Buying Smarter: What a Real Estate Attorney Wants You to Know

Steven Spierer (00:00)
I am Steven Spierer and this is talkradio1.com We're going to do something a little different today. Aviva Sonenreich is a commercial real estate broker in Denver, Colorado.

She also manages and leads her family's real estate portfolio, which was started by her grandfather decades ago. And she's a podcaster with over a million followers.

So It is my pleasure to say Aviva Sonenreich Welcome to talk radio one comm

Aviva Sonenreich (00:34)
Thank you, Steven. It's great to be here.

Steven Spierer (00:37)
So for your audience and just so they will know why I am in this conversation, I'm a practicing real estate attorney and for the same 47 years that I've been doing that, my business partner, my law and business partner, John Woodward and I have been creating investments in real estate for friends and family and clients and ourselves. Aviva, when we spoke, we agreed that we would start by having you ask the first question. So Aviva, where would you like to begin?

Aviva Sonenreich (01:08)
Well, Steven, when we got on our first call, I told you I'm fascinated by the intersection of law and real estate and that I wasn't smart enough to pass the bar. So I stick to the real estate and let the attorneys do the talking, but I'm very excited to chat with you today because you clearly excel in both. Now you have been practicing law in real estate for decades.

What is the biggest legal mistake investors make today?

Steven Spierer (01:43)
Great. you know, legal mistake is a different thing and I don't know that I've really thought of it from that perspective, so I appreciate that. So I think probably it would be not understanding what the paperwork says. Very few people actually read everything and practically no one really does. mean, loan documents are voluminous and a lot of folks don't even try. What I think the biggest legal mistake would be

To start with would be not understanding the transaction and you can do that In part by reading the documents but in part by consulting with someone who can really explain them So a real estate lawyer I think another legal mistake would be not learning how to hold title or set up an entity Properly to protect yourself either for tax reasons or for liability reasons So that'd be another one and then I'd be sliding into business issues like

not getting the right insurance and so forth. But from a legal perspective, think probably not understanding the transaction because the documents look overwhelming so they don't even try. So try.

Aviva Sonenreich (02:49)
Sure, I do say I find probably 85 % of tenants do not read their lease, which is baffling to me, but a consistent trend.

Steven Spierer (03:01)
I'll tell you, think 85 % of landlords don't read their leases.

Aviva Sonenreich (03:06)
I'm sure. I'm sure. But hey, let me ask you, do you use AI or chat GPT at all?

Steven Spierer (03:16)
I don't. I've been, I'm curious about it. My kids use it for different things and I know a lot of people, mean, I guess most people now are using it. And I'm sure someday I'll have the time to sit down and figure out what I can do with it. But I haven't, when people have described to me what it can do for me, I haven't yet found anything that makes me think, okay, I'll do that. And I said the same thing when computers came out. I'm 72 years old.

So I was in my, I guess in my 20s, 30s when they first came and I thought, well, I'll get a computer when I can see a purpose. Well, I'm on my computer every day now with, for lots of reasons, get tremendous use out of it. So maybe someday I'll use it. So far though, haven't found anything I actually, where I think, okay, that might help me.

Aviva Sonenreich (04:08)
One use case that I have found recently that I would absolutely never advise to supersede true legal advice is that you can actually upload a lease into ChatGPT and say, explain to me X provision as if I'm a fifth grader and it will analyze the lease and then explain to you said provision like in any, you could say, explain to me

this provision in the tone of Howard Stern, and it would generate that.

Steven Spierer (04:44)
Okay, so here's why I wouldn't want to do that and I don't think I'd encourage anyone to do it is because what you're going to get is a generic, at best, you're going to get a generic understanding of it but what proper advice from a real estate lawyer or for that matter from a real estate broker is going to be completely dependent on the individual circumstances. So you've got two sets of circumstances, let's say in a lease and let's say you're a landlord.

One would be generally to find out what the thing says, and that might be useful for that. But the other one is, what am I concerned with for my particular property in this locale under these laws, for this particular tenant, for the condition of the property, for how long I want to have a lease and why, and for other issues that might come up that would be unique to the property. So the parking or

pets or access or storage or how to proceed, what requirements I have of a resident for getting or a tenant in a commercial setting for capturing my attention, how do I want them to communicate with me. Those are all custom things, custom fits.

Aviva Sonenreich (06:04)
Sure. It is by no means can replace a mind like you said you've been practicing law for 47 years. That's irreplaceable. We all know that. the technology, and this is extremely early stages of this AI technology, is humbling to say the least because sometimes it reads

The lease is better than your tenants, but no, it's interesting. just constantly curious and I love technology. So.

Steven Spierer (06:40)
Yeah, and I think the technology can be, it's certainly useful for all the things that used to be very cumbersome. And of course, being able to send things instantaneously and so forth is all, it's all very, very helpful.

