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Non-Traded Reits vs. Direct Real Estate Investing

  • Broadcast in Real Estate
Howard Kline

Howard Kline


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As a real estate broker or investor, you might typically look to buy an office building or shopping center directly from the owner or seller.  As a seller, you may direct your broker to market your property to individual or corporate investors. However, are these your only options?

Join us as we discuss non-traded REITS with John Bessey, President of Phillips Edison-ARC and Tony Chereso, Principal and Chief Operating Officer of Factright.

These are two highly experienced, knowledgeable and interesting gentlemen who will discuss, among other things:

  • Non-traded REITS as an alternate to direct real estate investing;
  • The benefits and detriments to non-traded REITS vs. publicly traded REITS
  • The relationship of non-traded REITS to Commercial Real Estate Brokers
  • Property types and classes of properties owned by non-traded REITS
  • The good, the bad & the ugly or are all non-traded REITS the same and what should you be looking for in a good REIT investment

Mr. Bessey served as Chief Investment Officer for Phillips Edison & Company from 2005 to 2010. During that time, he managed the placement of more than $1.2 billion in 140 individual shopping centers comprising over 14,000,000 square feet. Prior to that, he served Phillips Edison as Vice President of Development from May 1999, starting the ground-up development program for the company. He started and completed more than 25 projects which included Walgreens, Target, Kroger, Winn Dixie, Safeway and Wal-Mart. 

Mr. Chereso has a well-diversified financial service background ranging from corporate accounting, finance audit to management sales leadership.  Most recently Tony was national sales director for a securitized TIC sponsor.   Tony is a principal and Chief Operating Officer of FactRight. 


0:12 Introduction

Welcome to CRE Radio with Howard Kline. Our focus is Commercial Real Estate exploring vital questions from plenty commercial landlords, property and asset managers, investors, brokers, tenants and anyone providing services to the industry. Your host is Howard Kline. His Commercial Real State practice over 35 years has concentrated on broker, leasing and property management issues. CRE Radio broadcasts are presented with the sole intent of educating listeners. Howard and his guests are specifically not off for any legal advice. If you need legal advice, consult your own counsel. CRE Radio is available live and downloadable anytime at creradio.com. Call in during the live show with your comments or questions, (619) 393-6492, then press 1 to be placed in queue and now, here is Howard Kline.

1:07 Howard Kline

Hello everyone. This is Howard Kline and hold on a second, we are trying to get hold off some of our guests which we will be able to get hold off and our guests for today's show will be John Bessey, CEO of Phillips Edison-ARC. John is really a great guy. I've had an opportunity to speak to John. Hello John, you there? Okay, so John is not there right now. We've got let me tell you a little bit about today's show. Today's show is about non-traded REITs and the question here is "Are there reasonable law alternative to traditional real state investments?" Our special guests as I had indicated are John Bessey, CEO of Phillips Edison-AR and Tony Chereso, President of FactRight. Now, let me tell you a little bit about let's see how long I can delay on this. Let me tell you a little bit about the show and the key saying that it cross my mind in my pre-show conferencing with John and Tony were the fact that this is not my area of specialty. I am not an expert on non-traded REITs and so, the important thing here is that I have the opportunity to learn just as much as anyone else. So Melanie, why don't you tell us where we are at now with regard to our guests, you there Melanie?

2:51 Melanie

Yeah. I am.

2:55 Howard Kline

You're on the radio, Melanie.

2:58 Melanie

I'm on hold right now.

2:59 Howard Kline


3:00 Melanie

Hold on.

3:01 Howard Kline

So, would you please have the two guests have them call in to our number, it is (619) 393-6492, and then we'll put them on the line. So we'll go ahead and do that. We have some technical difficulties. One of the issues is that John is at I think it's Dallas Airport and we were at the last second. He had to fly out a little bit later. Now, about 1:15, California time and so we've had a little difficulty making that connection so we're going to be working on that. So, non-traded REIT is a very interesting particularly to me because I am not expert in that. I'm somewhat familiar with traded REITs, publicly traded REITs, and when this issue first came up to me, I was trying to figure out what it is that these non-traded REITs are Now, I dealt with them before. I have some familiarity with ARC, Phillips Edison-ARC __04:15__ has got both traded and non-traded REITs and the question that I had was why would anybody look to these non-traded REITs as an alternative to traded REITs that you could buy interest on the stock market or for that matter, direct real estate purchasing which is the subject matter of this show if I can have my if I can connect to my guests which seems to be a bit of difficulty right now. Let me tell you what else we'll be talking about. If Tony DeFazio was out there; please get your clients to give me call at (619) 393-6492.

