hebner:
We both saw a massive change in what our paper net worth was to what it ended up being. We both were saddled with very large staffs and large overhead. In my case, big name venture capital firms that wanted … It was go big or go home. He and I both, as we got older, neither of us wanted to go through that. We probably, in retrospect, hired too slow.

Greg Hebner:
We under invested in the platform, because we wanted to make money every single month we were in the business, and we have. Never had an unprofitable month. As we started to staff, I think our M.O. was hire as many Swiss Army Knives as we can. People who can do a lot of different things. Some of our longest-standing employees now … You’ve met some of them. They might have started in an admin role or a processor role, and moved around to credit or origination even or other roles.

Greg Hebner:
They really learned the system and how we do things. We do things pretty differently as you know. We’ve hired senior people in operations. Obviously, finance staff and legal staff and those. But we were a pretty large company with a staff of 15. I think now we’ve got some new hires … A couple that we haven’t even announced yet, or it’s just very recent. I think now as we look at the business, I think COVID has taught us maybe where some of the gaps were.

Greg Hebner:
I don’t know if you guys have seen that in your business, but things have … You know, “I wish I had somebody who could do that.” Or maybe making some changes to the organization. That’s been more of the focus over the last few months. Obviously, everybody we hire on the originations side, it’s to keep … We’re not big marketers. I wish we had your marketing acumen. You guys do fantastic things.

Kevin Kim:
Thank you. It’s all the marketing team. None of my … I’m just a talking head.

Greg Hebner:
I’m not assuming that the [crosstalk 00:32:20] or marketing-

Kevin Kim:
We don’t know anything. Our marketing team is top notch though. They are fantastic.

Greg Hebner:
… We’re pretty quiet, as you know. We depend on our own origination staff to forge relationships, build ties, get referrals. It’s very much an organic growth. Each of those people on the origination team have been huge parts of our business. Our originators carry a very large book. Of those 30 people, we have very few people that actually do want origination.

Greg Hebner:
It’s probably a shocking low number to your listeners, relative to a lot of the companies that are our size. We expect a lot out of each person, so each of them have been really critical hires. We have some really strong people in credit. Great closing team.

Greg Hebner:
More and more, what we’ve started to do … We’ve actually been hiring some people who have left … Not coaching by any means, but have left some of the better lenders in town for whatever reason. I think that institutional knowledge and some of the shops that we have a lot of respect for have been great additions to our team.

Kevin Kim:
Nice.

Greg Hebner:
We’re all doing the same thing, we’re just doing it a little bit of a different way. We’ve had some closures and some credit people. Some folks, I think, have brought some great insight and perspective to our platform. I don’t envision us going from 30 to 200 like some of these shops have.

Greg Hebner:
That’s just not what we’re trying to do. But we’ll continue to grow and continue to add staff. We certainly have a lot of growth in front of us. I think we’ll always be just a little bit of the slow character.

Kevin Kim:
Lean and mean. You guys came from the world where it’s overstaffed, and we were overstaffed and we felt it too. What can we do? How can we do more with less as COVID came around?

Greg Hebner:
The technology has really lent itself to that. I was running a large servicing business before, during the financial crisis. I watched people who had been at companies for 20 and 30 years of a large business, begging me for a job as a call center rep. That was the only job they could get in the industry in 2008 and 2009.

Greg Hebner:
Our industry has a horrible reputation for staffing incorrectly. We either hire too fast or hire too slow, but it’s a really difficult balance. I think we want to build it organically. I think you know this. We don’t have an institutional owner or a private equity owner. We’re one of the larger independent platforms, so it’s really up to us in terms of the growth we want and the culture we want.

Kevin Kim:
Right. From a platform standpoint, I always talk about you guys as an example, because you guys have taken it very … You have built the company organically, but you don’t have someone … You and Jan can do both sides of the business. But you’re concentrating, “Highest and Best Use,” almost. Right?

Kevin Kim:
You have the deal flow in originations, and you’re managing the operations. There’s a lot of necessity for that. We see a lot of operators think about, “How do I grow my business?” Also, “How do I build my team so we can concentrate and grow?” I still have a lot of clients that, either they’re too small or they have too many staff.

