Investment Structures with Michael Episcope

Investment Structures with Michael Episcope

Michael is a principal of Origin, co-chairs the Investment Committee, and oversees investor relations, marketing, and company operations. Michael brings 25 years of investment and risk management experience to the company and believes that calculated risk-taking in inefficient markets is the key to building wealth. He has closed over $2.3 billion of transactions and has raised or invested principal funds of over 56 million and averaging a gross IRR of 30%.

He’s been featured on Forbes ValueWalk and HuffPost. He was a Commodities Trader on one of the exchanges. Now, he’s focused on helping others transform the way they invest in commercial real estate.

 

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Investment Structures with Michael Episcope

 

Brett:

It’s not too often that you have a Co-founder of a company that has closed over $2.3 billion of transactions, and has raised or invested principal funds of over 56 million and averaging a gross IRR of 30%. Our next guest is the co-founder of Origin Investments. It’s an investment committee and oversees Investor Relations. He brings 25 years of investment and risk management experience to the company believes that calculated risk-taking in inefficient markets is the key to building wealth. He’s been featured on Forbes, ValueWalk, and HuffPost, and he was a trader on one of the exchanges and now he’s focused on helping others transform the way they invest in commercial real estate. Please welcome to the show with me, Michael Episcope.

Michael:

Thank you, Brett. Appreciate it. I like what you said there to not having a tax strategy is the enemy of or not having a plan as the enemy of tax strategy or something like that, that’s the first time.

Brett:

Not having a clear plan is the enemy. That could be for anything, especially for investment, real estate or tax, or whatever that you’re trying to accomplish. So, we’re going to dive into that here in a minute with what you do for your clients, what you’ve done in your past to mitigate risk. But before we go there, would you give our listeners a little bit more about your story and your current focus?

Michael:

Yeah, sure. I’ll take you back kind of you mentioned my first career, I was actually a Commodities Trader, and take it back to the beginning. But in 1988, I ended up coming up to Chicago, I lived in Florida at that time and went to DePaul University. And after my freshman year, I got a summer job at the Chicago Mercantile Exchange. I was 19 years old. I didn’t realize it at that time. But I was starting my first career if you will. And I ended up pushing all my classes tonight. I loved it down there, I wanted to work full time, I always worked my whole life, whether it was shoveling sidewalks, mowing lawns, delivering papers, what have you. So I’m always been kind of somebody who loved to work and the idea of having financial freedom, I guess, at a very young age or having that ability to make money. So when I was down at the exchange, I spent kind of seven or eight years rising through the ranks, I was a runner then I was a clerk than a broker. And then ultimately, I got a shot to trade. And that was in 1996. I started trading and 97 had a great career for about the next 9 or 10 years and decided to retire from that business in really right around 2006. There were a couple of reasons why. Number one I kind of achieved much more than I had ever set out to do and stacked up a lot of chips in my life and build some wealth. I was also in the beginning, I was single by the time I was done, I was married, I had other people who counted on me. I just decided that it wasn’t worth it anymore. And I wanted to retool, and so I decided to go back, retool myself, through education and get a master’s in real estate at DePaul. I then connected with my now partner David Shear, we’d known each other for about four or five years. Just we’re really kindred spirits from the beginning, worked in many different facets, but a lot of it was in sort of the wealth management area or managing our own wealth because we’re both high net worth individuals coming out of previous careers, who wanted to be in real estate to take advantage of all the things that real estate had to offer the tax advantages, the passive income, the ability to grow, and protect capital. And at that time, we just thought that we can do it better than others who were in the industry. And you know, whether you’re talking about the multibillion-dollar players or some of the reeds out there, or some of the small players and we pulled our capital together and it was kind of the best thing we ever did. 