5:04 Howard Kline

Now, what we're talking about we will be taking about today are the advantages and disadvantages of investing in non-traded REITs versus direct investing issues that you might have to deal with regarding direct investing and we're also going to be talking about oh gosh, some of the payoffs that are available in non-traded REITs that are not available. For instance, I think John had indicated to me that some of these non-traded REITs are going to be paying the public 2.5% to 3% more than a traded REIT. Publicly traded REITs are institutional. They have different motives, different methods of operation because they do have to answer to the whims and fancies of Wall Street where the non-traded REITs do not. We are going to be talking about the good, the bad, and the ugly of non-traded REITs, what makes sense, what doesn't make sense. We are going to be talking a little about the core operations of non-traded REITs and what these non-traded REITs what you should be looking for and did a conversation with both Tony and John. They made it a big point to deal with you know, stick to what they know and what they are doing, and that's one of the things that we're going to hear from John hopefully or we're going to have to reschedule the show for some other time, and I'm just still waiting to see if I hear from anyone of them. This core concept is important.

7:05 Howard Kline

So, here is Tony Chereso. I have got Tony in right now and we'll add Tony to the line. Hi Tony, how are you doing?

7:15 Tony Chereso

Fantastic Howard, how are you?

7:17 Howard Kline

Well, I'm a little flustered because I was talking briefly with John. I really want to get John on the line. Hopefully, Tony DeFazio is going to be getting a hold off John and having him call in to the show. If not, I'm going to have my assistant producer to try to call directly and get this connected. In the meantime, I think that we probably ought to start with you. I was just kind of filling in on the time based upon my conversations with you and John, and I really want to get John in on this because John he is just he tells good stories and he knows what he is talking about. So why don't you and I talk a little bit at least for the time being about why what someone would be looking for in a non-traded REIT? Let's talk a little bit about it. Well, before we even go there, why don't you tell us what a REIT is for those who are not familiar with REITs.

8:27 Tony Chereso

John Howard, REITs are portfolio of real estate and it could be we're seeing different types of asset classes or mixture of asset classes in these REIT portfolios. Essentially, you're looking at assets or portfolios that's anywhere from billion to 5 to 6 billion dollars and it can be a variety of like I said, a variety of different asset classes. There is also debt REITs. REITs that actually invest in and originate financing related to Commercial Real Estate. So it could they're primarily focused around the Commercial Real Estate sector that could play in the hard assets itself or on the debt side of the market.

9:18 Howard Kline

Well, why is there such a thing as a Real Estate Investment Trust and why isn't just in LP that's a limited partnership or in LLC, which is a very popular ownership vehicle of Commercial Real State?

9:37 Tony Chereso

Well, I mean there is some a couple of things. The REIT was enacted which scares that to 33 and there are favorable tax advantages under Subchapter M of the tax code which requires 90% of the REITs. Tax will going to be distributed annually. So there are some very significant and beneficial tax advantages to investors under this particular structure.

10:06 Howard Kline

__10:07__ and what might be some of those tax advantages?

10:13 Tony Chereso

Well, I mean you get pass through in regard to depreciation. So you get the tax sheltering of the some of the dividend income related to it and...

10:22 John Bessey


10:23 Howard Kline

Hey, guess who we've got on the line. Through all of the nervousness and everything else, I have John Bessey on the line. John, say hello. It's so much for having John Bessey on the line. John, if you could hear me, would you call in on your cell phone. It's (619) 393-6492. We had him briefly. Can you hear us John? Okay. So I'll have we'll try to add John in...

10:57 John Bessey

I am on the line Howard.

10:59 Howard Kline

Yeah, but we can't hear you too. Could you call in at (619) 393-6492 and we can add you to the show? Can you hear it, John? Okay, so more technical difficulties. I hope he heard me. Some dead time, now I got cut off. You know, you're trying new technology and this is what happens. Okay, so Tony let's try you again Tony. So where are we at Tony? Where do we last leave off?

