From Soup to Nuts, Industry Passion from the Ground Up | Jason Gilbert at Armanino LLP

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A partner at Armanino who leads the Real Estate Investment Fund practice, Jason Gilbert and Kevin go way back. Listen in to learn more about Jason’s story coming up at Armanino, serving the private lending industry, and becoming partner.

Jason co-leads the Real Estate Investment Fund practice at Armanino. During his career, he has specialized in the real estate investing sector, focused on private equity debt funds and mortgage real estate investment trusts (REITs). His day-to-day energy is spent advising clients on fund accounting, best practices in the industry, the structuring of offering documents, financial close, back office operations and fund management software.

Jason has been a regular speaker at the IMN Real Estate Opportunity and Private Fund conference, the California Mortgage Association and the American Association of Private Lenders. He earned his BS in business administration and his MBA from California State University, East Bay.

Episode Transcript

Kevin Kim:
Welcome, everyone, to another episode of Lender Lounge with Kevin Kim. Today, I have a colleague and someone I’ve very proud to call my friend, Jason Gilbert, from Armanino. Jason and I have come up together sort of in this industry. We both were, what was it, associates, I guess? I was an associate. I don’t know what they call it over in CPA world, but in the space.
Jason Gilbert:
I’ll roll with associate. I’m good with that title.
Kevin Kim:
And I think you’ve been in it a little bit longer than I have, but when I came to the industry you were my counterpart. And we’ve been working in this space now… How long have you been in this space now, working in this space?
Jason Gilbert:
So I think when I landed at Armanino it was like 14 years ago. I’ve been active, or playing some sort of role, in the space for the past 14 years. Now it’s changed over the past 14 years but my first project when I landed at Armanino, and Armanino was already involved with the mortgage pools and auditing tax, some light administration or oversight work, that was one of my first projects at Armanino and it hooked me at that point.
Kevin Kim:
Very cool. Very cool. Because I remember when I joined Geraci I went to my first event, it was the first PPM and we needed to audit financial laws and it was like, I couldn’t reach Josh and then they directed me to you and then here we are. That was for me, eight years ago. So you’ve been in this industry a little bit longer than I have. Normally we talk about kind of story of the business but I kind of want our audience … A lot of our audience are your clients, a lot of us already know Armanino. I kind of want to talk about you, my friend, because I want to get to know more about how you came up in the industry and where you cut your teeth before this and all that stuff. I mean, did you just jump in right out of college? There’s no CPA school, right?
Jason Gilbert:
Well no. In order to become a CPA you’ve got to have a certain amount of accounting credits.
Kevin Kim:
Right, right, right, right.
Jason Gilbert:
To meet the prerequisite to even sit for the exam, so I’m actually a finance major. To be honest, and I’ve told everybody that I work with now, I didn’t want to be an accountant. Those classes in school, I would sit in the back of the class and be bored out of my mind.
Kevin Kim:
Right.
Jason Gilbert:
All historical, debits and credits, nothing forward looking, everything dealing with the past and snooze fest. And I don’t know if that’s part of me. No knock on the professors but the content’s pretty dry. What are you going to do with it? It’s just hard. I loved the finance classes. Calculating future cash flows, net present, that was cool. I was all about the yields and the calculations. When I went to graduate and I was looking at what I aspired to be was a CFO or director of finance or one of those roles. Looking at the job description they all said they wanted you to be X amount of accounting experience or CPA was preferred. On all of them.
Kevin Kim:
Right.
Jason Gilbert:
So begrudgingly I headed down the pathway of getting my accounting classes taken care of. Getting to the point where I could sit for the CPA and get my CPA so I could some point get to a CFO position. I was going to school at night to get my additional units. At that point I needed enough units that I might as well just bolt on two extra quarters’ worth of work to get my MBA. So I just went ahead and trudged forward to get my MBA with the accounting units and the finance units.
Kevin Kim:
There’s a Master of Tax, something like that? Tax Master’s?
Jason Gilbert:
Not even tax. I didn’t do anything with tax. It was just an MBA with a focus on accounting.
Kevin Kim:
Okay. That’s enough.
Jason Gilbert:
It’s all I needed. I was working full time at a car dealership, found a job. I needed experience. I needed somebody that was going to be willing to give me accounting experience or back office debits and credits experience. I landed that job as a part time employee, morphed into a full time job, and I was going to school at night which was crazy. I couldn’t imagine doing that now. I realized that the ceiling was right above my head. My hair was already hitting the ceiling at at job. I wasn’t going to go anywhere. There was no up side.
Kevin Kim:
Right.
Jason Gilbert:
I started to apply every place that I could get to. Job boards, to the point that I had an Excel spreadsheet to make sure I didn’t apply to the same place twice because I couldn’t remember. I was sending my resume and applying every day.
Kevin Kim:
When was this? What year was this? Because you and I are the same age.
Jason Gilbert:
It’s 2006.
Kevin Kim:
Yeah.
Jason Gilbert:
I was applying everywhere. Didn’t have my Master’s yet, but I was in process and just needed another opportunity to get somewhere where the ceiling was much higher. I was capped. Somehow, Armanino had a job posted in Career Builder or something. Landed, the HR department called me back and said, “Hey, do you want to come in? Come in for an interview?” And I’m like, “Yeah, sure.” I was running so hard at that point between working full time and going to school, didn’t do my research on the firm, what I was coming in to interview for, just came in blind. They gave me a bookkeeping test, which, I guess I did well enough on to get to the second interview process. Came in and interviewed with two partners and a manager all at the same time, which, if I had done my research and figured out who they were before I came in I probably would have been a little more nervous. Because I didn’t, I wasn’t nervous at all. It probably worked to my favor, actually.
