Today’s guest is Tim Wallen.
Tim is a Principal, the Chief Executive Officer (CEO), and he sits on the investment committee for MLG. He serves on the Board of Directors, and he is an Officer for the MLG Affiliation of Companies. Join Sam and Tim in today’s episode.
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Starting in Real Estate [00:00:00]
MLG Capital and its Growth [00:01:38]
Buying Through All Cycles [00:08:47]
MLG Capital’s investment strategy [00:11:13]
Equity recap deals [00:12:29]
MLG Capital’s Contribution Fund [00:19:43]
Background in Real Estate [00:00:00]
MLG Capital’s Investment Focus [00:03:45]
MLG Capital’s Profit-Sharing Structure [00:12:30]
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Connect with Tim:
Linkedin: https://www.linkedin.com/in/timothyjwallen/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
Facebook: https://www.facebook.com/HowtoscaleCRE/
LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
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Want to read the full show notes of the episode? Check it out below:
Tim Wallen ([00:00:00]) – And this is why I say in real estate you can buy through all cycles because human error is real. There’s varying degrees of talent. And that same deal in the rental, 44% of the rent roll is 20% below the market and rents 44% of roll is 20% below the market in rents. And again, so human error is real in our industry. Operators make operational mistakes. Why somebody would ever sell off market? I’ll never know. But that’s okay. That’s where the opportunity comes in.
Sam Wilson ([00:00:33]) – Welcome to the How to Scale Commercial real Estate show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big. Tim Walden is the CEO and principal and he sits on the investment committee for MLG. Tim, welcome to the show.
Tim Wallen ([00:00:53]) – Well, thank you. Appreciate being here, Sam. Absolutely.
Sam Wilson ([00:00:56]) – The pleasure is mine. Tim. There are three questions I ask every guest who comes on the show in 90s or less. Can you tell me, where did you start? Where are you now and how did you get there?
Tim Wallen ([00:01:04]) – So I started in the industry as a as a CPA.
Tim Wallen ([00:01:08]) – I was with Pricewaterhouse, did the California thing and lived out there for a number of years, came back to Milwaukee, had as my client joined them as their CFO in 1989, became the CEO in the year 2000. And I’m still here today. So 34 years with MLG, you know, 35 plus years in the industry just living and breathing real estate.
Sam Wilson ([00:01:32]) – Man, that’s awesome. What is MLG for our listeners that may have no idea?
Tim Wallen ([00:01:38]) – So MLG, MLG Capital, the M and the L. I bought I bought the L out in 1991 and the amount in the year 2000, but it was meaningless age group years ago and just I don’t care about having my name in the masthead. Just have a great team here and focus on the building. The team of MLG Capital.
Sam Wilson ([00:01:59]) – Gotcha. What what does MLG Capital, what do they do today?
Tim Wallen ([00:02:04]) – So, you know, we’re a vertically integrated real estate company. We manage roughly 40,000 apartment units. So we shovel snow, we cut grass, we fix toilets.
Tim Wallen ([00:02:13]) – We do all the hard, dirty part of the business. But we’re also this I call it sophisticated investment banking firm. We have nine CPAs, six attorneys and staff, 850 employees overall. So we have a we have a big crew of folks working hard to take care of our clients and making wise investments and decisions as we go forward. Every day.
Sam Wilson ([00:02:32]) – 40,000 apartment units, when you came on as CEO, how many apartment units did you guys own then?
Tim Wallen ([00:02:41]) – Um, well, maybe with 2000, something like that.
Sam Wilson ([00:02:46]) – Okay, so. So this, this is. Things have radically changed from when you came on as CEO. What did you say was that 1982.
Tim Wallen ([00:02:53]) – 2000? About 20. 23 years ago.
Sam Wilson ([00:02:56]) – 23 years ago. Okay. So you’ve added about a little under 2000 apartments per year. I mean, that’s still that’s for anybody. That’s a lot of growth. What have been some of the keys as you think about the last 23 years that have really helped you guys accelerate? And it sounds and it’s kind of sounds like just keep the keep the accelerator down over the last 23 years.