12:07 Tony Chereso

The last question you were asking Howard was specifically related to some of the tax advantages which we talked about that pass through depreciation and so provides here some sheltering of income. So you get the benefit of owning real estate, but you owned it in a REIT structure. So it's not double taxation flow through 90% of the tax __12.35__ distributed it annually and you get you know, the other advantage is that you now are able to invest in a very diversified portfolio of traditionally high-class Commercial Real Estate.

12:50 Howard Kline

Aha, okay. Well, you see that is a significant difference. So why don't you talk a little bit about the good, bad, and the ugly. How do you distinguish between because I have been reading some articles about REITs, some non-traded REITs that didn't work out very well. Why don't you we talked about what it takes to choose a good non-traded REIT and the things that you look for and in particular, I want to know why you're an expert on this because you want to tell us a little bit about you and your business.

13:32 Tony Chereso

Well, Howard, FactRight is an independent third party due diligence firm and our role in the industry is to evaluate the issuers of these non-traded REITs and actually measure the performance and track the performance of the REIT portfolios.

13:50 Howard Kline

Let me interrupt you for a second. I think I have John. John, are you on?

13:54 John Bessey

Yes, I am Howard. Sorry for the...

13:57 Howard Kline

Oh, it's not your fault.

13:58 John Bessey

Technical difficulties.

13:59 Howard Kline

Yeah. I was trying to call you and that's what happened. You can't be perfect with this technology when people are running around in the airport.

14:08 John Bessey

I was thinking, where is my son to help me with this.

14:13 Howard Kline

As long as we could take care of the show and Tony has been ably filling in, probably a little bit flustered right now. What we were talking about and I think we ought to consider what Tony let's go back a second for the podcast. I'm obviously going to have to be doing some editing here, but Tony was talking a little about his background and we had skipped to the good, bad, and the ugly portion of our outline. It's how you can distinguish between a good REIT to invest in and a bad REIT. So Tony why don't we go over your background a little bit so that everybody is familiar with your expertise and then, John could chirp in and we can talk about Phillips Edison ARC and then the things that they focused on that make them a good REIT. Go ahead Tony.

15:11 Tony Chereso

Thanks Howard and welcome John. As I mentioned, FactRight is third party independent due diligence firm. Our expertise and our role in this space is to evaluate the capabilities of the issuers of these particular programs as well as other type of alternative investment products and also to measure interactive performances of the programs as they've start to execute on the strategies. This space has explored over the last five to seven years. We're currently looking at well over 47 effective REITs in the marketplace, actively in the market raising capital. We have the daunting challenge for the independent broker-dealer to sort of seep through those programs and those sponsors, and determine which ones are appropriate in predicting their success. We look at a couple of things. There are three main things we're focusing on and large part starts with the sponsor and issue release. We want to make sure that the sponsor has specific technical expertise in the discipline or the investment strategy they're pursuing. John will talk a little bit of about Phillips Edison, but you will hear very specifically that they're focused in the focus of their program aligns with their 20-year plus history of Phillips Edison, grocery-anchored shopping centers. They're not doing central business office or hospitality, they're staying in their core niche. And so, we looked at that as a primary focus. We want to make sure that the sponsor has the ability to raise capital. We've been in a market where the market is really tight and not having the ability to raise or have the trajectory to raise capitals impedes the sponsor's ability to be able to execute on the strategy and that puts the investors at risk. So we want to make sure they have infrastructure and ability to do that.

17:16 Tony Chereso

You know, on the flip side of that, we got to make sure we're managing and watching that they're not raising too much capital because you need to be able to raise it and deploy it efficiently. We've seen the changes in the market. We're both from a standpoint of the cap rates of some of these asset classes as well as ability finance has shifted and makes a little bit more difficult for the sponsors or issuers to be able to deploy a capital efficiently.

17:47 Howard Kline

Okay. Let me interrupt you a second. We'll get back to that because I want to bring I don't have John for that long time so I want to make sure that I get John in here. One question I have for both of you so that it's clear. Most of the audience is real estate brokers. When you are talking about broker-dealer, you're not talking about real estate brokers, correct?

18:13 John Bessey

Correct. We are talking about security broker-dealers.

18:17 Howard Kline

Right. So in this particular case, is this a product that real estate brokers can get involved in?