Kevin Kim:
But they don’t have people that are at the executive level helping them actually move the ship forward. Talk about that. I know, you and Jan, you’ve been with him as a partner. Were there any other senior-level hires that really helped move the ship forward or move the ball forward over the years?

Greg Hebner:
For sure. We hired Doug, who came from Patch of Land. He’s been a key part of our initial team. We hired our head of capital markets, investor relations. He came from PennyMac, Dan. We brought on a good general council. Strong accounting and finance team. We have a lot of people.

Greg Hebner:
You’ve met Christina. Christina’s been with us for eight years. She’s very talented and been in a lot of different roles. I think the one thing we’ve done well … We’ve hired some really good people, who maybe didn’t have the skills or experience at the time, but had a great attitude and a willingness to learn.

Kevin Kim:
That’s what I wanted to ask you about as well. How do you select these people? What are you looking for in these people?

Greg Hebner:
That’s a good question. I will tell you, when we first started, it was like you’re trying to find somebody who is willing to take a leap and jump onto your island with you.

Kevin Kim:
That’s true.

Greg Hebner:
Because you didn’t have a whole lot. I can’t pay you very much. I don’t have much I can guarantee you. But I think you’re looking for people that are smart and curious, willing to ask questions. The other thing that we really look for in hiring is you’ve got to have a service mentality. We bang this across their heads all the time.

Greg Hebner:
Getting a great client … If you’re going to be a balance sheet lender, getting a great client and keeping a great client is probably saving your business. It’s hard to get great clients. You’re going to do everything you can to keep them.

Kevin Kim:
Yep.

Greg Hebner:
Because if you keep great clients … Look, I’ve been a huge advocate of you guys. If people ask me, I’ve referred you business, as you know. That is worth your weight in gold, and that’s how we’ve built our business. And if you have a really terrible experience, it can go the other way 10X. We really focus on finding, just like we find the right employees, we’re very particular about the clients we work with.

Greg Hebner:
I get great loans all the time, it’s just not our loan. It’s not our borrower. As much as with the employees, we’re trying to find the kind of borrowers who appreciate what we do and how we do it, and will be long-term borrowers. I got to talk to a guy before this call. He’s been borrowing with me for seven years.

Kevin Kim:
Wow.

Greg Hebner:
He texted me and says, “Greg, I’ve got a quick question. Can you give me a call?” I haven’t talked to him probably in a year. But it’s like, you’ve been working with him for seven years. He knows what we do, I know what he does. Five minute question, but he feels like he got some love. And I haven’t talked to him in forever. With that, you can build a great service business. I’m sure you guys are the same way.

Kevin Kim:
Yeah. A lot of firms in lending, balance sheet lending businesses at least, are very similar. It’s a service business. Local business oriented. If you keep your clients happy, they will come back.

Greg Hebner:
Very great business. I think you know this. We do our own draws and we do our own service thing. We’re one of the only guys who do that. There’s a couple of other … Steve, who you talked to before, he does as well. I don’t want anybody else interacting with my client ever.

Kevin Kim:
Right. Controlling the interaction.

Greg Hebner:
I want to control every interaction. If that interaction is not up to your expectations, I want you to tell me about it. If you didn’t get the service, the response, the answers … Jan and I will take a call or one of our other senior people will take a call. We expect that service interaction.

Greg Hebner:
Between a lender and a borrower, it’s not always a kumbaya. You might have to deal with issues, but I want you to deal with it in a way that still maintains the professionalism of a high-quality institution. We really tried to raise the bar in how those interactions happen.

Kevin Kim:
Would you say that’s a core value of the company, when it comes to being service-oriented?

Greg Hebner:
Yeah. The exceptional service. The white glove service. We have an award we award to our employees for who provided exceptional service voted on by the employees.

Kevin Kim:
Cool.

Greg Hebner:
It’s really something that we celebrate and talk about.

Kevin Kim:
That’s great.

Greg Hebner:
When we have something that goes the other way, we talk about that too. That’s a learning experience.

Kevin Kim:
Right.