Over the years, we invited friends and friends of friends in you know, syndicated deals, and it was really the, I think this notion of alignment. Because David and I started the firm as more of a family office and we are always investing putting our own capital and then bringing people in not investing 5%. But we were investing 60%, 70% into deals. And so that notion of alignment is always carried through even to today. And it really resonated with people. And we just believe better decisions are made when everybody’s aligned. When we’re aligned with investors, our team is aligned with us. And it’s a, it’s a unique advantage to Origin. So that grew considerably from just the two of us, through about 2014, ‘15 grew on a nice slope we had about call it 75 to 100, investors in 2015. And then we decided to apply marketing to our strategy. And that’s where we really took off. And when we realized that just, there were a lot of people who saw our value proposition wanting to partner with us. And today we have about 1500 investors, individual investors, we also partner with about two dozen IRAs, we have 30 people at the firm who are spread across investment management, acquisitions, Investor Relations, marketing, and then corporate operations, we have four offices around the country, we’ve operated five funds to date, two of them have been top decile, one of them is top core tile, two of them are kind of in the early investment stage right now. And then we have fun on the horizon as well. And I think you know, for the purpose of this discussion, one thing, even in my own life that I never really factored into the equation as much as I should have was tax efficiency. And our old model in everything we did was more of a buy, fix, sell. And that’s the way funds are set up. And that’s how we were set up for many, many years. And what we did is we looked back and said, we generate a great IRR, great multiple, but have we held those assets, we would have made a lot more money. And so our strategy going forward is much more of a buy-fix hold. But giving the investor the optionality to get out when they want so they can pull the trigger and get out? And do us. It’s sort of the time test and how do you build the most amount of wealth while you build it by finding assets, adding value, and holding quality assets forever, and that doesn’t matter if you’re talking about real estate, or stocks or, or anything out there. And so that’s kind of been our motto going forward. And you know, the QC fund is sort of an extension of that. Because if you think about our investor base, everybody in our investor base is taxable. We do have some people who invest with 401k, and IRA funds and things like that, but we only deal with tax from investors. So for us, going into QC was just a very natural fit. And it was business as usual, as we like to call it.

 

Investment Structures with Michael Episcope

Investment Structures with Michael Episcope: “In a crowded marketplace, fitting in is a failure. In a busy marketplace, not standing out is the same as being invisible.” -Seth Godin

 

Brett:

Love it, what a background so much there, and so much value and so much technology built over the years. I love how you said alignment. I love how you said 60, 70% of personal funds for the founders of the principals right going in versus just five, I think that does creates a sense of urgency and a sense of, we’re in this more than anybody else, right? So we’re gonna get hurt if we don’t stick through to the business plan and execute, which we’ll dive into more in a minute here. But I want to take one other step back, Michael. I believe we’ve all been given certain gifts in this life. And I want you to go back maybe to your high school days or the days at DePaul when you first started out in university. And I believe these gifts have been given to us to be a blessing and help to others. Some people call them strengths. Some people call them superpowers. But I’m curious, what are the one or two gifts that you believe you’ve been given? And how do they help you help and bless people today?

Michael:

Great question. Brett. I would say that really if you’re asking what my superpower is, I mean, I have always had a tireless work ethic and look at things from so many different angles. It was kind of interesting, like being one of the things I’ll say I’m really good at risk management. I’ve always been that way. And I don’t know if it was in my DNA, or if I learned that but one thing that made me a great trader, it’s my son’s funnies. I never thought about the money. I always thought about winning, what does it mean to win? And how do you define winning from an early age and so my work ethic and my ability to kind of outwork people even in then, because the trading floor was interesting, because you had people who you know, had high school degrees, and also people from Yale and Harvard, and you really couldn’t tell because it was a meritocracy down there. And so you can succeed regardless of your pedigree, and that’s not always true in some industries. So I use that as a real opportunity for myself to outwork, outsmart be faster than people. And so I remember I used to get up at five in the morning and study the markets and have a plan going in and just do that extra that I needed to do. And I’ve taken that in Origin. And I would guess that if you asked my partner, that’s one thing that he would say that he really saw me when we decided to partner together is my work ethic and my integrity as well. So you know where that comes from. I mean, we can trace it back to the roots, I’m sure of my early days, but I’ve always been somebody you know, who is just looking for an opportunity, my wife would call me a restless soul. But I remember even as a kid when it was snowing, I saw an opportunity. And I’d call my friend and we’d grab shovels, and start at eight in the morning knocking on doors. And we had somebody who answered it was $5 to do that, and we took that into lawn mowing, and we always had summer jobs and doing things, but it was always also just, I suppose, being able to recognize where there was an opportunity. And that’s what I even like to instill in my kids today is like, looking at things a little bit differently. And, and just seeing where there are ways to do things better in life or solving problems for others. And I think we do a really good job of that at Origin. It was really the genesis of the firm as my partner and I saw that the market was a little bit broken back then. And there wasn’t anybody or I’ll say, an adult in the room, who was representing people like us high net worth investors. And so it was very different to you have to understand in 2007, that was well before there was a proliferation of deals on the internet, and you could go to these websites and find them. So we’ve always taken that. And I’ve always taken that approach to everything’s just hard work and solving problems.

Brett:

Beautiful. Love it. Tireless work ethic, integrity, the limitless pursuit of finding opportunities. Fantastic. So now let’s dive into some tangible stuff right now. By the way, you can learn more about Michael Episcope at Origininvestments.com. Let’s talk about the ways that you’re helping clients and credit investors transform the way they invest in commercial real estate.