18:28 Tony Chereso

Yeah, yeah. I think the answer is yes and I think there are three ways that they can get into it. First, they can get on the buy and sell side if you are an investor or investment broker on the real estate side. Contact and create relationships with those REITs that are raising money through the independent broker channel to see whether you can service either them on the buy side or on the sell side, bring them properties or marking their properties to the larger marketplace. The second is if you're a service provider from a broker's standpoint. They were always the majority of reach out there in the independent broker space, their business model is that they actually hire third party property managers and third party leasing groups, and so they go around looking for the best property managers and leasing groups where they have their properties or cluster properties or regional properties. So I think those are the three ways. Buy and sell from an investment broker's standpoint, leasing side from leasing broker's standpoint, then management side from property management's side.

19:32 Howard Kline

Why don't we talk a little about this core concept because the core concept is something that really came through in my conversations with both of you and it's just a very significant factor. So John, why don't you start out with the concept of what your core business is and sticking to that as well as Tony, then you come in and you add to it and both of you, feel free to just get in to the conversation.

20:05 John Bessey

Alright. Well, let's talk about core from three words and Tony was starting to articulate this very well. It's that theme, team, and track record. So let us talk about core as it relates to those three terms. On a theme, are you seeking with your __20:20__ and Tony used the term style draft. We've been doing grocery-anchored shopping centers for the last 20 years and in fact, if I had to do apartment or industrial, I'd be probably pretty good at losing investor money because I don't know enough about those programs, but we do know the grocery-anchored says. From a team standpoint, it's like team It's like core team capable and do they have the history of producing the returns and delivering the expectations of the equity they're raising. And then, from a track record, they'd done it before. Tony made a good point. Have they raised the money, have they placed it, have they liquidated it before and return the money to the investors. So that's on the equity side or the investor's side. As far as on a real estate broker's side, core products are class A and it's either one or two cities or core plus, but there is a little vacancy, but there's still the top newest shiniest product, whether you're in retail office, industrial, or multi __21:22__ and that's a core product category that the ending would be the majority of the regions in the non-traded space are looking to because they need to service the equity and they service the equity by being able to count all the rest. Core is assumed to be a low risk as far as steady income coming and they need to be able to grow the income so that they can actually return their original capital at the end of the program. So that the two sides of core.

21:51 Tony Chereso


21:52 Howard Kline

Go ahead.

21:55 Tony Chereso

John, this is Tony, a quick question for you. Certainly, we're talking about the focus of the technical expertise related to the real estate and experience of the management team, but with these programs, they are ultimately a security and so can you talk a little bit from your experience bringing out you know, having the technical expertise in real estate and stating to you needing, but then now layering in the security aspect of this program.

22:27 John Bessey

Well, that's kind of interesting. I got to admit, Howard and Tony, I was little naive when we started this program and we joint ventured with __22:35__ securities and my naivety was that I didn't understand that it was really one financial adviser at a time that we had to tell the story to and that the story had to be compelling off that they would risk their reputation to recommend and decide on behalf of their investors to invest the portion of their retirement or portion of their investable assets into our non-traded REIT and those financial advisers really like all of us through the great recession have taken __23:03__ because that great recession was an equal opportunity disruptor. Everybody and anybody was affected by that. So everybody is a little skittish out there and I will tell you that. That was probably the biggest learning curve that I had. It is to simplify the conversations that was repeatable to not only the financial adviser, but that financial adviser could then repeat it to the individual investor and it was like compelling easy enough to understand story that they would trust you invest their capital.

23:35 Howard Kline

I think that was stated very well. Let's talked a little bit about history. How does history come into play here?

23:46 John Bessey

Well, there is an old saying I think that leopard doesn't change its spots and a tiger doesn't change its stripes. If you have a history and again, future results are not depending on the past results, you can count on that, but you have a higher probability of getting your desired result if the people you're entrusting your __24:06__ equity too and capital too have actually done, but they said what they said that they're going to do. There are three things that happened there. Three things happened because of that. You have experience, you have knowledge, you know where the pitfalls are, you know what to do right and what to do wrong. Howard, I talked about this. Most of my learning has come through my failures and so, I try not to do the same failure twice because it's too hard to learn, right?

24:33 Howard Kline

No, it's not the truth.