Tim Wallen ([00:03:17]) – Yeah. You know, it’s about having talented people and you got to have talented, smart people that work hard, enjoy what they’re doing. We have a great culture here, a family culture. You know, people that work hard and want to do great things for their clients, great things for the coworkers. You know, we have a structure here that actually I share 65% of all the profits and promote structures for all employees and only retain roughly one third for myself. And that’s key to keeping talent. We our key guys don’t leave. They just we just we had very little turnover and we just keep great talent here.
Sam Wilson ([00:03:59]) – How does that work? I’m sorry. I got to got to get into the weeds on this because I think you’re the first person out of, I don’t know, 800 interviews I’ve done here on this show at this point that shares 65% of profits with employees. How does that work, practically speaking, from senior employees that have been there for 20 years and the guy that just started last week.
Tim Wallen ([00:04:20]) – So, you know, we have our models that we built. And again, I’m a I’m a number spreadsheet guy. So you build great theories and how things should be shared. And it’s a guide guidepost and how it should be done. Um, and you know, there’s obviously people that are really driving the key strategies of, you know, buying stuff and raising capital and doing all that we do. And then there’s a lot of people black, black, black and tackling. There’s actually an old mentor. Mine had a phrase, there’s finders, binders and grinders in business and you got these two of the three to be successful, you know, finders find opportunities and that’s of a great value in our industry. Binders buying relationships to keep and maintain stuff coming and the grinders grind out the work and you got to be two of the three to be successful and that and that plays out. So we just we allocate it around. It’s not, you know, it’s not it’s we live in a capitalistic society, so those who produce and crank it out get more and but everybody shares in the pot to a degree.
Sam Wilson ([00:05:21]) – Right. That’s really cool. Like, I like that idea. I mean, that’s something we’ve often struggled with is looking to grow. You go, okay, we’re going to grow, but then how do we meaningfully bring on and retain top talent grow, but without giving away maybe equity in the company. So like kind of your, your the way you’ve thought through how you share share profits with employees. And that’s I mean that’s, that’s pretty strong. So it sounds like that’s been a key to one of the things that has helped you guys grow as much as you have. Things have changed here radically, I guess. Well, before we get to that, before we get to how the market has shifted, I want to hear 40,000 units that you guys own today. Are you strictly focused in the multifamily space? Is that it? And is that always been it?
Tim Wallen ([00:06:04]) – No, we’re very focused. We’re biased towards multifamily industrial. We have been for 30 years. We dabble in retail and office.
Tim Wallen ([00:06:14]) – And I’d say more opportunistically, when there’s an opportunistic opportunity overall, typically office retail represents between 1 and 3% of our funds. Very small, right? But it’s got to be a deal that the math is just killer and in a killer location. And you can you can make sense of it. But so I’d say if you took all of our funds together, I think we’re like at 86% multifamily and about 7% and seven, 8% industrial. Actually, it might be even 10% industrial. And then, you know, 3 or 4 or 5% of retail and office combined.
Sam Wilson ([00:06:46]) – Has there ever been a temptation in in your career history where you just said, man, let’s just let’s just cut all the other lines of business and stay strictly focused on one.
Tim Wallen ([00:07:00]) – No, you know, because, you know, my belief is very cycles and there’s very cycles where certain things make more sense than others. And frankly, a small blend of commercial assets and multifamily commercial assets tend to create higher cash flows but little higher upside potential.
Tim Wallen ([00:07:19]) – Multifamily typically has lower cash flow with higher upside potential if you have a strategy for growing your NOI. So I think they were extremely well together. They both have different tax attributes. Uh, multifamily is very tax advantaged, commercial is a little less so. And so again, they work well together. So the multifamily losses on paper, the taxable paper losses can offset the ordinary income of a commercial assets. But normally you might be paying ordinary tax on. So, you know, being a tax guy, I hate paying taxes and I don’t like don’t like paying certainly ordinary tax rates. I only want to play cap gain tax rates so they work well together.
Sam Wilson ([00:07:59]) – Know that that’s that’s fantastic I think and I think one of the things maybe that goes back to, you know, profit sharing with your employees and having people on board that can help manage those things. I think one of the things the thrust of this show is how to scale. So one of the things that we’ve commonly heard is that people, if they’ve had their hands in too many things at once and then they couldn’t effectively grow.