Jason Gilbert:
I came in, did the interview, and somehow got hired. By luck. So fortunate enough to be part of that team at that point. Armanino was, I think …
Kevin Kim:
Where you on the tax side? Was it automatically on the tax side?
Jason Gilbert:
I was on the accounting side. I was on the consulting side. I was doing bookkeeping and software training. Teaching small businesses how to use QuickBooks or whatever program they were, I was teaching them how to use it and do bank recs and all that other stuff, and then doing bookkeeping for some clients.
Jason Gilbert:
It was when I landed there that my first project was doing accounting for mortgage pools. We were taking the mortgage pool statements that would come from TMO and putting them into Quick Books to make financial statements because there was no PNL side to the statements that were coming out of TMO. That was the first project I had, and that’s what hooked me on the funds. Because it was finance. It brought me right back to finance and looking at yields and return to the investors. I just loved the model.
Kevin Kim:
And that was 2007, 2006?
Jason Gilbert:
That was the end of 2006.
Kevin Kim:
Oh nice. Wow. So you were here, you had gotten your feet wet pre Dodd Frank. When did you join audit, then? Just so everyone knows, now you’re a partner on the audit team focusing on private lending industry, mortgage funds, pools, and the like. That’s why we’re friends.
Jason Gilbert:
Yep.
Kevin Kim:
But if you’re doing bookkeeping and accounting that’s a totally different practice.
Jason Gilbert:
I happened to be, because at that point the lead partner for our mortgage pool practice was Josh Nevarez, I was …
Kevin Kim:
Shout out to Josh, what’s up homie?
Jason Gilbert:
Josh, right? Shout out to Josh. He took me under his wing. He was energetic, he had recently become a partner of Armanino, high paced, fast moving.
Kevin Kim:
Right.
Jason Gilbert:
I loved the energy. So I partnered up with him and I was working directly with him from the accounting standpoint doing pool schedules or monthly accounting and advisory and distribution calcs and supporting that side of the business. He was the one that convinced me, because he had come up the audit ranks and was an audit partner. He was like, “Man, you should switch to audit.” So he coerced me into switching from where I was over to the audit side. So after two years of being Armanino I moved over to audit.
Kevin Kim:
So you started on audit in 2009. Okay, very cool.
Jason Gilbert:
At the end of 2008. So right about when …
Kevin Kim:
That’s when all those things were trending, right?
Jason Gilbert:
Everything went crazy, right? You were seeing glimpses of it in the late 2007, early 2008, and then right when I transferred to audit and started auditing the funds was when everything …
Kevin Kim:
Blew up.
Jason Gilbert:
The record stop and everything quit and everything blew up and I was in the middle of trying to audit funds and help set valuation. …reserve needs and everything else.
Kevin Kim:
Oh God.
Jason Gilbert:
I walked right into that.
Kevin Kim:
Do you have any horror stories from that time?
Jason Gilbert:
Well, horror stories for sure. Horror stories like crazy properties and crazy stuff that …
Kevin Kim:
For the audience this is pre Dodd Frank, this is, private lending was not what we are today. It’s a very different industry.
Jason Gilbert:
Yeah. I mean, even today we’re still, to a certain degree, the cowboy industry and softly regulated. Even before then it was wildly unregulated. Unfortunately everything had been so good for so many years, right? You create a fund, you take your two and 12 and pay the 10 like clockwork. They just worked like clockwork. The funds were just turned. No problem, no yield compression, everything was good.
Kevin Kim:
Yeah.
Jason Gilbert:
And then we ran into 2008 and everything went completely the opposite way. Unfortunately there were a lot of learnings that came from that time period of the way that we structure docs, and the way that management takes fees, and a bunch of that stuff that we still have baked into the PPMs and operating agreements today, 12 years later, were from the learnings of that two year time period of [crosstalk 00:10:49]
Kevin Kim:
All the advice that we give right now, it comes from that area.
Jason Gilbert:
From those fund managers that were having to live and breathe it. We’re like, oh man, we should change that, and we should change this.
Kevin Kim:
Back then everyone was charging loads, they were charging all kinds of crazy stuff back then. Yeah.
Jason Gilbert:
Yep. I mean, you learn from it so it doesn’t happen again. I think we’ve come through a lot of learnings from that time period. That was the birthplace also of when everyone started getting into the performance fee and the target rate and the split above… Everyone brought in the hedge fund mix of a portfolio model. Because before everyone just paid the per annum but the fact that it was so hard to raise capital you had to look invested with the investors, that everyone started coming up with these other models to make sure that everyone could get back to a 8% pref.
Kevin Kim:
Yeah.
Jason Gilbert:
Back then I think the prefs were set at nine.
Kevin Kim:
Damn. 9 pref. Wow. I mean, we can go for days, we can talk about fund terms forever. The funny part is we’re going through it kind of now, people are learning their lessons in different ways. It’s kind of interesting to talk about. I mean, we’re both relatively young. You’ve got a young family, I’ve got a young family. I came out of law school during the recession, but I was working at a bank before that. It’s a different perspective, but seeing where we are today can you believe?
Kevin Kim:
Let’s talk about that. For those of our audience who weren’t around before the great recession, how different is this industry today comparatively speaking?
Jason Gilbert:
I think the sophistication level of the industry has taken a step forward. Has come in a hurry.
Kevin Kim:
Because back then the Wall Street money was still there, right? Everyone says, comments on how the Wall Street money came to our space and blah blah blah, that’s not really, no, it’s always been there.
Jason Gilbert:
It’s always been there. I think the 2005 through 2006, ’07, time period, Wall Street money, and all the big banks were coming in and buying people up and consolidating then. Because they were chasing yield.
Kevin Kim:
Yeah.
