Unlocking Middle Market Real Estate Potential with Mike Zane

Mike Zane (00:00)
if I’m an investor and I’m being marketed an offering where there’s a heavy value add component to it or you know some element that strikes me as sort of, I’ll use the word novel I guess, I want to know that the sponsor has executed on something similar to that in the past.

and that they’re not just sort of giving this a try for the first time.

you know as an investor that’s that’s sort of not what you what you want to see you get involved with potentially not to say it couldn’t work but you know you’re bringing risk into the equation

Scott Bursey (02:03)
Welcome back to the Real Estate Pros Podcast, the podcast where we connect with the best minds shaping the investment landscape. And today we have a very, very strategic real estate person that we’re speaking with. Mike Zane, principal of Lexcraft Advisors. Mike, thanks for being here.

Mike Zane (02:23)
Well, thank you, Scott. This is exciting.

Scott Bursey (02:25)
Yes, yes, it’s going to be a good conversation. And for our listeners who may not be familiar with your journey, please tell us how did your career begin and what is your main focus now, Mike?

Mike Zane (02:36)
Sure, how did I get here? So, I founded Lexcraft Advisors about five years ago. That was after spending, I don’t know, 12 years or so in the corporate world. I ⁓ was a management consultant at PricewaterhouseCoopers prior to founding Lexcraft. Spent around five years there.

And then prior to that I was in real estate finance at JP Morgan for another five years prior. So one thing led to another. I gathered up some pretty good real estate experience at JP. At PWC I was involved in sort of this combination of the audit world and the advisory side of the business.

that experience was really valuable and anybody who wants to set out to found a services firm would do well by spending some time in the consulting world and I was fortunate enough to do that. And then like I said about five years ago I saw a pathway to, rather than working with the…

the fifty largest shops in the country at a PWC, as far as a client base. I saw this opportunity to kind of scale things down and work with what we define as the middle market of private real estate.

And so that’s exactly what I did. So I went out and founded Lexcraft. It was 2021 and kind of worked out well in a sense. Everybody was at home at that time and, you know, Zoom calls became accepted. So I guess I kind of took advantage of that, you could say. And, you know, we have clients coast to coast around the country and

So that acceptance of sort of that remote relationship was a nice tailwind for me as I was getting started. like I said, the experience that I gained through time in real estate finance and in

world of audit and advisory. It all kind of comes together here at Lexcraft and you know I think it’s if it wasn’t for that experience I would not be able to to operate the business quite as well as I as I otherwise would be able to. So it was kind of this fortunate confluence of events and experience and it all sort of came together and it’s a lot of fun.

Scott Bursey (04:49)
That experience is so valuable. And Mike, Lexcraft has developed a strong reputation for advising clients across complex transactions. To start things off, in a crowded advisory field, what is the single most critical niche of specific client segments that Lexcraft advisors is currently focusing on serving and how does that focus define your value proposition, I guess?

Mike Zane (06:02)
Sure, Yeah, think we intentionally, we serve a pretty niche client base. You know, all of our clients are…

⁓ sponsoring private real estate investments under one structure or another. So we’re working with shops that are raising equity under a fund structure. We work with other shops that are raising equity on a syndication basis. And like I said earlier, our target client is really a middle market shop.

There’s variation in terms of how folks will define that. We’re typically looking at shops that are managing investor equity up to maybe a billion dollars and then down from there. you run into these situations where you have relatively small teams of people managing fairly sizable sums of money.

those small teams of people have to decide, do they want to build out financial operations teams internally to handle things like accounting and in-house finance, your financial planning and analysis function and so forth and an investor relations function, or do they want to work with a service provider that specializes in those areas and bundles those services into one cohesive offering?

know, in a nutshell, that’s who our target client is. And that’s really what I’ve spent the last five years trying to design around in terms of a product offering and in terms of the way that our team is structured. You know, so I think we at this point, we are uniquely situated to serve those shops in a way that I think it would be somewhat difficult for your larger, you know, fund admin to

to service or your larger bookkeeping firm. Because we’re really looking to get ingrained with our clients on a deep level where we literally become their accounting team. We literally become their investor services team to the point where I’m really not satisfied until our clients are thinking about us as their internal team. And that’s really what we want to be.

Scott Bursey (08:05)
That level of specialization is truly becoming a non-negotiable for investors right now.

Mike Zane (08:11)
Yeah, I think it’s true on the sponsor side too. I we’re seeing investors targeting specific markets, specific asset classes, and a lot of our clients have chosen to niche down along at least one of those, one spectrum or the other. And it works. So I agree with you.