Sam Wilson ([00:08:20]) – But it sounds like you guys are still even so focused, like you said, 86% multifamily and industrial. I mean, that’s our 86% multifamily and 10% industrial. That’s pretty hyper focused. So appreciate, appreciate you taking the time there to share about that. Let’s talk a little bit about the kind of the market dynamics and how you guys have adjusted here in the last 12 to 24 months to what seems to be a rapidly changing market on the multifamily space? I’d love to hear your insights on that.
Tim Wallen ([00:08:47]) – Well, you know, my belief is you need to buy through all cycles and you shouldn’t be afraid of a cycle that’s there. We bought all through Covid. We closed deals in April 2020 and May 2020. Um, you know, there’s opportunity in every cycle. The key is, are you being real about the assumptions that you’re making in the midst of that cycle? So for right now. Yeah, you got to. You got to. You got to. You got to pay a higher interest rate.
Tim Wallen ([00:09:13]) – So actually that it’s not that big of a deal. You just can’t pay as much for something. Right. And so my belief putting money to work in today’s environment is an incredible time to put money to work because it’s likely when we’re selling, we’re going to probably have a much better debt environment out there that lenders aren’t won’t be as screwed up as they are right now with the regional banks and the speed at which the tenure moves create a disruption in our in our industry. My my guess is we’ll be selling a cycle where there’s plenty of plenty of plenty of debt available. And if there’s plenty of debt available as competition and you get better pricing, better spreads and we’ll sell it better pricing because of that. So now we’re not assuming that happens. We’re assuming the interest rates don’t change from where they are right now. We’re assuming the current conditions stay as is in our mathematics. So if we can buy today, today’s cash flows at today’s interest rate and we can make the math work, I think we’re going to do better in our performance show and be really happy we bought right now.
Sam Wilson ([00:10:09]) – Yeah, absolutely. I like that buy buy through all market cycles. Let’s talk about what you guys are maybe how how you change strategy in the 2008 cycle and if there’s any correlation to what we’re seeing here today.
Tim Wallen ([00:10:23]) – So, you know, I would say 2008, nine, ten gave me a little humility in the business. I never lost money in my career in real estate and a real estate transaction. Real estate guys generally are expected to win every time with their investor base. They’re not expected to lose. Unlike a stock bond. Guys win. Some may lose some. An average out real estate guys don’t think that way. They think they need to win every time. And we used to do all individual syndications, so we transitioned from individual syndications to fund structures coming out of 2008, nine, ten. I said, I’m going to get my clients diversified. And it is challenging as that cycle was. It’s the best thing that happened to our organization. It made us think ten or what we were going through that trial and that and that rough cycle as an industry.
Tim Wallen ([00:11:13]) – And I think our company is ten what it is we we target lower leverage. We target 60 to 65% debt. We don’t go to 70, 75, 80% debt, which you could in our industry, we stayed away from debt funds that allow you max leverage, floating rate debt. And anyway, so coming out of that cycle really transitioned to, you know, fund structures. We also added some additional unique elements of what we do and how we source our opportunities. Historically, we just bought primarily in Wisconsin, Texas, Florida, and sometimes there’s hard to buy in those markets because that’s where our people were and said, we’re going to open up the country and we’re going to stay in Middle America. We’re staying away from two coast to coast are crazy on pricing. But but half of what we do is we we buy deals that we find on our own, but half what we do, we actually proactively invest where other real estate guys are all over the country. So we’re talking to roughly 2000 different real estate professionals across the country, and we’re willing to invest in other guys deals, but we’re typically 95% of the equity and and and it gives us the well, we need to have enough control so we can sell and we want to, but it gives us opportunities that we’d never see.
Tim Wallen ([00:12:29]) – And I’ll just give you a quick example. Equity Recap deals right now is my favorite deal. Right now. It’s where the sponsors got a deal. They voted for six, seven, eight, nine years with a capital source. The capital source wants their money out and the sponsor really doesn’t want to sell right now. And so in that environment, I’m just buying out the existing equity guy. We’ll write the check for the full amount of the equity and the sponsor gets to stay in the deal, gets to keep all their fee income and we get a deal that we went to saw otherwise. So being proactive and being willing to invest in other real estate operation in the country is unique to our industry. Generally. People just do what they can find.
Sam Wilson ([00:13:06]) – Right, Right. Let’s dig into that method because obviously you have to be at a certain size and have the capital base to go out and be that. Recap. Recap. Investor But when we formulate even a thoughtful question as it pertains to that.