Greg Hebner:
That’s a really important part of what we do. If I lose a client that I really want, I take it personally.

Kevin Kim:
It stings because you worked so hard to build that, not only culture, but that relationship. And it can go sideways with just one bad interaction.

Greg Hebner:
It isn’t you or me, it could be somebody in your staff. It could be your administrative assistant. It could be … It’s got to go from top to bottom, I think, if you’re trying to build that kind of culture.

Kevin Kim:
A hundred percent. A hundred percent. Right now, with 30 employees, you guys are not only stabilized, but you guys are growing. LA markets and northwestern markets have stabilized. Things are looking up. Let’s talk about where we’re going. Where is Arixa going? What’s the plan for 2021? What are you guys excited about?

Greg Hebner:
We are going to announce … We’re going to have an institutional, separately managed account in 2021. A pretty high-profile investor. I think that will be more in the commercial space, but that’s an exciting development for us. I think it’s a long-time goal of Jan’s to really bring … Most of our investor base, probably close to a thousand investors, are mostly retail.

Greg Hebner:
Some family offices and REAs, but not traditional institutional properties. We’re excited about that. I think there will be some new markets that we’re going to go in and try to replicate the strategy that we have, which we’re excited about as well. But I can say, probably for the first time in four or five years, it finally feels that we have our capital sufficient and right-sized for our origination.

Greg Hebner:
I spent many years chasing my tail, or we’ve been chasing our tail, where you have more origination demand and interest than you have the ability to capitalize on it. It’s a frustrating place to be. It’s a good place. You’d rather have …

Kevin Kim:
Capital constraints are always … That’s the reality for balance sheet lenders. It’s always more deals than money.

Greg Hebner:
Well, I don’t think that’s the way for everybody, but it certainly was for us.

Kevin Kim:
The trend tends to be the ones that are service-oriented.

Greg Hebner:
Going into-

Kevin Kim:
Balance sheet money, not Wall Street money.

Greg Hebner:
… Right. Not Wall Street money. There’s always plenty of that.

Kevin Kim:
Plenty of that.

Greg Hebner:
Going into 2021, I think I’m excited about some of the new staff and really feeling like the business is well-capitalized to really take care of the clients the way I like to take care of them. We need a lot of new clients. I wish I had the answers. My LOs say it’s all them, maybe it is. But we’ve been able to acquire some new customer relationships over the last three to six months.

Greg Hebner:
I’ll be honest. I think before COVID … I don’t think there’s any way I would have been able to win this business. I can’t put my finger on it. I think it’s different across different organizations, but I think our industry struggled. We’re not a giant industry with tens of thousands of staff that you can … I think we stumbled a little bit between March and June. I think some companies failed to keep their engines running the way they were, had some missteps, and maybe soured a few relationships.

Kevin Kim:
I think so too. I definitely think a lot of key players, their exit or their failures created some kind of vacuum.

Greg Hebner:
It feels like that. I’ve heard some horror stories of things. I’m not going to put anybody out here, but of companies I hold in high esteem who really let some clients down. Long-term clients. Just not meeting commitments and not responding the way you and I would expect them to respond.

Greg Hebner:
There can be a thousand reasons for that, but I’m excited about some of these new clients, Kevin. Clients who do 10, 15, 20 transactions a year. Really experts in the markets for the products that they are. You can build a hell of a business with those kind of clients.

Kevin Kim:
Exactly.

Greg Hebner:
I like to say 50 clients doing 20 million a year with me a billion dollars of business.

Kevin Kim:
Exactly.

Greg Hebner:
It doesn’t take 5,000.

Kevin Kim:
That’s a credit to the stability that you guys had during the crisis. What I was finding is there were some people that were … The reactions felt like, some of the reactions, as if ’08 was happening again. I’m like, “This isn’t ’08, guys. This doesn’t feel like ’08.”

Kevin Kim:
I kept saying it. “This doesn’t feel like ’08. This feels a little bit weird, this feels a little bit strange. This is a crisis, but I don’t think it’s ’08.” But some people just …

Greg Hebner:
I’m glad you were right. I don’t want to go through that again, Kevin. I don’t want to go through that again.

