JF1708: Reg A Allows Non Accredited Investors To Invest In Big Deals with Alex Aginsky
Alex has been working on his platform, BuildingBits, for about three years, they are now live and accepting investments. They are a company that brings institutional type commercial real estate deals to the average person. We’ll learn what led Alex to creating this platform, and also hear about the experience and returns that an investor can expect to receive. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“If we feel the price is fair and is supported by a third party appraisal, we’re not going to beat them up on the price in two or three months when it’s time to close” Alexander Aginsky
Alexander Aginsky Real Estate Background:
- Principal Shareholder, Founder and Chief Executive Officer of Building Bits
- Extensive real estate, private equity, and venture capital experience
- Managed a complex commercial real estate portfolio for global investors, including two hotel developments
- Based in Portland, OR
- Say hi to him at https://buildingbits.com/
- Best Ever Book: The Fountainhead
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Alex Aginsky. How are you doing, Alex?
Alex Aginsky: I’m well, thank you, Joe.
Joe Fairless: I’m glad to hear that. A little bit about Alex – he’s the principal shareholder, founder and chief executive officer of Building Bits. He’s got an extensive real estate private equity and venture capital background and experience. He managed a complex commercial real estate portfolio for global investors, including two hotel developments. Based in Portland, Oregon. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Alex Aginsky: Absolutely. Before founding Building Bits, my main business for many years was helping family offices and ultra high net worth individuals internationally to find great deals, great investment opportunities in the United States. My job was to not only identify the asset, but do all the due diligence, negotiate the terms, structure the deal, broker the deal, and then manage all the assets post-acquisition. In many cases we were a principal, as well as the manager and the broker…
So we kind of took on all of the responsibilities, in essence, as a general partner, of all the acquisitions. We did deals of all sorts, everything from new development projects to stabilized, income-producing assets; all asset classes, from multifamily, medical, to office and industrial, and really throughout the United States, though historically most of the focus has been on the West Coast. So that was kind of the impetus behind the creation of building bits, in the sense that the idea was born in trying to scale that existing business and trying to really broaden our horizons.
We started opening up offices internationally. We had an office in Russia, in Moscow, another one in India, New Delhi, and ultimately I came to the conclusion that we could source the capital right here at home and internationally through this regulation that came out of Obama’s Jobs Act, called Regulation A+… And really offer the exact same suite of services that we’ve been offering to very wealthy individuals, offer that same service to now virtually anybody. You didn’t have to be a multi-millionaire and invest millions of dollars into a particular deal to be able to take advantage of the power that real estate provides, that you and I, Joe, are both familiar with as a result of this new regulation.
So in essence, Regulation A+ allowed us to really be able to have the average Joe – pardon the pun – the average person, the average retail investor, be able to identify a particular property on our website that they would like, be that Walgreens or Starbucks or an office building maybe that they work in, and be able to invest as little as a few hundred dollars into that property, and we would manage that whole process for them. We would curate the properties to put on the platform, we would take each property through an SEC qualification process, making them available to all investors.
We would then take on the management responsibilities, and so on and so forth. So all you would have to do as an individual investor would be to find a building that you might like, maybe in your hometown, maybe halfway across the country, maybe it’s based on a particular geographic preference or certain return profile that you’ve got, or maybe you just like Starbucks, so you wanna own a part of an actual Starbucks, and have Starbucks pay you rent, rather than you buying a cup of coffee and paying them everytime. Whatever your criteria might be, you could have selected a building on our platform and invest into that building, and start to earn regular quarterly dividends from that point forward.
That was really the idea, that was what we started to build out in 2016. It took a couple of years to really get through that process, to build out the platform, and most importantly, to get through all of the regulatory compliance, and then to really convince the Securities and Exchange Commission in the U.S. that this would be a product that we can, in fact, sell to the mass market… And we finally got, after almost two years of wrangling with the SEC, we finally got the qualification in September of last year, so we ended up launching the platform soon thereafter. We’ve now been in the market for about 4-5 months.
Joe Fairless: Lots to discuss there, and I appreciate you sharing where you were before with Building Bits. Best Ever listeners, you recognize Building Bits because they’re a sponsor of the show… So I know about his company, but I don’t know his story, and also, Alex, we haven’t had a chance to really do a Q&A, so I’m really gonna enjoy this, especially given your background in commercial real estate… So let’s first talk about you. Before you were helping family offices find great deals in the U.S, what were you doing before to qualify you to do that?
Alex Aginsky: I’ve always been in the investment world before the company that was responsible for bringing capital into the U.S, which was called Aginsky Capital Group. For a number of years I had another kind of boutique investment advisory firm that worked on the other side; we were helping companies to source capital all over the world, and that was really the main business. We would package deals for them and approach Western private equity firms that wanted to invest into emerging markets, be that Asia, or Eastern Europe, or elsewhere.