Sam Wilson ([00:13:24]) – Do the returns get muted for you as the recap? Equity is your is your return, what you’re expected return is lower because would almost think that the other the initial equity investors would be wanting to get market pricing on the deal.
Tim Wallen ([00:13:43]) – I would say in general we we think we typically are getting a 5 to 15% just discount off retail if it was on the street because we the same deal that we’re doing, we know we couldn’t get the deal. And I’m not going to say specifics right now, but there’s a deal right now. We just signed a letter of intent on we’re going under contract at a we’ll call it A57 cap rate. When in this submarket, if you look at retail, it’s a high demand submarket. It would probably still sell for 4849 cap rate. And where if it’s 5657 case, 5.67% cap rate on the buy side.
Sam Wilson ([00:14:21]) – Wow.
Tim Wallen ([00:14:22]) – And you go, why does it why does it happen? And this is why I say in real estate, you can buy through all cycles because human error is real.
Tim Wallen ([00:14:31]) – There’s varying degrees of talent. And that same deal in the rental, 44% of the rent roll is 20% below the market and rents 44% of a roll is 20% of the market in rents. And again, so human error is real and our industry operators make operational mistakes. Why somebody would ever sell off market I’ll never know. But that’s okay. That’s where the opportunity comes in.
Sam Wilson ([00:14:57]) – Well, and you’re solving you’re solving a problem for them too. Yeah. In that the I would imagine the transaction is a simpler, smoother transaction. They get to remain in the deal. So maybe, maybe the sponsor takes a haircut on you know on on the initial whatever it is but yet they get to retain ownership in the deal. I was talking to somebody else that was and they were you know a lot smaller than what you are. But there’s still a several billion dollar firm and they’re saying everything that we do from this point forward is a recap we are selling. That’s the only way we’re moving properties by bringing in bringing in other sources of equity to buy out our current investor base.
Sam Wilson ([00:15:35]) – I think that’s it’s a really intriguing kind of method there. But again, that needs it.
Tim Wallen ([00:15:41]) – It’s useful. I mean, when you sell illiquid assets, it’s not uncommon to give up something in pricing to exit illiquid, illiquid investments, right? Especially if you want to go out at a different time than your partner does. Right. And so the equity guys want to do some asset relocation reallocation and the sponsor doesn’t want to sell the asset yet.
Sam Wilson ([00:16:02]) – Right? Right. Makes a heck of a lot of sense. What do you say to that sponsor or in this case, let’s assume that that sponsor is staying in on the deal for whatever percentage of it that they’re going to own. What do you say to them once you close the deal and say, hey, guys, you know, 40, 44% of your rent roll is 20% below market, or maybe it was other way around.
Tim Wallen ([00:16:21]) – Yeah, well, 44% of the rent rolls 20% below market.
Sam Wilson ([00:16:24]) – Yeah. So what do you say to them if they’re staying in the deal with you?
Tim Wallen ([00:16:27]) – Well, we told them on the front side, we’re not doing the deal unless you’re willing to move the rents.
Tim Wallen ([00:16:32]) – Okay? I mean, you have to take the business risk. You can’t go deal with somebody in JV equity with people if you’re not equally aligned in what your goals and objectives are for that asset. So we’re not going to do a deal if we have a different opinion from the sponsor and what should be done to the asset. So we have those conversations up front, get an agreement and if we’re in agreement, you know, we’ll we’ll put a letter of intent out and say we’ll be your equity to take them out.
Sam Wilson ([00:16:59]) – What are what are some things that you guys have kind of on maybe top, top of the mind items that are on the checklist As you look at those potential sponsors and you vet those sponsors, you say, hey, these are the criteria that they have to meet either organizationally, personally, net worth wise, I’m certain you guys have some parameters. You say these are the people that we want to work with. They must fit in this box. What are some of those things.
Tim Wallen ([00:17:23]) – You know, I’d say the the the the differs a little bit. Basically, let’s say it’s a couple new guys that just sprung off another shop and they have a good track record but with somebody else but they’ve never really done it a lot on their own. We’ve done deals with guys like that, but we’ll have a tighter string on day to day management over control. In fact, in some cases, you know, because we have nine CPAs on staff and I got another 60 accountants on staff here or more than that, you know, we’ll say, hey, listen, we’ll do this deal, but we’re going to do all the Treasury and comptroller function here. We’ll do all the accounting. You guys don’t really have that infrastructure to do it on a timely, accurate basis in our opinion. And we’ve done that with people. You said you just don’t have enough infrastructure there, so we’ll play that function as part of this deal. You can run the day to day strategy, you can run the asset.