24:37 John Bessey

__24:37__. So that's really where team comes in. They've done it before. There are steep to it. They are long in the __24:42__ in the industry that they're __24:46__. I will give you a little example of that. You probably have read Malcolm Gladwell's The Tipping Point and in The Tipping Point, he makes the argument that you become an unconscious confident when you have over 10,000 hours of experience in one field of study and he gave the example of The Beatles. The Beatles played in nondescript German bars for 5 or 7 years, 7 days a week, 8 hours a day. The ones with the chicken wire up front __25:15__ and they had over 10,000 hours of experience and expertise in playing as a band before they landed on America and showed up on The Ed Sullivan show. Becoming an unconscious confident through that experience is huge value being brought to the individual investor or any individual endeavor. So if you look at our team, on average, we've been together over 20 years. That's over 52,000 hours of experience within the discipline of retail real estate and that really wraps up that team.

25:47 Howard Kline

Now, that's pretty impressive. Now, there are some REITs out there that diversify. Is it always negative when a non-traded REIT diversifies into a direct area, John or Tony?

26:10 John Bessey

Tony, I'll take and I think we both come up with the same answer.

26:15 Tony Chereso

Yeah. You know, it's a generalization that I don't think applies. I think it depends and I hate to keep it going back to the team. But it creates a diversification of portfolio when you have multiple asset classes and certainly that place favor to the ultimate investor, but you got to make sure that again, going back to the team, I have the confidence __26:41__ on manager with a very diverse portfolio. Listen, most of the people that are listening on this call are real estate professionals. They know what's -- it's like managing office building or apartment building or maybe a retail center. They're completely different. They have different dynamics and different changes and so, it is important that the team is structured around that so if you are going to go out with a diversified portfolio, you got to make sure that you have the right team in place available to support that.

27:11 John Bessey

You know Tony, I would agree with that, Tony, and I would add to it that if you from a road map standpoint, if you look at the public markets and you look at the publicly listed REITs that are out there right now, they're all specializing in various specific sectors. One that is taking on the teams right now from evaluation standpoint is __27:29__ and now, they're talking about breaking up the entire company into their very specific subcategories. I think if you look at the general broad market place, not only _27:39_ out there, maybe you can correct if I am wrong, Howard is generally __27:44__. It's not the current paradigm that people are operating under. They want a simple story. They want a sector specific area and they want specialization and delivering those returns that the equity is demanding.

27:59 Howard Kline

It's kind of Steve Job's approach. Keep it simple and do what you know how to do.

28:06 John Bessey

Yeah. Howard, what we have seen in some cases where some of the programs have diversified and not basically as their initial strategy, they diversified because the sector they're originally investing has gotten to rich and they can't buy it credibly any longer and so, they'll move from industrial, then bring in some hospitality and then by default, you create a diverse portfolio. But it wasn't what the initial investors were looking to get into and it was really essentially driven based on availability and pricing in the market.

28:44 Tony Chereso

So much coming to me then and they couldn't place it.

28:47 Howard Kline

So one of the things if you're an investor, you want to pay attention to, you want to pay attention to your broker-dealer too to see what kind of experience, if they know how to ask the right question of the right it's not necessarily limited. They may have the knowledge and experience to deal with different sectors, but you want to make sure that they know how to ask the right questions of each of these REITs that are focused on their core products.

29:15 John Bessey

Absolutely. I bet when people called in for the show a $10 to a dime that what will tell us Howard is that I am the top of my field because I specialized in industrial. I am the top of field because I specialize in investment sales of retail. I'm the best in my field in my city, in my market place because I am specializing in multifamily class A _29:36_. The guys listening I got to believe the guys because I was that way when I was a real estate broker. The guys listening to the show know that if you specialize, you can gain that focus on attaching gains, so much more traction and credibility and success in the marketplace. I think it's a pretty proven paradigm, don't you think Tony?

29:59 Tony Chereso

I would agree. Howard, are you still there?

30:14 Howard Kline

I got a bit more technical. Yeah Tony, I'm here. __30:18__. There still have more technical difficulties going on.

30:22 Tony Chereso

Yeah, _30:23_.

30:24 Howard Kline

Can you hear me now?

30:25 Tony Chereso

We can hear you.

30:27 Howard Kline

The more technical difficulties, we'll get back next. We will get back to everyone after a few brief messages and then, we are going to be talking about the financing issues and the ability to raise money that Tony had addressed earlier on in the conversation when we had even more technical difficulties. We will be right back.

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32:29 Howard Kline

Welcome back, we're at CRE radio, and we are talking to John Bessey and Tony Chereso and we're talking about Non-Traded REITs. Welcome back gentleman.

