Austin Hair, Partner at Leaders Real Estate Development, shares his experiences locating, leasing, acquiring, and moving to the perfect property. We discuss how long-term leases protect the tenants, and when is the right time to reach out for help from a broker.
Welcome to Consolidate That, Ivan. Really glad to be back with you. I feel like it’s been a while since we’ve recorded when we might be giving away the movie magic secrets here. But I feel like it’s been a little while since we’ve gotten together to do an episode. We’ve got a really cool – probably our first ninja ever on the show as a guest, so I’m really excited for you to introduce them and to chat with him.
Yeah. Hi, Ryan. Excited to introduce our guest today. His name is Austin Hair. Interesting fact about the calendar events. When I book with you, Austin, Google thinks that it’s a hair appointment, so it makes the Google Calendar event looking like scissors and something like that.
And if you’ve ever met Ivan, you know he does not have many hairs.
I focus on those things a lot because I don’t have any. But Austin has gone from professional wakeboarder, to real estate investor, to American ninja warrior. Austin is a partner at Leaders Real Estate Development and host of the Leaders Real Estate Secrets Podcast and the Real Estate University. Leaders Real Estate helps all types of healthcare organizations grow by developing creative real estate strategies and data identifying the best locations and providing capital for building purchases. Austin, welcome to the show.
Thanks. It’s a pleasure to be here, and I appreciate you having me on.
We met through talking about the strategies around real estate and what we’re doing in Galaxy sort of it, and thinking of, “Should we buy or should we lease? Should we buy from the owner? Should we buy not from the owner?” Then all of these decisions are coming to all consolidators when they’re starting their first practices before they develop the solid strategy. Why don’t we start, but let’s take a step back. How do you become – from professional wakeboarder to real estate investor?
Yeah. I started wakeboarding when I was 12, so I pursued that like pretty aggressively, and that brought me down to Orlando. I was on the pro tour, so like 2017 or so. But um, it was a lot of fun. What happened was, my body just started not being able to take the beating. I started realizing like, “Okay. I’m going to have to figure out some sort of off-ramp here.” I actually opened up some fitness centers, and then I was investing in some Airbnbs, and commercial real estate and stuff like that. When I was looking for new locations to bring my fitness centers to, that’s when I met my partner.
What happened was, I had this idea what I wanted to be doing in my head. It’s like – I thought like, “Okay. I like these areas. I don’t like these areas,” et cetera, et cetera. What happened was, he came through and, my now-partner at the time, we laid out all these different metrics by which to grade the location. We had like – we went seven layers deep with the analytical data, which is way deeper than I had normally gone. We put a score by everything, we added it all up, and we gave clarity. Like we had numbers around our metrics. What happened was, the place that I felt really good about all of a sudden didn’t look so good, and places that I didn’t feel great about all sudden start to look really good. I’m just really impressed the way that he did things.
Then in 2019, I knew COVID was coming, so I sold the gyms. No, kidding. I had no idea COVID was coming, but I just got super lucky. I did sell the gyms, so great timing.
That’s so lucky.
Yeah, it’s a great timing. My partner invited me to come work with him once I sold. I was impressed with the way he did stuff, and I liked his processes, so I said, “Yeah, sure.” We kind of have merged our two backgrounds together now in the real estate strategies for healthcare and vet consolidators.
It’s such an awesome entrepreneurial journey and luck with the – are those gyms still open or did they go out of business?
Sadly, one of them closed down and two of them are still open, so I had a total of three. I was getting ready to do the fourth one when I got in a disagreement with the franchisor. People say that multilevel marketing is a scam. Being a franchisee is a scam. So yeah, that was really the reason why I got out of it when I sold when I did, was because a disagreement with him. I guess I kind of owe them a thank you.
Well, it’s probably good for like early stage trying, you kind of dabbling with entrepreneurship. It’s like structured entrepreneurship, I would call it.