When 2008 happened, when the Great Recession took hold on the entire world, many of our investors weren’t interested in continuing to move forward with the deals, so we needed to kind of redefine our business model and find a new way to create value… And it was at that time that I approached many of my clients overseas and I asked them if they would have any interest in continuing to work with us in some other fashion. They said that they wanted, instead of raising capital or selling their businesses, they wanted to in turn look to the United States as the last remaining safe haven in the world, and look to place capital there. That’s when the former business was really born, was really out of that Great Recession, 2008-2009.
Joe Fairless: And you were identifying properties, doing the due diligence, brokering it and managing it post-acquisition… What was the hardest part to do at that point in time for you?
Alex Aginsky: There was complexity in all of it, obviously. I would think that finding a great deal and putting it together was certainly not an easy task, but also managing the properties. We think that the triple-net properties are not so complicated where they require a lot of management oversight, but nonetheless, there’s always something that happens that requires some handholding, some work with the tenants… Long-term that proved to be actually the most complex of all things, but I feel like we were able to really get a pretty good handle on how that process works, and that’s what ultimately led us to be able to start building bits and take that to a whole other level.
Joe Fairless: Will you tell us a specific example of where a triple-net lease required some hand-holding on your part?
Alex Aginsky: Sure. I can think of a few examples, but most of them really have to do with what happens when the tenant is not able to continue to make good on their obligations under the lease… And it really rarely happens with the types of tenants that we now have on our platform, which typically are credit tenants. We do a lot of vetting in advance to make sure that they have the financial wherewithal to be able to continue to make good on their obligations.
Where we ran into some difficulties early on was with tenants that were relatively small, that would sign on a five or ten-year lease, and then a couple years into it weren’t able to make ends meet, so that required some restructuring, or ultimately retenanting the property altogether… That is never a simple or straightforward process, and again, that’s why the focus for Building Bits has always been on really great properties, that are in great locations, and most importantly, that have strong tenants in place, with corporate guarantees or personal guarantees in certain cases, so that we can obviate the risk as much as possible.
Joe Fairless: In 2016 you said you started to build out Building Bits, and it took two years to get the right approvals… Why do this approach? I imagine it was over six figures that you invested into the regulatory approval process… So why invest that much money and that much time, when you could do one-off 506(c) offerings, where you’re still bringing in the public, and it’s significantly less money and significantly less time invested on your part.
Alex Aginsky: There’s many different ways to answer that question. It’s a great question, and I get asked this quite often, Joe, so I appreciate the question. I think that really the biggest reason to do that was we saw where the world was going. I see the world democratizing more and more every single day. The gig economy that we live in, the Ubers and Airbnbs of the world make it possible for anybody to now be able to have, in essence, their own business, be that by renting out a room in their house, or by owning a miniature taxi company.
You can now take those savings and put them into your ownership of real estate without having millions of dollars to become an owner of an entire asset. So I firmly believe that this is the future, I firmly believe that in the not-too-distant future all of us will own a lot more of the global economy in this fashion. We’ll own not just buildings, but we’ll own all sorts of other things as well, that can be crowdfunded, that can be purchased in this fashion… And real estate is the most obvious and the most logical asset class, in my opinion, to use for this type of investment, given its stability, given the fact that we all understand real estate, we all work in buildings or live in buildings, so everybody understands what that is, everybody understands what paying rent is, and everybody would love to own a part of something big and tangible like that.
I typically use a quote from over a hundred years ago from Andrew Carnegie, who said back then that over 90% of all millionaires become so through owning property… And that still rings just as true today as it did 100 years ago; yet today it’s becoming increasingly more and more with every year, with every decade, for somebody that just works an average job, to be able to afford a large commercial building. Even their own home. So this model allows people to be able to take a piece of the global economy that has never before been possible for them to have a piece in. So that was really one of the drivers.
The other primary decision to go into this direction was the sheer scale and size that we felt we could ultimately build and achieve through this model. Like I said, we were the first such company to have received this type of SEC qualification, and I feel that there’s a lot more people out there that would love to be able to invest, but simply can’t afford to invest into commercial real estate, than the people that actually can.
In U.S. the statistic is that about 95% of the U.S. population is non-accredited. That means only 5% are actually accredited investors that can participate in the 506(c) type offerings that you just mentioned, Joe. So we’re really going after the 95% of the market. We’re making it possible for anybody to have the same kind of access that my former clients user to have when they were dealing with me.
Joe Fairless: I know you’re not an attorney… At least I don’t think you are, right?
Alex Aginsky: That I’m not what, sorry?