Kevin Kim:
I was being optimistic, and people were calling it. “You’re being optimistic.” I’m like, “I don’t know guys. This is all kind of artificial almost.” This is the government forcing us to stop. It’s not like the values just tanked all of a sudden. It’s not like all of a sudden …

Greg Hebner:
It’s not like all of a sudden there’s 100,000 homes … I don’t know if you remember in ’08. You put a home for sale and it was like crickets. You couldn’t give it away.

Kevin Kim:
The inventory comparisons were …

Greg Hebner:
No inventory now.

Kevin Kim:
Exactly.

Greg Hebner:
No inventory.

Kevin Kim:
That was the one thing I was telling people. There’s still so little inventory out there. A simple thing, go onto Zillow and watch the house values increase.

Greg Hebner:
They have.

Kevin Kim:
They have. My house went up 20% during COVID. I was like, “What the hell?”

Greg Hebner:
It’s like Tesla stock over there.

Kevin Kim:
It’s like Tesla stock. No joke. It’s one of those things like where we were talking about it, this is different. This is very, very different. I think that the funds and … It’s interesting, because I’m in the fund formation business. All of the clients that we’re managing, about 20 to 100, everyone did okay. No one really suffered that much. I haven’t seen a single one except for the hospitality funds.

Greg Hebner:
Of course. I understand.

Kevin Kim:
But if you’re in the mortgage fund business and you’re a balance sheet lender, and you stayed disciplined and customer-service oriented … All of clients seemed to be doing well, if not excelling. We had one client in Arizona, it allowed him to grab so much market share in his local community that he basically was able to, similar to yourself, attract a big investor.

Kevin Kim:
It’s amazing what people are doing. I don’t know if it’s optimism. Do you think it’s optimism? I don’t know what it is. Is it stability? What is it?

Greg Hebner:
Well, look, I think the one thing if I’m trying to glean lessons … Hopefully, we never have crisis management involving a pandemic in your and I’s professional careers again.

Kevin Kim:
Seriously.

Greg Hebner:
But the one thing is, I know you did this too … You listened to your clients, you had empathy for your clients, you could tell that you cared. You don’t feed them BS. A good client will call me and say, “Greg, I need to do this loan.” I’m like, “Look, Kevin I can’t help you right now. Here’s why I can’t help you. As soon as I can help you, I’ll let you know.”

Greg Hebner:
Just trying to be direct. We were hearing stories of people calling their guy at XYZ company and nobody answered the phone for a month. They never got a call back.

Kevin Kim:
We heard some stories of lenders being overly aggressive, worrying that they weren’t going to be able to foreclose. I was like, “That’s not what you want to do here. You’re going to burn that bridge forever.”

Greg Hebner:
We saw clients who needed capital. We saw a bunch of these. “April 30th, your loan has matured. You need to pay it off.” “Well, I can’t.” “Okay. Here’s the NRD, I’m going to foreclose on you.” Almost like they were tying their capital rates to their payoffs. Boy, that doesn’t sit well, Kevin. That’s a customer lost for life.

Kevin Kim:
Customer service. Customer service.

Greg Hebner:
It’s a customer lost for life.

Kevin Kim:
Exactly. You basically did him dirty and he’s never going too … Why would he? Especially, in this market. Especially, if you’re in the Southern California market. So much competition.

Greg Hebner:
I don’t think I’m the smartest guy in the room, but I was just trying to treat people with a little bit of [crosstalk 00:49:09].

Kevin Kim:
It goes to the integrity thing. We always talk about integrity. Just be there for people and be honest.

Greg Hebner:
Care about their wellbeing.

Kevin Kim:
Exactly.

Greg Hebner:
I didn’t start with, “Hey, Kevin, how is your fix and flip project?” How’s your family? Is everybody safe? Is everybody healthy? How are you doing? I just think it’s the right way to treat your clients who are the life and blood of your business.

Kevin Kim:
Right. Well, speaking of family, I do want to bring this up. You have a three year old, right? He’s a three year old. Our kids are the same age. You have a three year old, right?

Greg Hebner:
My son was born in June 12th of 2017, so three and a half years old.