Jason Gilbert:
That’s not different. That existed then. There were heavy credit facilities that existed then. That was enough of a burn to get everyone to go away and short term memories always ring true. They went away for a long enough time period you kind of forget that they were there, it was all there. I think the understandings and the knowledge from the investor base, it all trickles down. Because before, you’d have to be dealing with the institutional or the heavy IRAs to be dealing with some of the complex due diligence that we deal with today. More and more I’m seeing our fund managers having to deal with the level of due diligence that used to be institutional only.
Kevin Kim:
Right. You see a resurgence of smaller hedge funds, single family offices, RIA driven fund to funds, coming to our space and investing because they like the yield, they like the security, they like the fact that it’s short term, and it’s a nice hedge to their ETFs and their long hold equity. You’re right. The sophistication has gotten better. But it’s still, in a lot of respects, a very fractured industry, right? That’s the thing, right?
Kevin Kim:
Because back then, no regulation. This is for our audience. No licensing regulation. This is sub prime mortgage, so this is no licensing, no Dodd Frank, no RSPA. TLA existed, kind of. Literally anyone could be a mortgage banker, anyone could be a mortgage lender. You had these massive securitizations going on. There was no such thing as conventional versus fix and flip versus … But this particular industry of hard money, in the context of fast funding, cash available now, was still a thing back then. From the product standpoint there may be different nuances, but it’s still the same. It was still an aggressive unregulated industry. We’re a little more regulated now, but I don’t think that much more.
Kevin Kim:
It’s not the regulation that’s driving the sophistication. So what do you think it is? Is it the fear? Is it the fear of another ’08? Is that everyone got burned so bad in ’08? That’s one of the things I always kind of wonder. What’s the reason for this level of depth in this examination that they’re giving us, a client of ours, or something like that?
Jason Gilbert:
I think you can sum it up in one name. And I think you know the name. There’s one name, and that should be the name for all of it, right? It always goes back to calling it a Ponzi scheme, but Ponzi was very small. Very small. Somehow that carries true for every other fictitious fund structure that carries forward. Madoff’s name should be the name for everything now, right? Because of the volume and the sheer size of it. The number of investors that were there and got …
Kevin Kim:
And their profiles, too. And their profiles.
Jason Gilbert:
Yes.
Kevin Kim:
The sophistication. How smart they were.
Jason Gilbert:
Exactly. The number of sophisticated investors that were involved in that thing got swindled. That didn’t see it, and nobody could find it? Holy smokes, right? At the end of the day you just look at it and go wow, that’s incredible. I think that reason alone is the reason that everything has stepped up and the due diligence is so much higher, because of how big that was.
Kevin Kim:
It’s true. A lot of people forget how deep that scandal went. I remember, I was at the SEC and was going to law school when all that happened. I was sitting in on conference calls with the DC office and the New York office. I was just a lowly clerk, I’m taking notes. But the level, the amount of files, physical evidence that they were gathering, it was mind boggling. It would fill a warehouse. The amount of, I mean, creativity that goes into something like that.
Jason Gilbert:
Yeah.
Kevin Kim:
We kind of started talking about the industry today. The industry has grown a lot and grown up a lot. I kind of want to know more about, you told me you joined Armanino’s basically out of college. Jumping into audit at two years. Now you’re a partner. Tell me about the path. I mean, come on, man, it’s a storied career. We came up together, I know a lot about it, but we see each other at almost every show, but tell us about that. There’s a lot of things that happened at Armanino’s over the years. You guys have grown immensely as a company but also as a vendor and service provider to the industry. Tell us more about that.
Jason Gilbert:
Oh man, there’s a lot to unpack there.
Kevin Kim:
We’ve got time.
Jason Gilbert:
My pathway to getting to partner at Armanino is solely based off of my involvement in the mortgage funds. I loved them, I was deeply invested, I taught myself the predominant software, the mortgage office, I was our in-house expert. To this day I’m still the in-house expert.
Kevin Kim:
You’re the TMO guy. I know you are.
Jason Gilbert:
On the product, because we were getting questions about it.
Kevin Kim:
You’ve got to know it.
Jason Gilbert:
Our managers were asking, saying hey, what do I do for this, and how do I do this, and I hated not being able to give an answer.
Kevin Kim:
Right.
Jason Gilbert:
It drove me crazy when I didn’t have the answer. I could tell them where we needed to get to but not the buttons to click to get there and it drove me nuts. So I taught myself the product so that way I could actually give the answers and provide the solution all the way A to Z. My involvement in that and being involved from fund startup to sitting with you guys and reviewing PPMs and comp structures and modeling all the way through A, day one launch, first years of a fund being launched, being very careful with the yields in the first couple of years because you can’t just fully load all of the expenses into the fund and kill the yield because who are you going to market that to?
Jason Gilbert:
So being through all that, seeing the audits, and being part of the audit side of setting valuation, dealing with loan loss reserves and legacy assets, work outs, and that side of it, I just love the model. I’m very passionate about it. I feel extremely passionate about the space and us moving up into mortgage rates and expanding the horizons because of the REET world and what that means from a sophistication level with your investor base. Just saying that you’re REET, everyone gets that public REET mindset. Now you’re a public REET, this is bigger. It’s a tax selection. Right?
Kevin Kim:
Yeah.
Jason Gilbert:
Most of us that are on the other side that are working with one now realize that it’s a tax selection. There’s some compliance rules, but it’s not that complex. But it adds a perception of complexity to your office and your structure. So us saying that we work with mortgage rates and being part of that process is very cool. I’m very passionate about it. That passion bled over into us expanding how we work with people and continues to this day.