Joe Fairless: An attorney, a lawyer. So I’m not asking from a legal standpoint, I’m just wondering more high-level, since you are targeting the 95%, the non-accredited investors, there’s gotta be more compliance, more disclosures, more red tape quite frankly that comes along with that, because I’m sure the government want to protect them a little bit more (or a lot more) than accredited investors… So just from a high level, what are some things that you all have to do, that you wouldn’t have to do if you just focused on the 5%?
Alex Aginsky: Absolutely. We’re very similar, in many respects, to what public companies have to do. Not quite as rigorous as far as reporting; for example, we don’t have to do quarterly reports, but we do have to do annual reports, we have to provide audited financials for each of the individual properties, we have to do annual 1K’s, 1A filings etc. So ultimately, all of the information is made public. Everything from each and every expense on each and every property, to even my salary – it becomes a matter of public information.
Joe Fairless: Got it. That is different than if you were doing 506(c) offerings on a one-off basis, that’s for sure.
Alex Aginsky: Exactly, exactly.
Joe Fairless: So you have experience in multifamily, medical, office, industrial… What’s your favorite asset class to make money in?
Alex Aginsky: It’s a difficult question to answer, because ultimately, it’s always deal-specific. Real estate is something that is difficult to generalize in, and every deal is dependent on the location, obviously… The first three rules of real estate, as I’m sure most of your listeners are aware of, is “Location, location, location.” So it depends on the quality of the tenant, the quality of the lease etc.
We believe that the types of properties that are best for the non-accredited investor, in our case, are either retail properties, and that’s because everybody understands retail, and you can go into that Walgreens or Starbucks or AT&T store which we have on our website, walk in, and know that what you’re gonna be spending your money on as far as maybe buying that new cell phone is ultimately going to pay rent now in that building that you might own. So it’s very simple… Specifically the single-tenant triple-net retail deals are the ones we’re focusing on the most.
We also believe that we can get the most amount of scale with the least amount of headache, if you will, given the quality of the tenants and the types of deals we’re focusing on. But beyond that, again, we’re very opportunistic and we look for deals that, on one hand, are quality assets in great locations, with great tenants, and on the other hand have some potential upside. They have to be income-producing to even qualify for them to go onto our platform. We don’t do any rehab deals or new development at this point. We might in the future. But the focus is really stabilize the assets that we believe are gonna appreciate in value, either because of the market, or the quality of the tenants, or the structure of the lease, or simply because that’s the type of tenant that will resonate most with our target audience.
Joe Fairless: So you basically have two customers. One is the investors who are passively investing in the deals, and two is the sponsors who you’re partnering with, who are managing the deals and overseeing them, that you’re connecting and partnering with them. Is that correct?
Alex Aginsky: Not quite. So we are in essence becoming that sponsor.
Joe Fairless: Oh, okay.
Alex Aginsky: We are not partnering with sponsors. We take on the asset management. There are deals that we curate, we have a number of brokers that come to us with different deals, we have a number of property owners that want to list on our platform. We need to make sure that those properties will meet the sniff tests and will meet our stringent criteria. And not just our criteria, but the criteria for the SEC as well.
If we believe that that’s a good asset, we’ll list it on the platform, and then the crowd gets to vote with their dollars and to determine whether that’s an asset that they wanna invest into or not. If they do, we’ll basically take down that property and we’ll take on the management responsibility.
Joe Fairless: Okay. So help me understand a little bit more… You are the asset manager, and you’re working with brokers. I’m a little confused. You’re the sponsor, and then the crowd… Okay, so you do not partner with other sponsors to [unintelligible [00:16:41].08] Alright, I’m with you. Cool.
Alex Aginsky: Right. Think about it this way – there’s no shortage of real estate brokers out there that want to get deals done, and they will approach us just and just any other buyer, and they will say “Hey, we’ve got this great urgent care facility (for example) that we just listed on our platform today. Here’s a great urgent care facility. The company is signing a 15-year triple-net lease, the cap rate is 8%, it’s a great quality asset, newly-built, newly-constructed.” If we feel that that’s a good asset, we take it through an SEC qualification process, list it on our site, investors can start investing into that asset right away.
If we reach the minimum requirement to ultimately acquire that asset together with financing, then we will, as the company building those properties, one actually, the entity that ends up acquiring the asset, and that’s the entity in which shareholders or crowdfunding customers will become membership interest owners in. We will then take down that particular property, and those individuals that made the investments will start to receive quarterly dividends from us.
Joe Fairless: Got it. Alright, thanks. Very clear now. With the property that you’re purchasing that you offer up to the investors, the crowd, do you always have that under contract?
Alex Aginsky: Yes.
Joe Fairless: Okay, so you have it under contract… And then you said the crowd can vote with their dollars on if they want to invest or not… What if they vote no? What do you do?