Kevin Kim:
Three and a half years old. My daughter was born in November of ’17. I remember we were talking, we were having drinks in Las Vegas, talking about having kids and the craziness of that. How has that been for you during all this nonsense? Are schools open? Is he in school?

Greg Hebner:
No, he’s not. I have an office that’s about a mile from my house, so I get a little a bit of sanity. I’ve probably been in the office and out more than you have.

Kevin Kim:
Neiman’s doing that. He goes to the office every day.

Greg Hebner:
I go to my office so I can work, but I’m also out almost every single day with clients. I just have bad …

Kevin Kim:
Nice.

Greg Hebner:
My joke yesterday, I was having an illegal, private gathering with people outside of my household. Don’t ticket me for doing that.

Kevin Kim:
All of a sudden you get a ticket from Gavin Newsom. Right?

Greg Hebner:
Yeah, I’m illegally with two clients on their project site. Being a dad … I’m a lot older than you are, but being a dad is a giant change in my life. He’s amazing. He’s at the age, I’m sure your daughter is too, he’s in his, “What is this,” stage.

Kevin Kim:
Oh, yeah.

Greg Hebner:
“Daddy, what is this? Daddy, what is this? Daddy, what is this? Daddy, what is this?” Just learning. He’s learning like a sponge. It’s been a lot of fun. He’s a little boy and I just want him to be able to interact with kids again. I’m sure you’re the same way with your daughter. I wish you had more of that to do right now, so that’s the big challenge.

Kevin Kim:
You can’t go out to do anything. They opened the playground near me, and I was like, “Thank you, God.” Because what am I going to do in the house? I had to buy a swing set to put in my house.

Greg Hebner:
I have a trampoline in mine.

Kevin Kim:
What else? What can you do?

Greg Hebner:
My son will not wear his mask. He will not.

Kevin Kim:
It took me about three months to get her to wear a mask.

Greg Hebner:
He will not do it. I actually took him over for the Apple conference a couple of weeks ago. He’s a big boy. I’m like, I’m going to run into the casino, because he won’t put a mask on. They’re going to kick my son out of the casino. I don’t. “Get out of here.”

Kevin Kim:
Do they care at all? I mean, they don’t care what kids do. It’s not a big deal with kids. Do they?

Greg Hebner:
I don’t know. A lot of these places are, “No mask, no entry.”

Kevin Kim:
That’s true.

Greg Hebner:
He’s a big boy.

Kevin Kim:
Yeah, I remember.

Greg Hebner:
He’s a lot bigger than even you saw. That’s the challenging part. But being a dad, it’s been …

Kevin Kim:
Well, they’re not really going to do what you want. I took my kid, but … It only worked because there were all these other girls at this one place we were going to, and they were all wearing masks.

Greg Hebner:
So it was cool for her.

Kevin Kim:
It was cool, so she said, “Okay. I’ll wear a mask now.” Now, she asks for her mask.

Greg Hebner:
Maybe we’ll get there.

Kevin Kim:
You’ll get there.

Greg Hebner:
The good thing is you get to see them a lot more than you ever would.

Kevin Kim:
That’s true.

Greg Hebner:
But it’s still challenging to …

Kevin Kim:
Patience. The patience is hard.

Greg Hebner:
Well, they think you’re at home more to play, right? No, dad’s home. Let’s work, because he has work to do.

Kevin Kim:
I’ve had many times … I’m in my home office for those who do not … This is fake. Many phone calls, and she just comes running right in. Thankfully, we started school. Schools here are open, so it’s been better.

Greg Hebner:
Okay. Well, good.

Kevin Kim:
Without school, my wife would have lost her mind.

Greg Hebner:
I do these weekly production meetings. Every once in a while, I’ve got 20 people on my Zoom call. He jumps up, climbs up on my lap, waves at everybody on the call.

Kevin Kim:
Nice.

Greg Hebner:
They all know him now.

Kevin Kim:
Nice. There you go. Very cool. I want to talk about … We’ve talked about some of the issues that came up during the pandemic and some of the legal changes. You mentioned some of the foreclosure regulations. One thing that I want to bring up, because it’s something that I think you probably have some insight on, is some of the local regulations in California that have come up in the last election. These ballot measures.