Jason Gilbert:
You know, Kevin, you and I were joking around today and for the past couple of weeks in the fact that us being engaged in the industry, I’m also very much engaged with our fellow service providers. So I, over this past year, given where we’re sitting, COVID, lockdown, quarantine, us being in California it’s like a kennel. You’re not going anywhere. So I’ve been reaching out to our competitors, to be honest with you. [crosstalk 00:21:25]
Kevin Kim:
Yeah, I want to know more about, for the audience to know this, this is not a common practice in the CPA sector. I’ve never seen this done before where they cooperate as much. Tell us more about this. I see this as kind of a co-vendor on a project. All of a sudden I see two CPA firms, your firm and another firm, they usually compete for business. But you’re both on the file together with us. I’m like, what’s going on here? I was on a phone call with one of your competitors the other day, he said they’re doing work with you guys on a project. I’m like, this is very cool. This is very cool to see. So tell us more about that.
Jason Gilbert:
At the end of the day I look at it this way. If we, as service providers, even the same line. Us CPAs sit on this side and we sit there and compete with each other, right? Trying to one up each other, or basically one down each other, right? It’s not any good for the industry. And it’s no good for our fund managers. It’s not making anybody more successful. It’s not making anybody raise more capital. It’s not finding better deals or producing better yields. We just need to be better for the industry. The pond is plenty big, right? For all of us in this industry, the pond is plenty big for everyone to play and be successful.
Kevin Kim:
Mm-hmm (affirmative).
Jason Gilbert:
I would rather be successful with my peers, work together, because there are going to be trade offs. There are going to be situations where we are the right provider for a fund manager in their setup, in their fund, in their investor base, and they’re going to want to see Armanino. There are chances that in this industry that my fellow peers, be it [Savio Callency 00:23:06], or CohnReznick, are the right provider and the right solution for that fund manager. Why not work together and make sure that the fund manager that we’re working with is the most successful that they can be?
Kevin Kim:
Right.
Jason Gilbert:
The more successful they are with raising capital and their investors and the happiness of their investors and their borrowers and dealings, they’ll create more funds, right? You get to a certain level that your investor base and your whales, if you will, are going to ask for another product. You’ll create another fund. That’s another opportunity. If we do the right thing we all benefit from the fact that we’re doing the right thing. So I have, I’ve partnered with our fellow CPA firms to make sure that we’re being the best solution for the fund managers. That may be where we’re the tax and we’re recently rolling out a fund administration offering, so it may be that we’re the fund administration and the tax offering, it could be that we’re the audit and the tax relationship. It could be that we’re just the auditor, right? But let’s marry up the fund manager with what they need and provide them the solutions that they need.
Kevin Kim:
That’s great. We encourage that type of collaboration. A lot of folks, in legal we have to because of jurisdictional issues, right?
Jason Gilbert:
Yeah.
Kevin Kim:
Outside of my practice area, which is basically federal, on the lending side we have to work with local counsel. And we do. NEMA and MOSA built an army of local attorneys we partner with and have referral partners, but I’d never seen it on the CPA side. I’ve always felt like CPAs, the big companies, try to keep it very, very tight knit and they don’t want to collaborate. It’s a very reticence to collaborate. I definitely commend you for that. I see it. I see the benefit of it.
Jason Gilbert:
I’ll be honest, it’s not easy. It makes you wildly uncomfortable. Having these conversations and talking …
Kevin Kim:
I’m guessing only with folks that you really trust. You know these people, you know them well, you’re willing to work with them, right?
Jason Gilbert:
I’m starting to. We haven’t had that relationship in the past. Prior to this year there’s no way we would pick up a phone call and talk about proposals or who we’re working with and who our relationships are, full deck, putting everything on the table on what we’re doing and what’s different, right? Never before. Right?
Kevin Kim:
Right.
Jason Gilbert:
So those conversations, especially the initial ones, make you uncomfortable. For sure. Because you’re like, man, should I be saying this? Should I be letting the cat out of the bag? That’s my own IP and should I be displaying the IP to the greater good? But at the end of the day it is for the greater good. Right? The end solution and what we’re trying to do here is to make the industry as a whole more successful. The more funds and fund managers that are successful in the industry, the better off all of us service providers are going to be. So let’s help everybody.
Kevin Kim:
Right. Agreed. We have a responsibility to grow the industry, not just from a service standpoint but also just to stimulate it to grow even further, right?
Jason Gilbert:
Yep.
Kevin Kim:
Talk about that. The industry as a whole, private lending has certainly become its own animal. This business purpose, short term, residential focused type industry that morphed from hard money lending into, I would consider it private lending. It’s certainly become, it’s not as large as the non QM sector, I think, but still giving it a run for it’s money. What do you, based on your estimations, how big do you think this space is? Where do you think it can go?
Jason Gilbert:
I’m probably the wrong guy to be placing an estimate on this. I would be taking a shot in the dark and everybody listening would be oh, that’s not even close. Or holy smokes, do you think he’s right? I’ve got to be honest with you, I don’t even know. I don’t even know. Couldn’t even put a number out there. I know that it’s big. I know that it’s growing, and we’re getting more and more interest, and interest from parties that I would have never guessed would be playing in the space.
Kevin Kim:
Yeah, I’m shocked every single day to find out, oh, you’re in this space?
Jason Gilbert:
Yeah.
Kevin Kim:
You’ve invested? And they’ve been investing all along.
Jason Gilbert:
Yep.
Kevin Kim:
It’s not just like, they’ve had an allocation in this space all along and they’ve loved it, just they’ve been doing it behind the scenes.
Jason Gilbert:
I’m getting more and more phone calls from interested parties wanting to know, A, our background, who we’re working with, and who we can make intros to. It’s pretty exciting. I love those phone calls, I will accept those phone calls all day because you know what, that’s just adding to the industry.