32:41 Tony Chereso

Well, thank you

32:42 John Bessey

Thank you.

32:43 Howard Kline

Well, we're all there, how do you like that? So, Tony you are earlier on in the conversation. You were talking about an important element in the analysis of a good, bad, and ugly REITs is the ability to obtain financing. Can you go in to a little bit more detail and then John, I would like to share a bit on that?

33:07 Tony Chereso

Alright. Financing is a tricky endeavor in these programs and there's a number of ways that some of the REITs approach __33:17__. Secure financing on an individual asset is they're requiring them or what they'll do is they'll bring them into the portfolio and then wrap them together in a structure deal where they'll have multiple assets and go out and finance it together. What we're findings is that the financing actually and John speak to this more specifically. The financing has been pretty favorable for many of the programs out there and it allows the use that in order to on a positive basis, to create a better yield for the investors, but it is the market. It continues to hold strong and we are seeing on the debt side a very favorable terms for some of the programs.

34:07 Howard Kline

So John, why don't we talk a little bit about the favorable terms and perhaps the advantages to someone investing in the REIT, Non-Traded REIT?

34:19 John Bessey

Yeah. It's one of those fundamentals that kind of it __34:23__ at your back. Two things are happening. First, on the asset pricing side, assets have adjusted down based on the recession and if you bought here's the big question, if you bought a house in 2006 or would you like to buy that same house today and the answer obviously is today because the pricing has come down and that's true across all real estate and all commercial real estate. So if you add that as one building block, great time to buy, __34:48__ Ben Bernanke, Uncle Ben as we call him, has said publicly that he's not going raise REITs until 2014. I mean what a gift of a lifetime that is. So __34:59__ financing, you can put on like 2.9%, say 3% as far as £2 interest rate on an IO, interest-only basis and __35:07__ permanent that, you know, it is going to range between five, seven and ten year. But you can get four year __35:13__ for 24.25 and 10-year __35:17__ 5% where it would be interest-only for the first couple of years and then, do a 25- or 30-year amortization after that. It's a fantastic __35:26__ because if you're buying things that have 7% cap rate let say and you're putting that on it at a 3%, then that really __35:35__ to the equity. That adds more value to the equity and it returns to equity somewhere around 12.5% to 13%. What a fantastic time to be in the marketplace? But on the other side of that Howard, is everybody has freaked out because my house isn't worth as much. I hate real estate, I hate you. All those things are going on in individual basis side and they're afraid, they are scared.

35:59 Howard Kline

Well, this seems to me that to be a really good time to buy. Well, there are couples of factors and we're at the real share conference in Los Angeles and there was some conversation about loss of patience, etc. But it seems to me if you're looking at a 5- to 10-year hold, this is a great time to buy. Because if you buying at a good price now, it will, as far as I am concerned, it will be up in 5 to 10 years and if your cost is minimal, this is the time to do it if you can do it and you choose the right property, which is always the trick.

36:47 John Bessey

Yeah. More importantly, the right property category that something you understand. You know, use what Warren Buffet says, "I'm only going to buy what I understand." People understand __36:56__ people understand grocery stores because __36:59__ twice a week. People understand pharmacies so that would be the first __37:04__ and then the second __37:05__, somebody who has done it before, longing the truth to what they've experience.

37:09 Howard Kline

Now, why would someone purchase a Non-Traded REIT versus a Traded REIT?

37:18 John Bessey

Well, if they're looking for yield. If your side gets the biggest difference between the two. If your publicly traded REIT and you're buying real estate, but trade is like an equate. So as the equity market goes up, __37:31__ prices go up, REITs go up. As the equity market goes down or stock prices goes down, REITs go down and there's a like a 96% correlation. It's __37:41__. I can buy it today and two minutes later, I can sell it. With the Non-Traded and their dividends I should say are somewhere between 3.5% on annualized basis, 3.5% and 4%. On a Non-Traded basis and traded basis, it's likely so when you're in, you're in and you got to consider yourself then. So if you need a pay for a vacation or remodel a house and pay for college, probably not the right investment for that pile of money that you're looking to invest. But yield returns are somewhere between 200 and 300 __38:16__. That's 3% higher than the traded REITs. So it gives you a very sector specific hard asset investment that delivers a higher yield if you are looking for a stronger cash return and it does not subject you to the volatility of the stock market. You know if it goes up, it goes up as it goes down, it goes down. Our pricing stays pretty much the same and it is constant and our yield stays pretty much the same unless we raise it because we are operating well.