Kevin Kim:
One of them is a tax-related one. They’re adding a tax to essentially … They’re adding taxes to properties that shouldn’t … Basically, they’re raising taxes on real estate. On commercial real estate and all types. I think it’s Prop 19. I really want to get your take on it, because you guys have so many relationships in the LA area and in California.

Kevin Kim:
A lot of these folks are working with legacy real estate. How do you think that’s going to play out? Give us your thoughts on it.

Greg Hebner:
We actually just put this in a recent investment commentary for our investors too. I think what you’re referring to specifically … There were three ballot propositions this year, 15, 19, and 21. 15 and 21 did not pass. For those listeners who aren’t California residents, we have a 1978 law in the books called Proposition 13, which limits property taxes to a 1975 and ’76 assessed value with an inflation index. But it caps and increases your property taxes.

Greg Hebner:
Unlike a lot of states around the country … Let’s say you and I our neighbors. I’ve lived there for 20 years, and I bought the house for $100,000. You came in and you bought the same house for a million dollars. Your taxes would be ten times my taxes, even though we live in a house of similar value. What it does is keeps people in their homes for a very long time in a lot of ways.

Greg Hebner:
Prop 19, which did pass, it was the only proposition that passed … Basically, allows portability for people 55 and over to move out of that house and keep the property tax rate that they had on their existing residence. This was very heavily pushed by the California Association of Realtors. Because there’s a lot of people who would like to leave their homes and maybe go to a new home or even downsize, but feel trapped by the property taxes and the amount of taxes that would go up in their monthly expenses if they moved.

Greg Hebner:
That passed. But what also passed in that same proposition is … Let’s say you and I decide to give our properties someday to our children. They would have gotten, until this proposition passed, they would have held our basis. You have a 10 million dollar house and you bought it for a million dollars, you could have passed it on to your heirs. Just giving people a sense … I think the numbers I’ve read in the last 10 years, there have been 650 properties in the state of California that have been inherited, or passed, transferred, and the lower basis stayed.

Greg Hebner:
All of a sudden, these people are now in 2021 going to have their property taxes assessed not based on what was given to them, but based on their current value. We believe this could be a giant tailwind for our fix and flip investors, and new inventory of older homes finally coming on the market, which is exactly what we want.

Kevin Kim:
That’s always been a problem in California. Aging inventory becoming part of the inventory out there for builders.

Greg Hebner:
It’s been a huge issue. It’s why so many of our cities, for those who don’t live out here … You have like beautiful home, beautiful home, beautiful home, home that looks like it was built in 1955 and never changed.

Kevin Kim:
My parent’s neighborhood is like that. Literally, three houses down, it’s a shack. It’s like, “What?”

Greg Hebner:
Again, what you’re saying, there’s a lot of funny stories. I think they called it the Big Lebowski, because Jeff Bridges had a house in Malibu that he inherited and the funny story about that one. You could have a property that you’re collecting huge rent on that you had no property taxes on.

Greg Hebner:
The question is, do you now, as an inherited home owner … Second home, third home, whatever it may be. Does that make sense for you to keep it? Or does that shack suddenly go to the market? One of our clients buys it, turns it into the other beautiful house like the other three, and creates additional inventory and new inventory.

Kevin Kim:
This only applies to residential? Or this applies to everything else?

Greg Hebner:
Just that so far. We’ll see how it plays itself out. I just think, if you really go through the math of what this looks like … We think there could be a really interesting push of inventory when that math starts to come to these property owners who have inherited appreciated property. We hope it would.

Greg Hebner:
That’s the beauty about our cities here. San Diego, San Francisco, Orange County. It’s just old stock. Not everywhere in Orange County, you guys have some newer cities down there.

Kevin Kim:
But still, we’ve got a lot of aging inventory out here, even in the new cities. It’s old neighborhoods, and they have to figure out what to do with them.

Greg Hebner:
And that’s what our clients do. I think Prop 19 will give a lot more information about it. I don’t think people look at Prop 19 like maybe you and I would look at it. I’m thinking about it not for 55 year old and older being able to be portable. I’m thinking about inventory. Creating opportunities and all that.