Kevin Kim:
Right. Talking about growing the industry and where it’s going, one of the things that I like to bring up with people who serve the industry is kind of, I’ve always argued that private lending is a very fractured space. I like that it’s fractured. I personally like that it’s very fractured. It keeps us nimble, it keeps us unregulated. But is there such a thing as being too fractured? There’s not a lot of advocacy in this space. What do you think about that? Have you thought about that before?
Jason Gilbert:
I haven’t. Only because I tend to like that it’s under cover.
Kevin Kim:
Right.
Jason Gilbert:
The fractured state of the industry means that you’re not dealing with heavily regulatory bodies that hold up growth, hold up ingenuity, and hold up users being able to do what you want to do as a entrepreneur, business officer, or what have you.
Kevin Kim:
Right.
Jason Gilbert:
I just, I’d rather it not get to the level where you have heavy regulation sitting over the top of it because it just slows everything down.
Kevin Kim:
Right.
Jason Gilbert:
It prohibits the early fund manager from getting to where you want to be because you’ve got to jump through all these hoops.
Kevin Kim:
What I worry about is it may even eliminate … I look at the conventional mortgage banking industry, I’ve been on panels and had meetings and discussions with folks who are like, we want to make this like the conventional market. I’m like, please don’t do that. I would hate that if that were to happen. There’s the whole metaphysical concept, you lose all of that entrepreneurial spirit.
Jason Gilbert:
Yep.
Kevin Kim:
Imagine if our industry was like the conventional space with Fannie, Freddie, Ginnie, VA, repo lines up the wazoo, take outs, it’s just not, I don’t feel like it’s conducive. But some people want it. I’ve always been against it, personally, I think. So I don’t know.
Jason Gilbert:
It’s easier to like that than what makes us different. We’re just another version of that, right?
Kevin Kim:
Right. It’s the point about making soft money, right?
Jason Gilbert:
Right.
Kevin Kim:
But there’s organizations that are shifting in that direction as they grow more and more institutional.
Jason Gilbert:
Fine. But there’s no, it makes it very hard to find solutions for potential issues that are out there when you have to sit in a box, right?
Kevin Kim:
Right.
Jason Gilbert:
So if you end up there and you end up in a box and you can’t provide the solutions that our industry provides now.
Kevin Kim:
Right.
Jason Gilbert:
Our industry right now provides a lot of opportunity.
Kevin Kim:
Yeah. In what forms? What’s your perspective on it? I have mine, but I want to hear your perspective on it. How does our industry serve the greater market and the greater real estate market, in your perspective? It’s always good to hear someone like yourself, their take on it. You serve the industry as a whole, we share clients across the country.
Jason Gilbert:
Yep. My perspective is that the greater portion of the borrower base wouldn’t be able to do or scale up like they do without the industry. If they have to go the conventional route, they’ll never get, some of them will never get off the ground. And B, some will never get to a sizeable, a point in their size or company growth cycle, that they get to conventional. At some point this isn’t the cheapest source of funds. So as you grow up and you’re more established and you can find cheaper sources of funds, some end up heading that direction. But you’ll never get the speed, you’ll never get the flexibility, you’ll never get the solution that you need tomorrow to go move on an investment like you can with this industry.
Jason Gilbert:
That’s the point of the industry, that’s why it’s here. That’s why both sides work. Nobody in our industry is coming at it from an angle of trying to be opportunistic with the borrower. We’re here to lend, we’re here to provide an opportunity for that borrower, and then get paid back and turn the page, right?
Kevin Kim:
Right. But they’re also willing to be … One of the statements that I love hearing on a consult is we may not be the cheapest but we are very relationship oriented.
Jason Gilbert:
Right.
Kevin Kim:
That approach, that seems to be a constant about the space. But there’s a force or a trend in this space to want to standardize. They want to make it cookie cutter. They want to commoditize it.
Jason Gilbert:
Right.
Kevin Kim:
That scares me.
Jason Gilbert:
I hate commoditizing. I hate the word commoditize because it makes everything the same. Then all we do … I mean, look at California and the amount of competition we have for rates.
Kevin Kim:
Right.
Jason Gilbert:
Right? And the compression that’s there. It’s not completey commoditized, but it’s as commoditized as you’re going to get across the 48 continental states.
Kevin Kim:
I would agree.
Jason Gilbert:
As commoditized as you want.
Kevin Kim:
Here in New York [crosstalk 00:33:30]
Jason Gilbert:
I don’t want more of that. We talk about commoditization all the time at Armanino and trying to keep ahead of being commoditized. Because as soon as you’re commoditized it all comes down to price. There’s no differentiators. It’s nothing that’s different.
Kevin Kim:
That’s the problem for service providers nowadays. Legal and accounting. We’re becoming commoditized.
Jason Gilbert:
Yep. You’ve got to continue to stay ahead of the curve, change the approach. But if we standardize the industry, there’s no way that you can change and be different because you’ve got to fit within that box.
Kevin Kim:
Right.
Jason Gilbert:
I’m of the mindset that putting in the box stymies innovation, stymies opportunity, and will put a big old anchor behind us as an industry and our growth trajectory forward.
Kevin Kim:
Right. I just hope that we don’t go that direction as well. There are some forces out there that want to do that, and I can understand their logic behind it, their motivations. I think it will be bad for the industry as a whole.
Jason Gilbert:
That’s fine. My vote’s no. My vote’s no.
Kevin Kim:
Agreed.
Jason Gilbert:
I’ll wave that flag all day long.
Kevin Kim:
Yeah. Just to share my thoughts on it, it’s always been to me like if the objective … one of the objectives is to create, my perspective is, is to create more inventory. Banks are slow, conventional lenders are slow. I don’t care how fast they say they are, they’re slow. As a former banker I can tell you, they are not built to be fast, nor do they want to be. Nor should they be.