Scott Bursey (08:32)
And that’s the main thing that it does. It does work. With the current environment of shifting capital markets, including persistent inflation and fluctuating interest rates, what’s the most common pitfall you see real estate investors running into right now,

Mike Zane (08:50)
You know, I think the one thing I encourage all of our clients to try to

really put some structure around is how they’re sourcing deals and how they’re underwriting deals. We don’t really do acquisitions as a service or deal sourcing as a service, but I try to encourage everybody we work with to find a way to see strong deal flow come across their desk.

and then to think about how can we, as a sponsorship group, how can we underwrite a fairly large volume of prospective deals at scale.

and do it in a fairly low capital intensive way or fairly low labor intensive way I guess. It’s a challenge. It’s an interesting challenge. It’s something I think a lot of shops, especially when you get into the smaller segment of the private real estate market, frankly I don’t think most shops succeed in that way. I would probably tag Deal Flow as the

number one thing that could probably be improved on by most of the shops in our sort of…

segment of the market. And I think technology is helping with that in a meaningful way now. I we have clients doing some pretty creative stuff with artificial intelligence to help with kind of like top of the funnel deal sourcing, top of the funnel, you know, basic preliminary underwriting. And I expect more of that will become possible in the next few years. So it’s an exciting time to

be in the acquisitions business. think, again, we don’t do acquisitions as a service, but from what we’re observing, I think there’s a unique opportunity for somebody who can really source ⁓ a high volume of acquisitions right now and figure out a way to underwrite those at scale.

Scott Bursey (10:44)
That insight hits right at the heart of our current challenges. And what do you feel is a strength, a core strength, or your vision perhaps, Mike, for Lexcraft advisors the next, oh, let’s say several years?

Mike Zane (11:34)
Yeah, so I think for us it’s probably more of the same in the sense that we’ve got our target client set. We think the runway there is large and long.

You know, there are thousands of middle market private real estate sponsorship groups across the country. So my personal goal is to continue with our business development efforts. I think the trick and the thing that I spend a whole lot of time thinking about is, you know, we’ve got a client base right now where we’re tightly ingrained with every group that we work with. You know, we are seeking to become the in-house.

team across the functional areas that we focus on, accounting and finance and investor relations. And so the question becomes how do you take that model and scale it out to be larger? And from being totally transparent, the one thing I care about above all else is delivering a level of quality to our clients that they would have a very difficult time finding anywhere else.

or even building out via an internal team of their own. So the entire team structure here is designed around just that. It’s designed around…

controlling for the quality of the delivery to each and every shop that we work with. And like I said, the goal is to continue growing but all the while maintaining that same level of control over the delivery. if you can’t do that, then you’re really not scaling successfully in my view.

Scott Bursey (13:05)
And that control is so vital. Walk us through, you know, beyond simply buying and holding, many investors are looking for tangible value add opportunities. Can you describe one strategic asset repositioning play that Lexcraft is frequently recommending to clients to unlock ⁓ hidden equity in the existing holdings, maybe over the next 18 months or thereabouts?

Mike Zane (13:30)
Well, we’re working with clients who are doing a variety of interesting things and pursuing different strategies and different asset classes. You know, I think that the ability to execute on some of these initiatives, it depends on what the skill set of the sponsorship group looks like. I think it depends on what kind of experience or background they have with the particular asset class. You know, do they have…

the in-house knowledge, resources, etc. to execute some value-add play where they’re maybe doing, you know…

full rehab of an asset or, you know, do they have the ability to acquire an asset, manage a portion of it as an active rental situation and then sort of redevelop or develop another component of that same asset. And, you know, we have clients pursuing these things and the ones who we’ve seen succeed are the ones who

you know again, or going through it with that depth of experience and know-how that we just talked about. You know, so I think if I’m an investor and I’m being marketed an offering where there’s a heavy value add component to it or you know some element that strikes me as sort of, I’ll use the word novel I guess, I want to know that the sponsor has executed on something similar to that in the past.

and that they’re not just sort of giving this a try for the first time.

you know as an investor that’s that’s sort of not what you what you want to see you get involved with potentially not to say it couldn’t work but you know you’re bringing risk into the equation there so so yeah I think I think to sum it up you could probably say does the does the offering match up with the sponsors track record and kind of you know what they’ve what they’ve done in the past and if it does you know great they’re shop specializing in all sorts of different creative value add plays and you know we’ve

seen plenty of them work.

I think it does and I think that’s true for our clients as it relates to growing their businesses and raising equity from their investor base. I think it also applies to us as a service provider. mean, we’re offering service across three lines. It’s that accounting and in-house finance and investor relations and…

You know, I’m confident after being in this business for five years in another 10 plus in a corporate setting that I can go into a conversation with basically any middle market real estate sponsor and bring them value through the experience that we’ve had across our client base over the last number of years. And it’s always my goal to bring them some thoughts that, you know, maybe they’ve not had themselves

Maybe it’s something we observed elsewhere. see risk in their business that they might not see given something that we’ve seen go sideways someplace else. So it’s stuff like that that I’m really looking to bring to our clients on top of the.

on top of the core service offerings that we provide. So Lexcraft Advisors is just that. mean, it is an advisory firm at heart. We provide tangible services across our three lines. But on top of that, we’re always looking to layer in advisory kind of ⁓ as a value add for the shops that we work with. And to get to that point, yeah, you have to have the experience. You have to have the track record.

you know, executing time and again. So that’s part of the reason, I think, that our clients choose to work with us and I hope that’ll continue.