Kevin Kim:
Critics of the bill were basically talking about it as a wealth tax or an inheritance tax. Something like that. But it incentivizes releasing the real estate to the marketplace. That’s one thing that’s good.

Greg Hebner:
It is one good thing. Look, it is an inheritance tax. There’s no question. But I do think, for what we have … And in California, it’s been very well documented. We have a giant inventory, giant supply shortage. We need more homes. Young families like your family, they need homes. Our clients need to be there to help provide that inventory. I really do hope it unleashes … We can absorb hundreds and thousands of properties in the next three to five years if they wanted to put them out. Without even missing a beat.

Kevin Kim:
And then, that’s been the challenge. They’re building new communities, but they’re too expensive. Or they’re building …

Greg Hebner:
Or not even where you want to be at. I don’t know about you, but there’s something about living in a neighborhood with a sidewalk and people that have lived there. As opposed to going 25 miles away into a green field subdivision.

Kevin Kim:
They’re doing that here where I live in Brea. They’re building in the old oil fields, literally in the mountains. You’re surrounded by those grasshopper things. It’s just like … It’s not really Brea. You’re not really in a community. We live right outside of downtown Brea, and I couldn’t imagine living up in the hills like that. And it’s a brand new division too.

Greg Hebner:
Because you want to be in a neighborhood. You want the charm. So I’m excited to see what will happen. This is all through California. This is Sacramento to San Diego. It’s statewide.

Kevin Kim:
It’s a big problem in the Bay too. You have a lot of aging inventory in the Alameda County area. A lot of old properties in Sacramento.

Greg Hebner:
San Diego. Vista and Escondido.

Kevin Kim:
San Diego too. Yep. Well, that’s great. Actually, one of the insights that I wanted to get on that, because I viewed it from a tax standpoint. I’m always like, “Wait. How does this impact my clients from a tax standpoint?” But you made a good point. It releases more inventory into the marketplace. It incentivizes the sale of real estate.

Greg Hebner:
Which also helps the property values for all the people around there.

Kevin Kim:
Mm-hmm (affirmative). Talking about … You said the impact on long-term. Let’s talk about where the industry … I want to get out a crystal ball as we close this great interview.

Kevin Kim:
You’ve been in the industry long enough to know real estate is cyclical. The pandemic did not necessarily negatively impact values that much. Where is our industry going? Where are we going next year? What do you see?

Greg Hebner:
I think the one thing you and I have both seen in the last three or four years is there’s consolidation happening in our big shops. Finance of America, Blackstone got a publicly traded SPAC. You’ve now got a publicly traded company that does what we do. CoreVest, great company. 5 Arch, great company. Both acquired by a publicly traded REIT, Redwood.

Greg Hebner:
You and I both know folks that trying to roll up platforms and purchase companies. Obviously, Genesis was purchased by Goldman Sachs. Anchor is owned by Wafra. You’ve got very, very large institutional players, and some of these platforms are backed by very large institutional players. None of them strike me as being low on ambition, so I think you’re going to see a pretty steady dose of consolidation.

Kevin Kim:
Well, that’s what we were hoping for. That’s what we were expecting this year. Not hoping for, but expecting this year.

Greg Hebner:
Nobody did anything this year, really. But you saw Broadmark have a public REIT that’s been quite successful, I think, on all accounts. Obviously, they got hurt in March, but they’ve rebounded nicely. I think consolidation and scale … Again, as the capital markets get more and more sophisticated, more and more commoditization of what the programs and products look like. I think if you and I had looked at what people were offering in February, if we said, “Send me your terms sheet,” they all would have looked the same.

Kevin Kim:
Yep.

Greg Hebner:
Everybody was providing the exact same product and pricing and leverage. And so, it feels like we’re moving down a path of scale, commoditization, institutionalization, if that’s even a word, of this being a really important part of the alternative investment universe. You’re seeing Apollo, Athene, giant players who have massive fixed income portfolios. KKR, who is buying Toorak.