Jason Gilbert:
Don’t have to be.
Kevin Kim:
Don’t have to be. The only way we’re going to get out of, have more inventory out there, in residential at least, have more inventory, is by incentivizing small business investors to go out there and invest in small amounts real estate, build properties, sell them. Otherwise where are we going to go? Master plan, is the entire state of California going to built by the [Kroll 00:35:45] brothers? It will take forever, and it’s not something that they’ll do with aging inventory. And it’s something that we need. You have conversion needs, you have aging hotels, there’s a lot of creative things that can be done. If we don’t have entrepreneurs and small business owners out there doing this, you’re going to end up with a city that looks like Irvine. For those of you who don’t know Irvine, I get lost in Irvine. I work in Irvine, I get lost in Irvine, because everything looks exactly the same. Terra cotta roof, beige walls, same drive throughs. It’s the most confusing city you’ll ever see because everything looks the same. All the houses look the same, all the buildings look the same. That’s just …
Jason Gilbert:
Control B, control C, control D.
Kevin Kim:
Exactly. And that doesn’t work when you’ve got aging inventory houses. In my parents’ neighborhood, all the houses were built in the ’40s and ’50s. They’re all custom homes. You can’t do master plan around that.
Jason Gilbert:
No.
Kevin Kim:
I really think you need to stir entrepreneurs, entrepreneurs are the ones to do it. So listen, there’s a lot of rumblings and bumblings going on right now because we’re in California, for those of you who don’t know. Jason’s in the bay area, I’m in southern California. We’re locked down again with COVID. We just went through this year. You and I are both very optimistic, we were optimistic during the summer, we did a bunch of talks about that. I continue to be optimistic. Where are you at right now? What are your thoughts?
Jason Gilbert:
I tend to be overly optimistic.
Kevin Kim:
Yeah, me too.
Jason Gilbert:
My mindset just generally always thinks the best and don’t play on the risk, downfall, if there’s opportunity let’s go, right?
Kevin Kim:
Right.
Jason Gilbert:
I still think that things at this point, considering the year we’re in and everything that’s transpired, the industry as a whole, yeah, there are some struggles out there and there are some properties that holy smokes, what do I do with this, right? We have fund managers that are having to deal with this, watching their portfolio and look at those properties and go I don’t know what to do with it right now because under the current situation and the current quarantine and lack of travel it’s hard to put a value on that property.
Kevin Kim:
Right.
Jason Gilbert:
Everything else, though, up until right, no problems, no hiccups, everything’s performing, borrowers making payments, delinquency in the portfolios hasn’t significantly increased. Maybe some maturity issues where you’re having to extend and they can’t find a work out or another solution. But they’re still making their payment.
Kevin Kim:
There hasn’t been an instance of having a massive blow out. I haven’t heard a single episode of a fund being in distress significantly.
Jason Gilbert:
No.
Kevin Kim:
It’s really nothing more than, at least standard protocol for most funds.
Jason Gilbert:
Right. Yep. So I’m of the mindset that stuff’s going to work itself out. But some of this is going to take a long time, right?
Kevin Kim:
Yeah.
Jason Gilbert:
Unfortunately it’s going to take some time to figure out what we do over here, how we work them out, when do we get back to standard or semi-new norm operation for some of those properties where you can put a legit valuation on it and get exit stage left. Who knows when that happens. Unfortunately that’s going to change some investments that are being made in the future.
Kevin Kim:
Right.
Jason Gilbert:
I think that also leads to some opportunity as well.
Kevin Kim:
Right.
Jason Gilbert:
Those that have a mindset of trying to get into a discounted hospitality deal, there is some opportunity there. I think you could do some work outs and get into some that are at a fraction of what they were.
Kevin Kim:
We’re not going to see like a major NPL boom, or anything like that?
Jason Gilbert:
No. I don’t think so either. I think people were preparing for that back in April and I would have looked at it and gone, man, based on scenario five, if you had five pathways of scenarios back in April where you’re going here’s your options and here’s where things could go, scenario five probably would have left you back to those 50 cent on the dollar NPL pools or tapes. Probably not down to the 25 cent tapes that were from before, but the 50 cent maybe. But nowadays? Nah. I think people are out there looking for opportunities and looking at it thinking that there is something there, but I haven’t seen anything to date that is of that discounted value.
Kevin Kim:
Right. Let’s talk about something that’s very relevant to both of your and my practices, these REETs, right? For those listeners out there who are uninitiated, a lot of the stimulation toward that direction, the reason why folks started doing REETs, was because of the tax cuts and jobs act. People have asked me, people who are thinking about doing it ask me, “Well, Kevin, what about this current, this election?” This episode may go out a little bit later, we’re recording this in December when the election is not completely finalized yet but it’s almost there. What about this election? Aren’t you worried about a repeal to the tax bill? I’m sure you’ve talked to your clients about that issue.
Jason Gilbert:
I think, to your point there, is that even with your guys’ involvement we’ve already built into every fund structure that we’ve developed that has added a REET component to their house the ability to unwind it tomorrow.
Kevin Kim:
Right.
Jason Gilbert:
You’re not stuck to it, you’re not married to it, although I will tell you there are certain funds that we worked with that we should have launched a REET well before the economic 20% deduction came in.
Kevin Kim:
They would have qualified.
Jason Gilbert:
They would have qualified and it would have made their life so much easier by having the REET in place, right?
Kevin Kim:
Yeah.