Michael:

Yeah, so we actually tagged that line, I think about four or five years ago. And it’s really our mission. And it’s kind of how what guides us. And when we think about that, what we wanted to do from a very early time, from the minute we started, what I’ll call professionalize the organization is the institutional arm for the individual investor, because when we looked at the market, and we sort of surveyed it, we said, here are the groups who are really going after the individual investor. And unfortunately, people look at individuals as, I can charge them more fees, higher fees, give them less service, etc, etc. And the arc of most investment firms is after I go with friends and family money, I am going to then go into the institutional world. And when David and I recognized and this goes back, and we were sort of on that route, and we sort of sat back and said, we like what we’re doing, we like who we’re serving, we feel like we’re making a difference. We feel like we’re better than the other firms who are out there. So why don’t we just keep doing this, and it made so much sense, it was sort of this aha moment, we don’t have to follow this traditional track that everybody else is following. And it’s easy when you are the customer and you know what the customer wants. So having not come from the real estate world, I think gave is actually a distinct advantage that may have taken us longer to get where we are today. But we’ve hired the right people around us. And I think the why in the business is so much more important. And that’s what David and I set out to do is just give the individual investors an institutional platform. And so you know, our team today, I would put them up against any team out there the multibillion-dollar teams that are representing pension fund capital, in fact, everybody on our team in the investment management side and the acquisitions team, they’ve all worked at those companies, but they’ve chosen to come to Origin because they believe in our mission and our vision and everything we’re doing on this side of the ledger.

Brett:

Absolutely, love it. So, now let’s talk about how does winning looks when mitigating risk?

Michael:

Winning to me is delivering on all of your business objectives. So we think about this in two ways. So there are two constituents, there are the internal constituents. Those are our team members, and we want to make sure that we are providing growth opportunities for them. And that means raising more capital, putting capital out in good quality deals, creating new product lines, etc. And then there are the other constituents which are in the investors and making sure that we are being true to our promises to them as well. And continuing to deliver high-risk-adjusted returns, when I say risk adjusted it means that we’re not just going after absolute returns, right? Our job is not to necessarily get people wealthy, but to keep people wealthy. So we do not affirm that goes out and leverages deals up 80, 90%, so we can make the highest IRR out there. We’re actually very conservative when it comes to using leverage and stress testing and we’re not a high volume shop either we’ve never been. So what we look at is two to one debt to equity ratio by high-quality properties in growth markets and a place where we would want to put our capital as well. And we do and we invest in all of our deals, I do want to clarify something, Brett in the early days, we were 60% of the deals, well, our firm has grown too big for us to maintain 60%. But the idea is still the same, that we’re investing significantly in all of the deals. And I’ll say my partner said this a long time ago it’s about the things you do, and you don’t do as well. And so we don’t guarantee debt, things like that we don’t want to take an unlimited amount of risk, because you only have to get rich once. And for all, we have a great lifestyle. It’s awesome. And we just want to make sure that our money is working for us. Now. I don’t want to we’re doing great deals, we’ve done a fantastic job on the IRR growth side, but we’re not taking an outsize risk anytime. And our credit committee meetings are exhaustive, they’re lengthy, our team knows that we are going to grill them. And we are representing every one of the investors in that room when it comes to that because we know it’s our name and our reputation and our money on the line. 

Brett:

Awesome, I love it so much there. I want to focus like a laser on, you only have to get rich once. In today’s marketplace, valuations are through the roof value add opportunities are hard to find. Interest rates, I believe are propping up values even more. And you’re seeing a frenzy of people trying to find you all compete for the same asset in driving these cap rates so low that. I’m in California, and I just look around and go, I don’t know if I buy anything here for a long time unless there’s some kind of truly proven value at play there. But how important is diversification, liquidity, and getting out of debt, when you only have to get rich once?

Michael:

How important are diversification and liquidity? First of all, we operate in a fund structure. And that is one of the reasons why we operate in a fund structure for exactly what you’re talking about. Because in a fund structure, you have a basket of properties that all work together. And there’s actually a big advantage. I don’t know how much I want to get into the weeds about this. But we create products that we want to invest in funds, though, they don’t benefit the manager, they actually benefit the investor because our performance fees are cross-collateralized around 10, 12, 15 deals in a fund. So when we think about risk management, you have each and every deal in the fund that is in its own special purpose entity. And then all of those roll up into a holding company, which is called the Funds. So if you have a problem with an asset, and you know, invariably, there will be you can always take cash flow from the fund from another asset and rescue that when you’re doing individual deals and you’re syndicating The challenge with that is suddenly if a deal needs $2 million, or $3 million in capital improvements or rescue capital or the bank calls their loan or something bad happens in the market, well, the only place to go for that is your investor, and you have to call capital or put more capital in or lend find a way. And so there are huge structural advantages to a fund. You made a comment about today’s market and what we’re doing the sort of on risk management, I’ll take you back to COVID. Because in one of our funds’ income plus, for example, we have three distinct strategies in there, we have a preferred equity strategy, we have sort of a core plus value-added strategy. We have a ground-up development strategy that’s 20% of that fun, so all baked into one single fund and it’s really an income-oriented fund for a moderate risk investor. But in that fund during the pandemic, what we did is we tilted the fund heavily towards preferred equity because it was impossible to price anything in that market, we had no idea what was in store over the next few months, we saw interest rates going down and we knew that bode well for the apartment industry. But at the same time, you had no idea what was going to happen if all these millennials were going to move back home and lose their jobs. So that was a moment in time that we went from having 25% of preferred equity in the portfolio to shifting everything to 60% preferred equity. And on the other side, the ground of development to me in this market is such a better strategy than even the core plus or value add because there’s a ton of capital chasing core-plus and value-added squeezing those margins out. But the development margins are still so high that if you believe interest rates are going up or cap rates are going up. You can guard against those through your return on costs or by developing to a higher cap rate in the future. So ours has really been a barbell approach. And I agree with you that it’s been really challenging for us to get our hands on existing value add projects. We’re going on 10, 12 years. So right now we’re sort of lending and then doing ground-up development. And that’s where we see the greatest risk-adjusted returns in this market.