38:45 Howard Kline

Typically, how do the operations of traded versus non-traded REITs differ? That was off the general question, but let see how well you can handle that.

39:00 Tony Chereso

Well, I'll speak to it.

39:02 John Bessey

Go ahead Tony and I'll fill in.

39:04 Tony Chereso

Yeah. I think we should typically wind up seeing it on the traded side of this industry as the management has internalized. They're part of the operations. On the non-traded, you typically have externally advised management. So you typically have an issuer of the REIT, then you have an advisor or subadvisor. That advisor or subadvisor is responsible for the day-to-day management reporting to the board of directors. At some point in time, if there is a public listing of that non-traded program, that management has to be internalized. Somebody is going to have to run that program and so on the traded side, that's already done or the management has already internalized.

39:55 Howard Kline

John, this is a perfect opportunity. We just gave you a big softball.

39:59 John Bessey

You did, you did and I'll take it from the operating side versus the structure or management side, Tony. On the operating side, which we'll see on the publicly traded typically speaking is that they will either __40:12__ the property management and __40:14__ for their properties to who they determine to be the best third party guys __40:19__ whoever that maybe in those particular markets or __40:25__ and then they'll do their own property management. In the non-traded space, the same thing happens. But in our case, we actually do all that management and leasing ourselves. Because we've learned early on in the __40:40__ that's really, really where we __40:41__ 20 years ago that is if you control all the inputs, you know the inputs being the sourcing, the due diligence, the financing, the leasing, the construction, the property management. If you control all that inputs, then you have a very strong control of what output is and as a third party broker when I was leasing other people's property number of years ago. I went to the loaning group and I think our rules take as know what that is. I went to the deals that would put money in my pocket from a commission standpoint. I wasn't working.

41:16 Howard Kline

More technical diff...I'm enjoying this John. We loss you for a second, come on back.

41:22 John Bessey

Oh, I'm sorry. You're my back in.

41:27 Howard Kline

Yeah you did, you're back in. I think that's an adequate statement, but yes we've got you on the radio too.

41:34 John Bessey

Alright, yeah. So there are different management styles and different management paradigms. I'm an advocate for the guys actually placing that equity, nurturing that equity through vertical immigration. Doing everything themselves versus forming it out to third parties because we all know this. One of the most difficult things of trade in the company is getting our employees and associates to think like owners and if you can do that, then you can add so much value to the overall equity you're investing and deliver more value at the property level. We're a big advocate of that obviously.

42:11 Howard Kline

You just _42:13_ hot point for me and we didn't talk about this so I'm going to _42:12_. This is one of Howard's big things, getting an employee to think like an owner, how true that is? I know that when I work for other companies. I would always think like an owner when I was general council for supermarket chain. I would walk into a market, I would be looking around at everything. I would be looking to see if there are any grapes on the floor. I would be looking around you know, I would walk in the back, that wasn't what I did as the attorney for the supermarket chain, but I wanted to see because it all reflected upon me and that is I think over my 30 some-odd years in business, that has been one of the most difficult things. It's to get employees actually think like owners. How they could that?

43:16 John Bessey

Well. Tony, you probably have a couple of ideas, but I'll share a couple. At first is I'm given a __43:22__ ownership and that's what we do. __43:27__ managements units and after a year of service, we give our employees based on their position and their function RMUs and each six months, those RMUs pay a dividend. So once we've start seeing that money coming in, then they've start tying back their activity, their efficiency, their caring about taking care of the customer, their entire thought process being tied to that distribution job. I heard Southwest, they didn't hire people and make them friendly, they hired friendly people and then train them on how to work on airline business. The same thing has to come with, I think, from an employee standpoint. You have to find people that care and have a high level of integrity and work ethic and once you get those three things, training them to do what you want them to do is really easy because they do care and they will put in more effort because they care. Tony, you're going through building a business right now. You're obviously going through some challenges, right?