Tim Wallen ([00:18:19]) – You know, obviously you got to stay within budget and you got to stay on plan. As long as you do that, you can run it. We’re not going to you know, we’re not going to micromanage you. As long as you’re following the plan and doing it. But we might stay involved on that perspective. But so, you know, obviously, experience matters. The opportunity itself matters a lot. I mean, if we like the deal, we might be more willing to have somebody with less experiences if they’ve just got themselves a great deal on the contract. No more senior guys have been doing it for 20 years, 30 years or whatever, and they have a deeper bench of talent on their team. You know, you you obviously it gives you a little more comfort, you know, that they’re going to know how to execute the plan, but sometimes they’re not as hungry either. So, you know, it’s a balancing. It’s really deal driven. And and you have to have a given that the other group is going to have integrity, talent to execute, you know, any kind of business plan.
Tim Wallen ([00:19:17]) – And then the degree of oversight drives, you know, some of the details of the agreements. But such is a great real estate. And but then you still got people that you trust and you like their knowledge and ability to get the job done.
Sam Wilson ([00:19:30]) – Got it. No, that’s great. That’s great. Thanks for giving some color there to that. Let’s talk a little bit about your contribution fund and how you. Is that your primary vehicle now that you guys are using or is that just one of many? No.
Tim Wallen ([00:19:43]) – Yeah, we have we have basically our closing funds that we roll out. We don’t do no close end fund with a typical close call. You know, it’s usually like a 7 to 10 year life of each closing fund and those each new fund we roll out about every 24 months, every two years. And any fund will buy 25, 30 assets and the closing funds, the Legacy fund is really designed for folks that are looking to smell the roses in life. They’re looking to not be involved in asset management.
Tim Wallen ([00:20:15]) – They’re they’re looking to have a good strategy for transferring wealth to the next generation. So the product is designed to deal with giving air flexibility, creating more diversification, getting away from single asset risk, or at least a small portfolio. And it’s very dynamic from an income tax perspective. Every client that we put into this, we’ve taken a tax bill from whatever it was down to below zero. And again, it’s knowing how to to to not pay taxes in our business and the art of real estate. I’m not thinking of taxes has never stopped buying. But at some point people get to an age they don’t want to do it anymore. They don’t want the risk profile anymore. So that’s that’s how we that’s that’s the focus of that fund and that’s evergreen in nature.
Sam Wilson ([00:20:59]) – And that salt that solves that the tax issue, it solves the not wanting to manage issue. It solves the the diversification issue. It sounds like the contribution fund is a pretty cool product that solves a lot of people’s problems, I think, especially as they age and they’re they’re ready just to hand it off.
Sam Wilson ([00:21:16]) – I mean, we talked about that a little bit, you know, before the show kicked off. That sounds like a pretty cool product there. Wish we had more time here to jump in today. Tim, thank you for taking the time to come on the show today. I certainly appreciate it. We’ve learned a ton from you. You guys have done amazing things. I’ve got about 20 more questions for you, but we’re just flat out of time. But if our listeners want to get in touch with MLG, MLG, if I could speak today, MLG Capital, what is the best way to do that?
Tim Wallen ([00:21:43]) – Well, you know, we have a lot of talented people, but they can reach out to me and I’ll pass them on to the team. But, you know, our actually if you send a note to investors at MLG capital.com or even my email address is T wollen at MLG companies or MLG capital.com. Certainly that will get them connected to the people that can help them out. And I appreciate the time here with you Sam, today.
Tim Wallen ([00:22:10]) – Thank you.
Sam Wilson ([00:22:10]) – Thank you, Tim. I certainly appreciate it. Have a great rest of the day and thank you for coming on the show. All right.
Tim Wallen ([00:22:14]) – See you.
Sam Wilson ([00:22:15]) – Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can do me a favor and subscribe and leave us a review on Apple Podcasts, Spotify, Google Podcasts, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank higher on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