Scott Bursey (17:45)
exceptional value. I couldn’t agree more. That’s so, so important. And it sounds like you have a concrete plan in place and strategic analysis in place to create that value. And Mike, I got to ask you, Dana gives us the what and the where, but it takes seasoned advisors like those at Lexcraft to provide the why and the how.

Mike Zane (17:49)
it.

Scott Bursey (18:10)
Translating complex data points into actionable strategy That combination is powerful. Where do you see the company going? long term the long-term plan

Mike Zane (18:17)
Mm-hmm.

Yeah, so the long-term plan is to, like I said, it’s to figure out how to continue to become the ingrained sort of thought of as that in-house financial operations team for each shop we work with. At the same time, we’re always looking to

Well, like I said before, we have to deliver quality as we scale. No compromises there. And then the other thing that we have an opportunity to layer on top of all of this is, you know, additional advisory support through the, basically through the use of a combination of data and technology to, I would like to think to uncover insights.

to help our clients make more educated strategic decisions about how to move their business forward. I think over time, if I look forward a few years…

you know, probably becomes possible to look across the client base, maybe do some surveying, maybe, you know, accumulate a set of data points where we can say, hey, you know, this is kind of what we’re seeing, you know, a typical waterfall structure might look like for an offering like this one with this kind of risk profile and what have you. And, you know, to the extent that I can bring that kind of guidance.

to a client and just bring that much more value to them. I would love to be able to do that. We’re working toward that now. We’re heading down that path. I think it’s just a matter of time until we get to something where we have some pretty concrete data around stuff just like that.

Scott Bursey (19:58)
And on that note, looking ahead two to three years down the road, perhaps, what major demographic or economic shift do you believe will have the greatest destructive impact on commercial real estate sectors?

Mike Zane (20:13)
I mean, that’s hard to say. Well, so we’re focused on the middle market of real estate. I would say that equity capital generally is probably at least a little bit scarcer in our segment of the market compared to the large shops. So to the extent that there are macroeconomic events that impact the…

whether it’s retail investors or smaller institutions or even family offices. And to the extent that macro events impact the ability of these firms or individuals to place equity capital with middle market sponsors, I yeah, that’s a real impact. I think we saw some of that coming out of COVID and there was real impact.

including to some of our clients. So, you know, I think that’s part of the nature of operating as a, you know, a smaller sponsorship group. You know, it’s kind of like running any small business where you’re exposed to macro events and, you know, I think you try to manage each balance sheet under your purview, conservatively and, you know, thoughtfully and…

gets back to what I was talking about earlier about identifying and mitigating risks. We do it from an operational perspective, but really it’s up to each and every sponsor we work with to do it from more of an economic or financial perspective as well. And you hope that gets you to the point where you have kind of this 360 view of risk in your business and are taking the right steps to mitigate it to the extent you can.

Scott Bursey (21:46)
It all kind of intertwines. And that’s a good point. Very good point. Is there any nuggets, golden nuggets or advice you’d like to give to our listeners today?

Mike Zane (21:55)
⁓ well, I would say that,

to the extent that anybody out there is considering an investment in a private real estate vehicle.

You know, everybody is looking at the returns and kind of looking at who the sponsor is, the nature of the offering, you know, what the cash flow scenario will look like or the waterfall over the life cycle. And that’s all well and good. I would encourage everybody also to ask some probing questions to that sponsor about what their back office looks like. How are they actually running their business? How do I as the investor know that?

that distribution dollars are going to route according to the operating agreement and how is that going to be done reliably and in a controlled way. Same thing for tax matters. If I’m an investor, hey sponsor, what assurance can you give me that my K-1 will be available to me at a reasonable time in advance of tax day?

real issues that investors run into. They’re real issues that sponsors sometimes struggle to solve for. And it’s those kinds of, I’ll call them risks, that we are here to raise our hand and say we have a solution for that.

Scott Bursey (23:13)
Awesome, Mike. And Mike, we love fostering connections here at the Real Estate Pros. For the listeners who want to follow your journey or perhaps collaborate with you, what’s the best way that they can reach you?

Mike Zane (23:24)
Well, I would direct everybody to learn more about us at our website. It’s lexcraftadvisors.com So I would start there. We also have some presence on LinkedIn.

I personally have some presence on LinkedIn, Lexcraft Advisors as well. You can find it there. We’ll post some pieces there about our thoughts on common matters that we see our clients facing. So take a look. You can also sign up for our newsletter there where we send out a monthly set of thoughts on these operational topics that we’ve talked a little bit about here today.

Scott Bursey (23:58)
Awesome. Thank you for joining us today, Mike.

Mike Zane (24:00)
Thank you, Scott. It was great. A lot of fun. I appreciate it.

Scott Bursey (24:03)
Yeah,

this has been a very good experience and thank you for those insights. And for our listeners, we appreciate you. If you got value from today’s episode, please subscribe. We have more conversations coming up with exceptional operators just like Mike. Until next time, keep your standards high and your vision clear. We’ll see you on the next episode, everyone.

Mike Zane (24:09)
Of course.