That’s awesome. Okay. Well, let’s dive in. I mean, these questions, we have them. And then, there’s kind of two types of consolidators. Some, they’re building de novo, so obviously, there’s analysis of where you put your practice is important. But then those that are buying practices, and potentially buying businesses in the book of business, but not necessarily wanting to stay in the same location. I mean, originally, you do want to stay in the same location. But would you suggest for those that are buying? And I think this is interesting to me. Basically, when you’re buying, I don’t think it’s in the due diligence list to check if your location is profitable. Because people are looking at the financial diligence, legal diligence, they look at the performance, but nobody goes – because you can do it without actually opening anything in the practice. You can do it remotely and say, “Is this is a profitable area where I can generate extra profit?” Let’s start with, should you buy or should you lease when you’re starting a new one?
Yes. It really depends on what lifecycle of the consolidation journey that you’re in? That’s really the answer with a lot of these questions is it just depends, right? I’ll try and do my best to lay out different situations in different scenarios that have different outcomes. First of all, people think that buying the real estate is a diversification of their portfolio, but we got to remember is that the value of the building is tied to the tenant, right? Although you have an asset, that’s a physical, you might not be – you’re still highly correlated with the business. Because if the business tanks, if the bet shop that’s there, that location tanks, and you can no longer fulfill the obligation of the lease, that building is far less valuable. You really are not creating a huge amount of diversity.
The second thing is, we’re all limited by the amount of capital that we have. Even Bill Gates has gone on record saying he wishes – he would feel comfortable once they had 12 months of operating expenses in the bank at Microsoft, right? That’s coming from Bill Gates. We all are constrained by the amount of capital. What that means is, what is the best use of your capital at the time? If it comes down to investing in real estate, or acquiring a new practice, right, doing an acquisition, which can give you a higher ROI? Usually, almost every time, the answer is focusing on your core competency. There obviously are exceptions. The further you get along that journey, and the more, more profitable you get, the more it makes sense, because you might have excess cash, right? You have cash coming out of your ears, I don’t know. But then it kind of makes sense to start and set up maybe like your own real estate development fund, because real estate is good, it is profitable, right?
But when it’s not your core competency, you might generate between 10%, 15%, sometimes like upper 18 percentage, right? But what are you going to get in your business? Are you going to get 30%, 40%, 50%, 100%? I mean, it’s really just spreadsheet math. We think that depending on where you are in the lifecycle of your business determines that answer. But at any point in time, it makes sense to bring on partners too. There’s partners, like for instance, what we like to do is we like to come in, we’ll buy the real estate on behalf of the vet consolidator group, and we’ll do a leaseback, right? Then we can also allow them to co-invest or we can figure out different ways to like align our incentives, so they can have a piece of the upside of the real estate as well. Yeah, that’s kind of like the lens that I look through, because people ask us this question all the time.
Austin, thinking about it on the practice acquisition side, so you’re buying the assets from the practice owner that’s selling their business. When is the best time in that process do you think to introduce someone like yourself into the process? Is it after the LOI is assigned, is it during due diligence? Is it after the APA are signed? Where do you think that makes a lot of sense for you guys to come in?
Yeah. I mean, there’s plenty of times where the people who are selling, like you say, you got an individual who’s selling to a consolidator. Different groups have different structures, but if they’re staying on, there’s a chance they might want to hold on to that real estate, right? Definitely figure that out first. If they’re looking to sell that real estate, and you’re unwilling or unable to buy it as a consolidated group, then at that stage is where you would reach out to us. I’m assuming that by that point, you’ve probably done some due diligence, and you may or may not have an LOI, but you know, at least like this is definitely a practice that I want. It’s like at the stage that you know, that you want to acquire this practice. Then the real estate starts to become maybe, some sort of bottleneck. That’s where it would make sense to reach out to a group like ours.
The other thing that is interesting to me is, I’ve heard different scenarios, how people can lease the building for their business, and I heard two models. There’s people that lease for market price rent, top of the market, bottom, whatever it is, and then with a certain growth per year. And maybe you can throw those numbers average, like what is the market these days in terms of percentage. Of course, markets are different, but sort of – is it like 3%, 5%?