Brett:

Excellent. Are you ready for the lightning round? 

Michael:

Yes. 

Brett:

If you go back to your 25-year-old self, what is the one Golden Nugget, you would tell yourself to do?

Michael:

Well, I suppose I would have started trading a lot earlier because you don’t know what you don’t know. Something my dad taught me when I was younger too. It was interesting. He instilled something in me in a story, and it was just about betting on yourself. I remember I asked him, he’s an attorney by trade. And I asked him why he quit this firm that he was with at the time because it was a very prominent law firm. And he said they offered me too much money. And I started to what he said if I took that job, he said, I would have never gone off on my own. And he said, and I knew that if they were offering me x, I was worth 10x of that. And so I use that as an opportunity before I get comfortable in life, to go off on my own and he had a great career, he was an awesome attorney. And it was life-changing for him. And I’ve always passed that on to my kids and other people as well. And so I’m just thankful as I look back that I had an opportunity or I guess at that time that my boss didn’t pay me too much to get comfortable, right. And I took a chance on myself but in terms of you know, I don’t regret anything because I’m where I’m at today. Because of the lessons, I learned back then. And I know a lot of times people say well, I wish I didn’t make this mistake and I wish I didn’t make that mistake and I’ll tell you right now that I have my share of investment mistakes and everyone of those was painful at the time. But it led me to this where we’re sitting today in for the creation of Origin and I wouldn’t give them back to save anything I wish I would have put less money in the maybe at the time and I can say that but those lessons are invaluable to becoming an astute investor because the first rule of investing, don’t lose money.

Brett:

Excellent. If people want to get in touch with you, Michael, where is the best place to find you?

Michael:

You go to our website, origininvestments.com. You can connect to any of our investment relations representatives there or you can email me. My email address is michael@origininvestments.com. One thing David and I pride ourselves on is, being reachable, being connected to our investors and being available. So if you want to talk, feel free to reach out to me, I can either answer your questions or connect you to the right person at Origin.

Brett:

So, Michael, thank you so much. I’d love to have you back on the show again, maybe in a month or two. And we can discuss what you’re seeing on the ground-up development and dive into some more tax strategies. In particular, their frustrations with what’s going on or challenges or opportunities that you’re seeing. But you can find again, Michael at origininvestments.com. And for those who are interested in learning more about the Deferred Sales Trust and go to capitalgainstaxsolutions.com, and we appreciate everyone listens to the show. Please rate review, subscribe. And as always, we believe most high net worth individuals and those who help them they struggle with clarifying their capital gains tax deferral options, not having a clear plan is the enemy, using a proven tax deferral strategy, such as the Deferred Sales Trust, and we’re getting with Michael Episcope with Origin Investments is the best way for you to grow your wealth, preserve your wealth, especially in these times. Thanks, everyone, for listening. Make it a great day.

 

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About Michael Episcope

Investment Structures with Michael Episcope

Michael is principal of Origin, co-chairs the Investment Committee and oversees investor relations, marketing and company operations. Michael brings 25 years of investment and risk management experience to the company and believes that calculated risk-taking in inefficient markets is the key to building wealth.

He frequently shares his knowledge with individual investors on Origin’s blog, Forbes, ValueWalk and HuffPost, and his expertise has made him a frequent speaker on real estate investment panels and podcasts.

Michael is the former president of the DePaul Real Estate Alumni Alliance and a sustaining sponsor of the DePaul Real Estate Center. He has been a Vistage member for more than six years and lives in Chicago with his wife and three children.  He enjoys traveling with his family, snowboarding, and frequents ski resorts all over North America.

 

 

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