Greg Hebner:
These are some of the most sophisticated investors in the globe, and they’ve honed in on our strategy. They like it, they’re making investments. They’re building platforms, investing in platforms. That momentum … It seems to me like we’re almost at where the SFR rental space was maybe five years ago, six years ago. When you first started to hear about Invitation Homes and American Homes 4 Rent.

Greg Hebner:
Now, these are massive companies. Very large value creation. It feels like our industry is getting some of that pixie dust sprinkled on us, if I was to maybe draw the comparison.

Kevin Kim:
I just hope that we don’t end up in what I call the standardization that you saw in the conventional market. The domination of agency and everything being designed to revolve around that. I like the fact that our industry is kind of fractured still. Well, actually I think it’s still pretty fractured.

Kevin Kim:
I like it because it creates a lot of different avenues for entrepreneurials. You have a lot of different strategies that come out. Once you get commoditization, you get standardization. And a lot of lenders don’t deal the same types of loans. I like that.

Greg Hebner:
I’ll be the last man standing. I’ll be the survivor kicking and screaming, because my entire value proposition … Anybody who has ever dealt with me knows, I don’t have a terms sheet. Or I’m sorry. I don’t have a pricing sheet or pricing terms. I have a conversation.

Kevin Kim:
Right.

Greg Hebner:
My job is to find something on my balance sheet that works and is a solution for what you need. Hopefully, I can continue to do that as long as I’m in the business.

Kevin Kim:
Because if we start operating off of fixed matrices, we’re no different than the conventional market.

Greg Hebner:
But you and I both know, most shops who have heavy capital market and loan sale businesses, they do. We know them. You and I both know. The securities are coming out. There’s a lot of securitization being dealt with.

Kevin Kim:
Oh, yeah. That’s a different task.

Greg Hebner:
Those are very defined. I looked at a tape the other day, and it’s a remittance tape. It reminded me of 2007. I’ve got FICO bands and I’ve got this band and that band. It was 2007. I don’t want to call it … It was like a sub-prime securitization table.

Kevin Kim:
No, it is. It’s exactly the same. But it’s our industry’s product. Fix and flip.

Greg Hebner:
I don’t want to be that guy. The fun of this industry for me, and anybody who knows me, I love the structure. I love the deal. The art of the deal. Let’s talk about your project. That’s what is fun for me.

Kevin Kim:
And that’s what I worry about, is that we lose that appeal. A lot of balance lenders in the field feel the same way. You get commoditization, you start losing that ability to be nimble and flexible. “Hey, if this guy’s a repeat borrower, maybe we can do some extra things for him.” Or whatever.

Greg Hebner:
Whatever it takes. Hopefully, that doesn’t happen until I’m retired and out of the industry and have my feet up on a beach somewhere. But I think it’s coming. I think most people are going to end up going to where the money is the cheapest.

Kevin Kim:
That’s true.

Greg Hebner:
The capital markets of Wall Street, they tend to productize stuff. They’re very good at it.

Kevin Kim:
That’s very true. Well, Greg, I think that’s all the time we have today. Thank you so much for your insight. This was a lot of fun.

Greg Hebner:
All right, Kevin. I always enjoy talk to you.

Kevin Kim:
I know, right? When are we going to hang out next? Is it going to be Vegas? Is it going to be Newport?

Greg Hebner:
I can take you to coffee, because Pasadena is open. Other than that, I can’t take you into LA county.

Kevin Kim:
Orange County is open.

Greg Hebner:
I think in Orange County, I can buy you a beer in Laguna. Right?

Kevin Kim:
Yeah. Honestly, a lot of the places here are saying, “Until the police come, we’re going to stay open.”

Greg Hebner:
Not quite that way in LA. I have to tell you. I hope to see you soon, Kevin.

Kevin Kim:
I hope to see you soon.

Greg Hebner:
I always enjoy talking to you.

Kevin Kim:
We’ll be doing a live event soon, so we definitely will see you there.

Greg Hebner:
All right.

Kevin Kim:
I’ll talk to you soon, Greg. You take care.

Greg Hebner:
Be well. Take care.

Kevin Kim:
All right. Bye.