Jason Gilbert:
For those funds that we work with where it is significantly more effective and efficient for them to have a REET, with or without the 20% reduction, they will continue to have a REET. The main reason for that being the UBTI issue for your risk. If you can get past that hurdle you have a significant portion of debt and it doesn’t pass through UBTI, making them have to file a 990-T, hey, the REET solves that. Part two, you do a lot of out of state loans, you have source income from more than 10 states …
Kevin Kim:
Which is pretty common now.
Jason Gilbert:
Really common. So if you’re more than 10, your options are you have the fund structure and you source all that income to all those states and you send out 10 K-1s or in some cases you’re sending 30 plus K-1s back to your investor, you’ve got a fund tax return that’s 1,200 pages plus because of all the K-1s that are underlined. It’s unreal. In those cases, the REET still makes sense because it’s more cost effective and less of a burden for your investor to have the REET just continue forward.
Kevin Kim:
I didn’t think of it like that. I was always thinking about it from a political standpoint, whether the actual thing would actually be repealed or not. But that’s actually an even better point, there are scenarios where it does make sense regardless.
Jason Gilbert:
I think it’s case by case. We’ve just got to look at the underlying and go, okay, where is the portfolio, where are we sourcing income from, or what’s your investor base like and what makes the most sense, right?
Kevin Kim:
Right.
Jason Gilbert:
What is the most effective and less burdensome on the investors? Let’s go with that pathway.
Kevin Kim:
Right.
Jason Gilbert:
At some point, to be honest with you, the 20% reduction is probably going to sunset some point in the future. That’s our mindset.
Kevin Kim:
It’s set to end, officially, in 2025 under the current legislation.
Jason Gilbert:
Yes.
Kevin Kim:
The reason why I bring it up, for the uninitiated, is people are worried that the Biden administration may try to repeal the tax cuts and jobs act in its entirety.
Jason Gilbert:
Yeah.
Kevin Kim:
So yeah, there is that aspect. It’s going to sunset.
Jason Gilbert:
It will sunset, who knows if it gets carried forward. There’s always an outside chance that this thing carries forward, right? And it gets carved out, the 20% reduction for REET, income gets carved out from the QBI legislator that it sits underneath and it becomes its own deal. There’s always an opportunity that it maybe never goes away.
Kevin Kim:
There’s a good point. REET rules change actually quite frequently.
Jason Gilbert:
Yes.
Kevin Kim:
The recent safe harbors were installed, I think, what, four years ago? It’s not impossible.
Jason Gilbert:
I think there’s always an up side, and I think if you always have an exit strategy of worst case scenario it could go here, how do we get out of it and make sure that we’re not locked in? That’s why we’ve been such a huge proponent, and you yourself, of not making the main fund make the election, having any separate entity make the election, because that separate entity doesn’t mean anything. Tomorrow you can close it, roll everything up, and just shut it down. And then you’re not a REET anymore. You don’t have to worry about it. It’s just gone.
Kevin Kim:
Right. For our audience I kind of want to give them a little bit of my perspective on it is I also, I agree with Jason 100%. Actually a much more planning based approach than from my perspective, from a political standpoint I was always thinking well, what really matters is the senate. We really have to look at how the senate goes. If the senate stays with the Republicans and it does end up that way, this has to be done through legislation, it can’t be done through executive order, so it will have to be pushed through the senate. It will not be pushed through the senate. So there’s that.
Kevin Kim:
And there’s also just the practicalities of looking at the platform that was put out by the Biden administration which was basically stating that he wants to do some work on income tax, capital gains, there has never been a mention about the opportunity zones. No mention about the 20% QBI. It didn’t look like it was a target of the administration. I don’t think that it would make sense considering opp zones, they’re kind of tied together. Opp zones serve low income communities, this thing supports a lot of small businesses. In my personal opinion it would be political suicide to do that because it affects more small businesses than it does our industry.
Jason Gilbert:
Yeah.
Kevin Kim:
Going back to kind of the industry as a whole and Armanino’s growth, a lot of folks don’t know, you guys have grown significantly over the past four years. You guys have added multiple offices, you have an office in Irvine now, offices in San Diego?
Jason Gilbert:
Over the past four years we’ve added a Dallas office, Irvine, Seattle, I’m trying to think of the other offices that have popped up. We’ve expanded in LA, so we have five in LA. Pretty big expansion. I was going to say that when I started at Armanino, when I first landed here, we were like 200 employees. Now we’re at 1,400.
Kevin Kim:
Wow.
Jason Gilbert:
So by CPA firm, who usually are steady Eddies, not that charging forward and conquer the world tech type growth, we’ve grown a lot. And we’ve morphed over the years. We’re a big company now.
Kevin Kim:
Let’s talk about that, how Armanino’s kind of gearing up to serve the industry going forward. And you as well, Jason, specifically you in your practice. What’s on the horizon for you guys going into 2021? You mentioned fund administration, I think? Is that one of the things?
Jason Gilbert:
As I mentioned before, we’re expanding our current offerings. Historically we’ve been audit, tax, and some light advisory. Involved when needed. If you need a second set of eyes we’d be there for the second set of eyes and oversight. But not full administration where we’re pushing the buttons. We decided that in order to add more value to certain relationships, not all relationships, I think there are certain relationships where we are much better served to be the audit and the tax provide and continue down that pathway as we have historically. They are certain relationships where we would be much better partners with the fund manager and the fund itself as the fund administrator and be the one delivering statements, looking at yields, waterfalls, whatever the fund structure is. If there’s feeders or blockers or whatever else, right? If we were involved it would probably be less prohibitive for some of our fund managers to go ahead and launch into some of those products. You start bringing in international money and it gets complex, it gets hard.
Kevin Kim:
Oh yeah.