Aviva Sonenreich (06:56)
We are doing a transaction right now where the owner does not have a computer or it's so every signature is a wet signature. And I just am grateful that today we can use DocuSign and all the various ways to expedite transacting because schlepping back and forth for this paperwork is not something I've had to do in a very long time.

Steven Spierer (07:23)
So in this transaction that you're in, is this part of your family's portfolio or is this something where you're acting as a broker?

Aviva Sonenreich (07:31)
I'm acting as a broker on behalf of the seller.

Steven Spierer (07:34)
This is what type of property.

Aviva Sonenreich (07:36)
This is a small warehouse C class, 6,000 square foot warehouse in Denver.

Steven Spierer (07:43)
And do you do, what percentage of your time do you spend on brokerage for third party clients as opposed to working on the family portfolio?

Aviva Sonenreich (07:53)
Sure. Well, we have a really nice infrastructure for our family portfolio in terms of property management and leasing, and we're very systematized and dialed in there. So I'm finding myself having to handle that less and less. You know, I initially told you 40 percent, and then I thought about it, I may probably closer to 30 percent. But, you know, my passion is

media marketing and the intersection with commercial real estate. So I find myself working on the third party element of our business, which is transacting on behalf of owners and generally owners, less buyers. But I would say, about 70 % is third party just because, you know, this is something I want to talk to you about. You bought

industrial properties in Colorado in an era that I refer to as before it was trendy. And my the tipping point for me when it turned trendy, aside from cannabis, which was an element of it, but the real turning point to me is e commerce. What brought you to industrial product prior to you know, industrial

was not the bell of the ball until everybody realized that logistics and shipping and this whole I call it the chewy effect. What is the chewy effect? The chewy effect is in 2020 when the pandemic hit, nobody wanted to go to the grocery store and they realized they could get their dog and cat food delivered on a subscription to their door. And instead of

going back to the grocery store, they subscribe to Chewy and now Chewy provides their pet food. That's what I call the Chewy effect and I feel like there was a larger impact on our nation when it comes to e-commerce and logistics, all of that to say, what brought you to the industrial space prior to this e-commerce revolution that we're seeing?

Steven Spierer (10:01)
So

my law and business partner, John Woodward, grew up in Denver and went to high school there and he went to college in Colorado. And then he came to Los Angeles to go to law school, which is where I met him because I grew up in Los Angeles. And we were, it was in the first week that I knew him where he said, we were talking about one thing and another and California. And he said, I can't wait.

to finish law school so I can go back to Colorado where I belong. And then our friendship formed and our business started and 17 years later, 17 years after that, John was still here with his whole family and his kids, but he never stopped talking about Colorado. And at some point we figured out that with UPS Overnight and Federal Express, which had happened, and fax machines, which had happened,

And with cell phones resulting in long distance phone charges becoming non-existent, that we could actually do this. And we talked about it and John decided to move to Colorado. That was 1994. That was also the year that Denver International Airport opened. And so the new airport, and it was magnificent, the most advanced

in the country, maybe in the world at the time. And so what happened is John moved to Denver and opened that Denver branch of our law office and we were in constant contact and being who he was, he naturally attracted law business and he naturally was interested in buying more real estate. And so he found properties and through people who he had met and so forth. So we started there because he was there.

And because he believed in the area and because he said, this is going to catch on and people are going to discover this now might be a good time to buy. And so we did. And so that's exactly how that started. And then we've bought more over the years. And so that's how that happened. You mentioned cannabis, which was an interesting thing. And that has certainly become a factor in a lot of things. It's something that we don't do. We don't

have tenants who are in that business because while it's legally permissible in Colorado and a whole bunch of other states now, it's still federally prohibited. And it's very attractive. We've known, we've had clients who have rented to tenants in the cannabis industry with very, you know, they've made a lot of money because they'll pay much more rent than a normal tenant, than a non-cannabis tenant.

But the risk is that they disappear overnight. And we've had a couple of clients who've really suffered. One doctor bought an office building with nine separate units in it. And all nine, when he bought it, were occupied by marijuana offices. And he bought it at a price that reflected the rent that they were paying, which was about

three, maybe four times as much rent as they would have gotten from, you know, if a CPA had come in and rented an office or an insurance agent. And so we bought it and then they all left. And so he came to us as lawyers, he came to us as lawyers and says, well, what can I do about this? And the answer is really nothing.

because you knew all of this and you bought it and you took the risk and now you have a vacant building and when you go to rent it, you're going to rent it for a third, maybe a quarter of the rent you were getting. And so this is going to be a loss for a long time. Unfortunately, he owed a lot of money on this because he had put too much leverage, too large a loan, too high a loan to value ratio on it. So he had a large payment to make. And as a consequence ended up

having to, he ended up losing the property in foreclosure, which was most unfortunate because he had put, I think he'd put 30 % down, which ordinarily wouldn't be terrible leverage, but when you have tenants that are going to pay a quarter or a third of what you were expecting, you can't, he couldn't even cover the payments, let alone the property taxes, the insurance, the maintenance and so forth. So there's high risk.

which would bring me to some of the things on my mind today, which is the purchase of property and what the risks are. The benefits are you can make a ton of money, but what are the risks of either that you see when you have people who buy real estate through you and that you see with your family's portfolio in real estate?

Aviva Sonenreich (14:46)
Sure. You know, it's been so interesting to be so involved in the last five years. I'm 33 years old, so I was in high school in 2008. So I did not experience that adjustment. However, I'm experiencing the current market. something I'm finding is a lot of property owners in 2022, 2023, they got their

broker opinion of value or an appraisal and it came in at one price. And now they could get an appraisal or a broker opinion of value. And what they're seeing is their values have not maintained. This is not 2022 because of interest rates. Everybody thinks you buy real estate and it just goes up in value. the reality is in my opinion,

If you buy it correct, it will go up in value over time. Time is your greatest asset and patience when it comes to holding, managing and maintaining real estate. But, you know, the risk is paying too much per square foot and people think, you just can buy real estate and it'll go up and it's a gravy train. And that's not a realistic perspective. And boy, are some folks learning that.

first hand right now and I empathize with them, but it's a very interesting time. So I think that's risk number one. Risk number two, over leverage. Exactly, for the story you told about the office building, you know, we have danced in the same vein. We have 110 tenants. We have barely ever had maybe one or two

cannabis uses in our buildings for similar reasoning. when you see a property that's for sale, because maybe it has a grow operation in it, and it's a 10 cap, that might look attractive. But the risk on the other side of that coin is, boy, you could lose that tenant in a heartbeat. And now you have a 40,000 square foot facility that's built out to grow plants.

where houses are not meant to grow plants and that's a whole different discussion, but I suppose the risk is pursuing property without having a full understanding of transacting the market and then current economic impacts.

Steven Spierer (17:12)
It's said that good judgment comes from experience. And I think the corollary to that is that experience comes usually from poor judgment. And we certainly learned that the hard way half a century ago when we started doing this. And we bought an industrial building in Los Angeles that was a single use.

the tenant was a furniture manufacturer and So we bought it and then after a while the furniture manufacturer left and so we had to rerent it well what we learned Was that it was very hard to rent and was vacant for a long time and it turned out okay we got a tenant and that and the property cash flowed and and we eventually sold it at at something of a profit it wasn't Spectacular, but it was fine

and our investors and we made decent money on it. But what we learned was this, when you go to buy a commercial or an industrial property, let's say it's an industrial property, let's say it's a single tenant, and let's say that tenant is a really strong brand, okay? Let's say that it's a Target or Walmart.

Or let's say that it's whatever it would be where you recognize the name, you know it's a big company, they're probably going to succeed. And what you'll be told by the people who want you to buy it, and that would be the realtors and it would be the sellers and those are the people who would want you to buy it, is that this is a credit tenant. This is a wonderful tenant. This is a tenant who will never leave this building. This is a tenant who will

be here until everybody who's alive today has died of old age. Don't worry. The tenant will pay and they pay like a slot machine. so what we learned is that's not the thing to focus on when you're buying a property. It's impossible. The tenant would leave. They couldn't possibly leave. I want to know when they leave, how rentable is the building? How am I going to replace that tenant? And it comes down

to a couple of major factors. Factor one is what's the building like? Does the building have versatility or is it just a single user building? Something that has been built and is structured and has tenant improvements that make it just good for one thing. So you'll have to either completely adapt the building, which costs money, a lot of money sometimes, or is the building just not suitable? So does the building have

high enough ceilings? it have three-phase electrical power? Does it have a loading dock? Does it have a rail spur? Does it have sufficient yard if you need yard in the building? Does it...all of those factors for the building. So that's one thing. And then the other thing is, what area is it in? Is it in an area where you're going to be able to re-rent it because tenants are going to want to be there?

Or is it somewhere out in the middle of nowhere? Or is it somewhere that isn't highway or freeway convenient? Or is it somewhere where regulations are difficult? So it's going to be difficult to appeal to a broad category. So I want to buy, if I'm buying an industrial building, I want to buy a building that is not just good for the tenant that's there and not just good for a particular use or set of uses.

I want to buy a building where any kind of tenant or almost any kind of tenant could be there. You spurred this thought, Aviva, when you said that growing pot in a warehouse is not ideal. Right. So, okay, maybe they would want to be somewhere else and that'll change as more places become available that are better for that. But that in principle is those two factors would be what I'd want to know any time I'm

buying an industrial building.

Aviva Sonenreich (21:27)
Sure. If you could only choose credit tenants or mom and pops, which would you choose?

Steven Spierer (21:38)
I don't think I have a preference, do you?

Aviva Sonenreich (21:44)
think about this often. I'm under contract on behalf of a buyer right now with an extremely high credit tenant on two buildings. And I understand, you know, I understand and I'm learning a lot about the value. But I will bring you back to this story. In April of 2020, you know, our portfolio is primarily mom and pop, maybe a few credit tenants along the way.

But in April of 2020, we found that our tenants were paying the rent. And when I talk about our portfolio, industrial exclusive, everybody was showing up with rent. That first month after the pandemic had really taken our entire globe down. But when you turned on the news, you started seeing Cheesecake Factory, all these high credit tenants were refusing to pay rent.

And so I will say today, I do see and understand the value of a credit tenant and I have a lot to learn. However, I will stand behind the mom and pops if I had to choose.

Steven Spierer (23:01)
You know, it makes a good point, and you brought a memory for me. During COVID, we had in Colorado, in an industrial building, we had a name tenant, a name you'd recognize, and they just said, look, our nationwide policy is we stop paying rent. And during COVID, we were suspending payments. And our answer was, OK, well, we're not nationwide, but we kind of have a policy that if you don't pay the rent, we'll evict you.

And so they started paying us rent. I don't know if they were paying anywhere else besides us, but they paid us the rent. yes, there's going to be sometimes there'll be ice cold business decisions made by credit tenants who become, I guess, not credit tenants. If they're bankrupt or they have a problem, serious financial reversals. And that can happen to mom and pops. The reason I didn't have an opinion, and I probably still don't, is because we've had

lawyers and as investors both we have seen good experiences and bad experience with credit tenants and with mom-and-pop operations and so to me it comes down to the character of the person and the people who are making the decisions to begin with and then it comes back to their financial ability and then what it really comes to is communication so there I like the mom-and-pops better on that side because

when i call someone the person who answers the phone is in charge they make decisions we can actually have a conversation about business if there's a problem if there's a delay in rent if there's something wrong with the building if they're whatever the problem might be where sometimes when we have the larger tenants the ones who are part of larger organizations you can't get a hold of anybody who makes a decision you call and you can talk to you know the supervisor who's on site but they don't

know anything and they can't make a decision and it's hard sometimes to get there and the larger companies tend to be bureaucratic. They tend to take a long time to make decisions where when you talk to a mom and a pop, they are frequently will make a decision in two minutes right while you're talking to them and you can move forward. So in that sense from a communication standpoint, which I think is pretty important, I want that. But in principle, I don't have a preference.

Aviva Sonenreich (25:28)
very, and that's why I'm so fascinated with the legal aspect of your career is that not only are you investing and learning from your own transacting, but you get to see what other folks are doing for, you know, doing right or doing wrong. And

I would assume learning from their mistakes, which has to be fascinating because the mistakes that you can make, you know, I say commercial real estate is the wild west.

Steven Spierer (25:59)
It was a huge advantage for us. You're right Aviva because Yeah, what happened when we started the law practice? I mean we started John and I started right out of law school and we didn't know what we were doing with that We didn't know what we were doing with investments. We had to learn all of that. I Mean we were we were in our mid 20s when we started this and it just gotten out of law school. So We had clients in the law office

who were excellent and some of them were real estate syndicators and we learned from them and actually took tremendous value from watching what they did correctly. And then there were others who came to us who had invested with other real estate syndicators where they had lost the money or stolen the money and the clients are coming to us. So we got to see how that's done very badly.

So those experiences were very intense for how not to do it and how to do it. And so when we got in the position where we were going to collect money from friends, family and clients and ourselves and invested in real estate, we had by then a series of principles by which we were going to operate and avoid some of the most simple and obvious mistakes right from the start. And then we learned more nuances of

how to make fewer mistakes as we went. But for example, not commingling funds. I mean, you'd be shocked at how many real estate syndicators commingle their own funds with company funds or from one property to another. There was one real estate syndicator who we were the attorneys for who, against our advice, was borrowing. had 15 properties, 15 different partnerships, and he

when one was in trouble, he'd borrow money from the other one and finally got everything in trouble. And so I've not been in favor and I'm not in favor of combining a bunch of properties together in one entity. It is more convenient. It does smooth the volatility that you could have in a single property, but it also has a disguising effect. every time I've ever seen it done

with multiple properties, end up not getting solved, problems end up not getting solved as quickly as if you had to solve them because you can't get money from anywhere else. You have to solve the problem. So, mean, just as one example of a fundamental mistake.