44:30 Tony Chereso

Yeah, I would echo what you've mentioned and from our prospective, looking inside as I mentioned, our role is to evaluate the capabilities of organization and why don't we do is centrally looking at some intangibles and it really the culture of the organization and it starts from the top and we've had the pleasure of going in on several occasions to review operations __44:56__ and you can walk into their operations and _45.02_ walking into others and you can talk to people throughout the organization. You can see that they have a vested interest, but that's been driven based on what some of the things that John mentioned. They want everyone to think like owners. They __45:17__ them to think like owners and they provide them the tools and the resource to do that. So they don't feel isolated and it's really interesting when you go into a business and you really get a chance to talk to all levels of the organization and you can really get a sense of where they feel they fit and how they drive the profitability. There are many __45:41__ businesses that we go into and operations that we go into, __45:44__ have just completely disconnected. They don't know where the organization is going, what strategy, what their role is, or how they interface. So it is essentially a critical element of the overall success in the business.

45:59 John Bessey

You know, tying it back to real state brokers, Howard. I bet if you do a survey of all the guys that listen to you across the country and you ask them who the top guys are and what is one of the character traits those top guys are from whether they are releasing property management or investment brokers, they'll all say that they care and if they care for the owner that they're working for, that owner appreciates them and will use them a lot more, and put them in deals that they wouldn't even thought that they should be in. It's amazing how it feeds upon itself.

46:30 Tony Chereso

We're quick to respond to employees that don't care. I mean if they don't have vested interest in we show them the door real quick because that will invade the whole organization and so I couldn't agree with John more.

46:50 Howard Kline

The caring is intangible. That's very extremely valuable. Certainly, if you start with that, you certainly feel that you can go more from there. So I it is pretty clear that investing in any investment including a non-traded or traded REIT is not a guarantee of good returns. But I would think that a solid analysis of all the essential elements gives you your best shot at a very good return on your investment. Is that correct, John?

47:32 John Bessey

I could - I don't think I could have said it better. It goes back to the fundamentals __47.40__ but if you look back at the 6000 years of recorded history, there are no new fundamentals. So I've heard it said this way, if this somebody asked you to come visit their antique factory, you got to be somewhat suspicious, don't you? That's not you can't manufacture antiques. So if you look at the fundamentals and there are only a couple hard work, one of the things that are __48.03__. If work harder than anybody else in the industry, they will outwork you and leave you in the dust. But fundamentals are very basic and onward doing these simple things that are fundamentals at the property level and there only a couple -- hard work you know one of the things that our _48:03_ brings to the table is they work harder than anybody else in the industry. They will outwork you and _48:09_ that task, but fundamentals are very basic and onward doing the simple things that are fundamentals at the property level but not many people do it consistently and if you are a top financial advisor or if you are a top real estate broker you are prosecute in those fundamentals on a _48:26_ basis and you know what's easy about fundamentals? They're easy to do. You know what's hard? It's hard to do it consistently and the good guys always do it consistently and how they gain success.

48:38 Howard Kline

But if it were so simple how come everybody's not doing it?

48:43 John Bessey

Well, because you got to work hard at it. I know you have hired people and I have interviewed people, I know Tony has interviewed people and it is amazing everybody wants -- I have been interviewed a lot of people and everybody wants a job but not many wanna work that hard.

48:57 Howard Kline

And I think expectations are some times people have expectations that they think want I would consider to be 25% effort they come from a background that would value 25% effort at a 100% and I am like disappointed and they don't understand why. And I guess my school level at times is limited in that but when I find someone who just is a hard worker, is intelligent, cares bout what they do it's like gold. It's like gold. You better take care of them or my mother would say cover him up and you know put a blanket on them and hope they don't catch a cold.

49:43 John Bessey

Yeah. You know I have already said this way and it was kind a funny because I may be laughed when I heard it was that Americans are born and raised to be average and you know what it is to be a little bit above average? Not much. It's that when extra phone call a day, is that one extra follow up, is that one extra. It doesn't take much to be above average and you can be a standup by being just above average in America. It is fantastic opportunity.

50:08 Howard Kline

Can I have you talk to my kids? I can not just put an extra half hour in to study which is the less than that I wish I knew when I was in high school.

50:23 John Bessey

I'd love to talk to your kids that they can help me with technology.

50:26 Howard Kline

No I can help you with the technology although obviously we've have our fair share of problems here, so how do we sum this up and gentleman I wish that we had much more time I know that John has got a plane to catch and we may have to -- I may have to give both of you on the line and record and fill in the some of this, the conversation is really just started going right now and I am starting to enjoy it but...