Jason Gilbert:
Right? Do you want to deal with that on your own, or do you want to have somebody in your back pocket that can deal with it on your behalf, make sure that you don’t trip and fall down, and we can marry up to whoever you need on the other side of the house in the audit firm or be their concierge and deal with the auditors because we are auditors. I think for us, as a firm, we’re just trying to be deeper in our relationships. Be more successful with the way that we partner and provide the right solution no matter what it is.
Kevin Kim:
That’s fantastic. The add value approach is definitely … I mean, it’s kind of lost in our space. I sometimes wonder why is that. But the add value approach for a service provider is the most important thing. We are always trying to add value in whatever form we can.
Kevin Kim:
Going into 2021, we’re really excited to continue working with you guys. You and I will always be working together. We’ve been friends and colleagues for almost 10 years now. I also kind of want to ask, you’re just in private lending now, right? There’s nothing else?
Jason Gilbert:
I still have to support in some other industries through the rest of the year. But I’m less involved in the growth, key initiatives, value add.
Kevin Kim:
You’re focused on this industry for that.
Jason Gilbert:
I’m focused on, really it comes down to our real estate funds, REETs, and then the roll out of our fund administration. Fund administration is part of the real estate funds and the mortgage REETs that we deal with, but the other part of it, our fund administration arm is going to swing towards private equity and bigger firms like that. So it’s not just specific to real estate.
Kevin Kim:
So it will be a different lead depending on the industry, I’m guessing.
Jason Gilbert:
Yep.
Kevin Kim:
Very cool. That’s going to be very interesting to see. Administration’s always been a heavily heavily asked thing for us. We’ve always wanted to see more and more of it. Thank you for bringing that service to our industry.
Kevin Kim:
Where I want to kind of close out with is kind of more Jason related, right? We talked about your background and all that kind of fun stuff and how you came up at Armenino. We’re all locked down right now, but what’s the first thing you want to do? You, Jason, what’s the first thing you want to do once we can? I don’t know when it’s going to be, personally. What’s the first thing you want to do when we can actually get out there. Because you have a lot of cool hobbies, by the way.
Jason Gilbert:
I do have relatively cool hobbies. It depends on who you talk to. Some people think it’s unsafe, but most people think it’s pretty cool. For those of you who don’t know I race stock cars as a hobby. It’s a hobby that my dad and I do and it’s a great connection point for the two of us. Very much something that we enjoy doing together. It’s kept us well connected as I grow older and my kids get older my dad and I really enjoy it. So, A, I really want to be able to do that more than we have been, because it’s been very restrictive. Especially in California. I mean, sporting events …
Kevin Kim:
How does that work? They don’t let you go out there, right? They’re not doing any races?
Jason Gilbert:
They kind of do it under the cover. It’s not big enough to gain media attention. They basically told you to stay off social media and not promote it the way that normally you would just so that nobody catches you. But they’ve kept it low key. So we’ve done a couple of races, but not like we have historically. To be honest with you, I don’t want to have to worry. I would love for us to be able to turn the page on this and not question every move that you make. Whether you should be doing this, shouldn’t be doing this, is it okay to do it, am I going to put somebody else in jeopardy? Me and my family, we want to be able to just go out and do stuff as we did before, we took for granted before. Just be able to go out and see people, see our friends, and travel.
Jason Gilbert:
My wife and I had these big old plans that in 2020 we were going to travel and go see stuff. Instead of sinking a bunch of money into the house we were going to use that money to go have experiences with our daughters, who are five and eight. That didn’t go well.
Kevin Kim:
That’s a really good age to start, too, right? They’re mature enough to be able to move around with you.
Jason Gilbert:
Yeah. Maybe the later stages of 2021 that stuff comes back around, we start doing that stuff.
Kevin Kim:
Oh, man. Yeah.
Jason Gilbert:
But we’ll see. You know what, at the end of the day, one day at a time. We’re all in this together. Everyone’s going through the same struggles. Keep your perspective on it and trying to keep the mind right about this isn’t forever. It’s for now. They’re coming up with solutions in very short order. We’ll get there.
Kevin Kim:
Yeah. For me, in the theme of this, one of the things I want to do is just really get out. Travel.
Jason Gilbert:
Yeah.
Kevin Kim:
Even if it has to be for a work conference going to Vegas.
Jason Gilbert:
Yep.
Kevin Kim:
I just want to get out.
Jason Gilbert:
Took it for granted.
Kevin Kim:
Yeah, dude. All those days where I could have spent an extra day and had fun at wherever I was. There’s two brothers in the industry, the [Todesko 00:55:16] brothers. Whenever they go anywhere they go see stuff.
Jason Gilbert:
Yeah. Experience.
Kevin Kim:
The energy to go out there and enjoy the location that they’re at and see sites. I was like, I should have done that. I had so many opportunities.
Jason Gilbert:
At the time it was so easy to say I don’t have time for that, I have to get back to my stuff.
Kevin Kim:
Yeah, I have to get home. Exactly.
Jason Gilbert:
I’ve got to get home, I can’t spend that extra day. Now you look back and you’re like, yeah, I should have taken that day.
Kevin Kim:
Yeah. Exactly. That’s a really good way to close out the interview. Once again, Jason, thank you for joining us here today.
Jason Gilbert:
Thank you again.
Kevin Kim:
I hope the audience gains a lot out of it and if there’s any needs they have, give you a call. If they want to get into stock cars, give you a call.
Jason Gilbert:
Absolutely. I’ll give you all the run down on stock cars.
Kevin Kim:
Exactly. Hopefully we’ll see you all soon, and hopefully we’ll see you soon at a conference.
Jason Gilbert:
Absolutely.
Kevin Kim:
In a year or so, I guess.
Jason Gilbert:
A long time. A long time coming.
Kevin Kim:
I know, man. All right, you take care. Thank you very much.