Alex Aginsky: We have a certain period of time during which – we can basically think of it as a syndication platform – we can syndicate that deal. If there is a lot of interest and a lot of demand for that particular deal, and we can fill that demand, that funding goal, if you will, during that period of time – which can vary from deal to deal, but usually it’s anywhere from 60 to 120 days. If we can fill it, then we acquire that property. If we don’t fill it, then we simply don’t acquire the assets, and whatever funds have come in, we never actually touch the money, we never get hold of the funds. The funds are always going into an escrow account.
Hypothetically, let’s say we’ve got 90 days to raise capital for an asset. We were supposed to raise $100 and we were only able to raise $50, and the 120 days or 90 days came up to an end and the seller doesn’t want to extend, then at that point whatever funds – let’s say the $50 that’s sitting in escrow – will simply go back to all of the investors, without any offsets or fees or expenses.
Joe Fairless: Got it. And has that happened before?
Alex Aginsky: That has happened, yes.
Joe Fairless: So in terms of the relationships with brokers, and then also due diligence costs that you all I’m sure spend leading up to that point, how do you handle that?
Alex Aginsky: With regard to the brokers we’re upfront that we’re a new platform, and that we might not be able to raise all the funds, and they understand that, and they’re comfortable with it. Ultimately, the benefit to a property owner is that they’re paying much less in the way of transaction cost. We don’t take the big commissions that the other brokerage houses take, so ultimately they can sell the asset with much lower transaction costs, and that’s one of the big benefits to them.
The other benefit is that they can sell just a fraction of the asset. So they don’t have to sell the asset in its entirety, they can sell for example 50% of the equity on our platform… Which has never before been possible either.
Joe Fairless: Oh, yeah…
Alex Aginsky: It’s akin to floating part of the company stock on the New York Stock Exchange. That’s a new way of selling real estate. So that’s very enticing to some property owners. And because of these couple of things, they’re ultimately willing to potentially wait maybe a little bit longer.
The other thing that we promise them is no retrading. We’re not gonna put the property under contract only to then go back to them a month or two months later and say “You know what, now we want a discount on the price.” If we feel that the price is fair and is supported by a third-party appraisal, we’re not gonna beat them up on the price two months, three months down the road, when it comes time to close, and that’s very appealing to a lot of property owners as well.
Joe Fairless: Alex, what’s your best real estate investing advice ever?
Alex Aginsky: Wow, that’s a tough question. You put me on the spot there, Joe… To really do your research, to do your due diligence, and to make sure that you know what you’re ultimately getting yourself into. That’s very easy to do with building bits, given the fact that everything is so transparent, all the numbers are public. You can read our offering circular on the SEC website, the link is available on BuildingBits.com and you can see exactly where your dollars are going
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Alex Aginsky: Shoot.
Joe Fairless: Alright, let’s do it. First a quick word from our Best Ever partners.
Joe Fairless: Alright, Alex, best ever book you’ve recently read?
Alex Aginsky: Fountainhead.
Joe Fairless: What’s the best ever deal you’ve done?
Alex Aginsky: Purchasing a hospital in Roseburg, Oregon.
Joe Fairless: Why?
Alex Aginsky: It was guaranteed by a medical group on a long-term lease. We got it an a 9,5% cap rate, and it’s been one of the best investments ever.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Alex Aginsky: Believing that the tenant will be there long-term when they weren’t.
Joe Fairless: Best ever way you like to give back to the community?
Alex Aginsky: We do a lot of charity as an organization, and I do personally as well, and we attend a number of local charity events, and some that we sponsor.
Joe Fairless: And how can the Best Ever listeners learn more about you and your company?
Alex Aginsky: BuildingBits.com. That’s where a lot of information is available about the properties, about our team, and that’s where the link to the SEC offering circular is available as well.
Joe Fairless: Alex, congratulations on creating Building Bits, having this platform, having the properties that you all are putting together and offering to non-accredited investors. They need these types of investments. As you said, 5% of the population approximately are accredited; they get access to the really good stuff. And then 95%, they don’t. It’s nice to have platforms like yours, with these types of offerings for investors, especially the type of investment opportunities that you all have – rather conservative investments, versus, as you said, you’re not doing ground-up development or anything like that at this point.
Then also learning more about why you went the Regulation A+ route, and also your background in triple-net leases. They aren’t necessarily passive, especially if there’s a tenant default, so how you structure that or how you do due diligence with Building Bits to mitigate that risk from that from happening with the offerings that you all have.
Thanks so much for being on the show. I really enjoyed our conversation. I hope you have a best ever day, and we’ll talk to you again soon.
Alex Aginsky: Likewise. Thank you so much, Joe. I really appreciate the opportunity.Follow Me: