Investing in Revenue-Generating Commercial Assets with Zane Schartz
Investing in Revenue-Generating Commercial Assets with Zane Schartz
Zane Schartz shares insights on investing in revenue-generating commercial assets, his journey in real estate, and his approach to building financial freedom.
Zane meets with hosts Seyla & Aileen Prak, hosts of How Did They Do It? Podcast to talk about his real estate investment journey.
Can you share a little more about your background and how you got into investing in real estate?
Zane’s journey into real estate began in 2017 after his hockey career. Starting as an intern, he eventually joined the firm full-time, where he helped grow the company’s assets under management from $150 million to $750 million over four years. During this time, Zane honed his underwriting and management skills under the guidance of a trusted mentor.
When it came time to start his own venture, Zane founded Freedom Commercial Real Estate to align with two core principles:
Achieving financial freedom through disciplined investing.
Freedom through Christ. Freedom through Christ is really important to me, my faith is very important to me. I think that’s where true freedom comes from.
From your perspective, what do you see that was done right that you’ve imported into your business?
What we did really well was we had a very clean and clear plan of what we wanted to do. We had value-add multi-family as our bread and butter. We had a C class, put 5 - 10 K a door into renovations, and sell it 2x to investors. We had a clear and concise plan for investors. It worked very well for a long time, the market was rising. We executed a business model and did that. Then another thing investors liked was cash flow. Everybody loves cash flow; everybody loves low-risk investments. Everybody loves real estate and the benefits of appreciation and depreciation. My big part of running the old company was these triple net funds. These are very cash flow driven low risk because your tenants are investment rate tenants.
I was kind of learning from investors what they wanted what they’re looking for, and how we can provide that. A big thing investors want is people they can trust. They want to trust who they invest in. You can build that trust through performance, you can build it through communication, you can build it through delivering on what you say you’re going to do. I will say this, trust is gained and lost in buckets. So, if you can gain it slowly, you can lose it 100 times faster. So something that I want to carry over into my new company is being a trustworthy place where people can put their money and I can deliver on what I say I will.
From this experience, I recognized the importance of:
Trust: Building trust through transparent communication, performance, and delivering on promises.
Clear Plans: Establishing a concise strategy that prioritizes cash flow, stability, and long-term growth.
From your perspective and experience from working at another company for 4 years and playing hockey professionally, what are some of the skills and things you’ve implemented in your business, making sure that you start your business on the right path?
I think playing hockey, and really any high-level sport, there’s a mentality that you have of never be satisfied. You’re always striving to get better every single day to get to the next level, to make the next team, to make the next level. For me, the transition from sports to business, I really wanted to bring over the “never being satisfied” mindset:
How can I make this fund better?
How can I make the returns to investors?
How can I find the best properties on the market instead of the second best?
So, for me, the competitive nature behind private equity investment is what’s fun to me. So, taking those same ideologies, those same characteristics that allowed me to play professionally and implementing them into running a private equity, real estate firm.
For me, I’m never satisfied. I’m always going to want to find the best fund as possible, find the best tenants, and find the best properties. Something I want to be safe on is not trying to grow too big too fast. Taking that from a sports standpoint, you have to get your best reps in and make sure you really master the art of what you’re doing and not try to skip a step to get ahead. I’m really big on building a good foundation, growing slowly, and compounding that growth. Being an athlete really has helped me a lot in business and in life. There are just so many crossovers between sports and business.
What’s one thing that’s really important when it comes to finding the right deal to provide the best investment for your investors?
There are a lot of things investors are looking for, and I'm looking for a lot of things in my investments when I buy them looking for my funds. You can look at the cash flow. If the cash flow is high, the risk might be a little higher. So, really, what I’m trying to do is balance the risk-to-return ratio and get the perfect blend of the two.
Some ways we can mitigate those risks is by looking at the tenants and making sure they’re of a high investment grade:
How many times has a tenant renewed this property?
Where’s the closet competition?
What’s the repurposeability?
What’s the placer.ai report?
A lot of due diligence goes into prior to our acquisitions. But also, you have to make sure we’re hitting the cash flow projections and the cash flow numbers for investors because, ultimately, they’re in this to make money, and they’re in it to make as much money as they can. So, my job is to make sure that I can not only mitigate risk through diversification but also maximize returns from a cash flow perspective. So, balancing those two is what I‘m looking to do.
I wanted to start my company, Freedom Commercial Real Estate as a cash-flowing tool for investors. It’s less about appreciation, but the hope is that you’ll still have appreciation. Every asset that I buy, I want to be cash-flowing from day one. I want it to be a part of investors' portfolio that says hey, this is the place I want to put some money that I know will get money coming back. It’ll come slowly, but like baseball sports analogies, we’re aiming for singles and doubles, not for home runs and grand slams. If investors want to go into higher-risk investments like cryptocurrency, I think it’s fine to diversify and do that, but I want to be the very steady, stable, low-risk investment that I’m creating for investors.
Can you share more about your fund? What is a fund, what’s a triple net lease, and what’s your fund focusing on?
We have a current fund we’re raising for. With this fund, we’re going to acquire double- and triple-net-lease properties across the country.
A double and triple net lease basically means you have limited landlord responsibilities. If it’s a triple net lease, we have zero responsibilities outside of collecting rent. If it’s a double-net lease, sometimes we’re responsible for roof repairs or air conditioning. So, for everything we buy, we have limited responsibilities to no responsibilities. Our overhead cost is very low from an operation standpoint. What we’re doing is buying 15 to 20 of these single tenant properties, where we own the building and the tenants are investment grade. Tenants like:
CVS
Dollar General
AutoZone
Starbucks
Walmart
Kroger.
In these, we own the building, and the tenants pay us rent every single month. We don’t buy any mom-and-pop nail salons, we don’t buy pizza joints, no franchises. Everything we buy is going to be corporately backed by a multi-billion dollar corporation paying our rent.
I’ve been doing this for just under five years now and in the 60 assets that I ran at my old company, we were 100% occupied over my whole time running the fund, and we had 100% collections every single month. We know what we’re getting in the rents, and we know how long we’re getting it when we buy these properties.
It’s a great way for investors to buy into a fund. The fund structure is investors buy into an investment vehicle fund, and that fund goes out and acquires multiple assets. As an investor, you have ownership in, let’s just say, this fund has 20 assets in it, and you have 20 different streams of revenue coming up to the fund, and then distributions go out of that fund. So you’re diversified, meaning, if one of those 20 stores doesn’t renew their lease, or they decide not to stay at that location, we have 19 other streams of revenue, and we still own the 20th building, the hard asset, so we can sell that and liquidate it.
What I wanted to do was create a cash-flowing vehicle that sends out monthly distributions. We’re currently sending out monthly distributions at about a 7% annualized cash-on-cash rate every single month. We just direct deposit to all of our investors, and it’s a good investment vehicle for a lot of people. It’s beating any CD or T bill you can buy out there. You also get the appreciation of real estate, the depreciation of the cost segregation studies, and accelerated appreciation on the front end.
There are a lot of things to like about this fund and what we’re doing. One thing about it is we only take accredited investors.
How does your company acquire these companies?
It’s fairly simple math because we know what the lease term is, and we know what the rate of the lease is. So, let’s say we buy a Starbucks with seven years left on the lease, and they have a hundred thousand dollar annual rent. We know they’re going to be paying us that for the next seven years. Regardless, if Starbucks in a year says, “we don’t like this location, we want to vacate it,” they’re still obligated to pay us for the next seven years. We know for sure we’re going a hundred thousand dollars for the next seven years.
What we’ve done on every deal we’ve done in the past is put a seven-year note on it from a lender, so fixed interest, rate loan, and we know we’re getting cash flow. We know we’re making 100K, we know our debt service is 60K, we take that 40 thousand dollar spread, and we distribute it to investors, so it’s a pretty easy model. The hard thing is making sure you buy it at the right cap rate and making sure you have good relationships with lenders where you can get competitive terms. So, what I do is go out to different lenders, and I try to have them bid against themselves to find the best horse in the race for the investors. That’s where the competition comes in for me. Making sure that we can maximize returns.
If we get a loan that’s not as favorable to investors, we might be looking at a 5% return to lenders, but if we find a really good loan, we might be looking at a 7.5% return to investors on that specific asset.
What do you see in the second half of 2024 and the beginning of 2025? Do you think that double-net listings and triple-net listings are on the rise?
I think it’s common knowledge that the real estate space is definitely down (as of this podcast recording). I think that’s the best time to buy. I think Warren Buffet was right when he said, “be fearful when others are greedy, and be greedy when others are fearful.”
I think the properties that I’m looking at today are the same ones that I was looking at two years ago. I’m buying a deal next week at a nine-and-a-half cap rate that probably would have been a seven-and-a-half cap rate two years ago. Cap rates have just decompressed so much, and my hope, and I think a lot of people's expectations, is that interest rates will come down in the next 12 to 18 months, and with that, cap rates will also compress.
Our hope is that in the next 18-month period, is to buy as many assets as we can and increase the value of those assets through lease extensions. Then, also, through cap rate compression through just organic market cap rate compression due to lower interest rates. Then, we’re going to increase the value and then do cash-out refinances and then take the refinance proceeds and reinvest them back into the fund and create a compounding effect from equity created through the growth that we’ve done.
Albert Einstein said, “The eight wonder of the world is compounding interest.” So, we’re trying to do that and trying to compound our investment on itself. The end goal for this fund is to package it up together and sell it to a private equity group or a reit. So, we’re trying to do all the leg work for them, kind of trying to do all the hard kind of tedious stuff of buying these board up six, four, to seven-year leases and extending them and then packaging up a pretty portfolio to sell to reit at an equity multiple of 2x or higher to investors. That’s what we’re aiming for in three to five years.
I think it’s a great time right now to buy, and I think cap rates are going to come down because interest rates are going to come down. But, even if they don’t, we can still weather the storm with the current loans we have in place.
How do you know you’re buying at the right cap rate and price for that market when you buy across the United States?
We look at Placer.AI. I think that’s a really big thing to show where these specific properties are at and their tenant's percentile. We get a temperature from the tenants before we acquire the assets. We reach out to them and say, hey, what do you think of stores 1, 2, 3,and 4 in Dallas, Texas? A lot of times, they’ll just say, hey, we like that store, and we’ve considered putting more money into it or extending the lease, and we’ll get a good temperature on it. On the other hand, sometimes they’ll tell us that they don’t like the store and are even planning on shutting it down.
These relationships that I’ve built over the past 5+ years allow me to have these types of conversations. A big thing about the market is that we love Dollar Stores. I love Dollar Generals, CVS, and auto parts stores. Sometimes in a town of two or three thousand people, there’s only a Dollar General in the town, and it’s been there for 30 years. It’s the only grocery store within 10 to 20 miles at times. Those things print money for the tenants.
We might be in the middle of nowhere Oklahoma, but a Dollar General is needed there. People need groceries in the middle of nowhere. They need a carton of milk tonight for dinner. There’s a need for that, and there’s a need for auto parts stores. Everything we buy, we try to buy e-commerce proof. We think grocery stores are always going to be essential. We think auto parts stores are always going to be there. Every asset we owned throughout Covid was open during Covid.
They’re all essential businesses, and there are a lot of things that you can look at and a lot of boxes that need to be checked before you acquire a deal.
What do you guys do to protect your fund from a potential downturn?
We always keep working capital in reserves in our bank account for a rainy day fund. That’s the first thing. I will say our biggest risk exposure, and I probably shouldn’t be saying this on a podcast, but I always like to be transparent, is a tenant is not renewing its lease.
So, let’s say we have a Dollar General, and they don’t renew their lease. I always look at, prior to the acquisition, what’s the repurposeability of this asset? Where’s the closest auto parts store? Where’s the closest drug store? You’ll see a lot of times these tenants will just re-tenant each other. You might see an old Auto Zone that’s now a Dollar General. Or, you might see an old CVS that’s now an Auto Zone. They cross over a lot of times.
In those 60 properties that I ran in my old company, we had three tenants not renew their leases, and we had them repurposed and re-tenanted within a few months. You’ve got to see the repurposeability, and that’s how we try to mitigate our risks. We say, hey, if this tenant goes dark, which really is our worst-case scenario, what can it be? But the good thing is, we have fixed-rate loans on all of them. We know what the rent’s going to be. So, typically, we have some time and some leeway if a tenant does go dark.
How has real estate investing impacted your life so far?
I think real estate is a great tool to gain financial freedom. I think it’s a very slow burn. It’s not a get-rich-quick scheme. I think it was for a while, from 2010 to 2022, things were so hot you could close your eyes, close a deal, and then two years later you can double your money.
For me personally, I love real estate investing because it allows the cash flow to allow you the freedom to do the things you’re passionate about. For me, the things that I’m passionate about are supporting missionaries around the world. That’s really important to me, and it allows me the freedom to do it. It allows me the freedom to travel with my family and still play hockey for fun. I think the more you invest and the more passive income you have working for you, the more freedom you have. Time is our most valuable asset, so the more time you have, the more time you can do the things you love and have the freedom to do the things that you love doing.
What’s the one thing that sets successful people apart when investing in real estate?
I’ll say what I look for, and then investors can take that and do what they want in it. I look for somebody I can trust; that’s the biggest thing for me. What builds that trust is a track record in a business and a personal track record away from business. That trust can be gained from friends or family who’ve invested in the person and have shown success as well. For me, a big thing is that I only invest with people I know and trust. So, I’d say if LPs are looking to invest and they want to get in, I’d say start slow and start with the low-risk, boring stuff. If you see something that says it’s going to be a 3x, 4x, or 5x, then that’s a red flag for me. I’d say look for the boarding investments and then start boring.
For me, it’s all about trust.
Anything else you’d like to share with listeners?
I just think a lot of people like to invest. But ask yourself, why are you investing? What do you want out of it? For me, that’s the freedom and the ability to help people. For me, that’s the ability to support missionaries around the world. So, I always ask my investors, it’s one of the first questions I ask them is why do you want to invest and what are you looking for? So, ask yourself the question of: Why do I want to make passive income?
Then reverse engineer it from there. For me, the why is to make a difference in people’s lives and to support missionaries around the world. That’s why I do it.
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