Yeah, 2% to 3% annually.
Two to three.
So you kind of lock it into a lease, and then –
Yeah. Typically, investors want to see 10-year terms or 12-year terms, which is not hard. I mean, if you spent all this money acquiring somebody that you’ve done the due diligence, they’re a good fit. Like 10 years is not that long, and the leases are set up, really. It’s kind of ironic, because investors like long-term leases, but the leases actually protect the tenants, because the owners can’t kick them out or they can’t up their rent. It’s really kind of funny how investors like those longer term – even though it prevents them from being able to collect more money. But yeah, so the end of the day, usually, like 10 to 12-year lease is a good fit to kind of help everybody get at best case scenario.
The second question. I’ve seen a couple – we’re selling, a vet and he wanted to retain the building after the sale, and they don’t want to practice anymore. But they said, “I want to keep drawing income, passive income from these buildings.” But he was gearing to do that, based on the percentage of revenue of the building. Do you see those contracts? Because to me, it just looks not attractive to the personal realm.
That’s very atypical. That’s not normal at all. That’s not something that we’ve ever done. So yeah, I would just – personally, my preference is, don’t mix the two, just keep it. I mean, especially if you’re buying it, you don’t want to be – it’s almost like he’s the franchisor in that situation pertaining to sales like –
Exactly. That’s back to franchising, and especially because the thesis for consolidators is to acquire these businesses and improve them. Therefore, they’re kind of working on improving the businesses and then it’s sort of like a cut. It’s sort of like a franchise. I like that analogy. That’s interesting.
Yep. Keep a piece of the equity. You know what I mean? Sell a percentage of the thing. Don’t sell the whole thing if you want a piece of the up-side.
Right, exactly. Yeah. But then there’s situations that we discuss that there could be a, when to relocate. When do you see those cases? Because usually, you buy a practice and you’re buying a book of business, you’re buying the regular customer base. Then when does business, or how should business look at it and say, “Look, we actually bought it in a crappy location, why don’t we just relocate down the road or wherever it is, but bring the clients with us?” How difficult it is – have you seen in any other business aside from our domain – to actually move and then not lose all the customers along the way?
Yeah. I think a good story to illustrate this is, if you look at fast food chains back in the ’50s and ’60s. There are all these mom-and-pop shops, coming around, popping up, opening up places, wherever. Ones who did really well were the ones who really focus on their locations. They wanted to get the corners of Maine in Maine and they really did their demographic research. They started putting them out there, and then the history of – yeah, the story of the fast food chains is history, right? It’s very obvious.
After them, you kind of had like some drugstores kind of starting to do that in ‘70s and ’80s. Then in 2000, the banks started to do it. Then more recently, [inaudible 00:10:56]. What’s happening is like, they’re spending a lot more money paying those retail rates, because they’re making it very, very, very convenient for the customer. What happens is, they’re not dumb, right? Like biggest DSOs in the entire world, and the biggest pharmacies in the entire world are doing these strategies and they’re doing them well. What happens is, you might look at acquiring a practice, a vet hospital. You’re thinking to yourself, you have your metrics you mentioned earlier, revenue, quality of earnings. You obviously think about growth protential, whatever. You’re looking at all these things, but there’s an assumption that their location is working, because it’s gotten them this far.
What happens is, sometimes yes, you do close on a location, and you realize, “Hey! It’s gotten this far, but we’re not going to be able to go any further. A, we’re physically constrained by the building or B, we’ve tapped out our digital marketing. We’ve tapped out our [inaudible 00:11:43]. We’ve tapped out of word of mouth. Like, we literally need street visibility, and good energetic, anchor tenants or neighbor tenants to drive more traffic to this place, which is what a lot of the sophisticated guys doing. At that stage, that’s when you have to think about relocating.
Really, to answer your question about, you lose patients, you lose clients when you relocate, it just depends on how far. I mean, most of the time, like if you’re in a recessed like old, kind of dilapidated house that’s in a neighborhood, which I know a lot of groups still have, you can probably find a good prominent retail center not too far from there. You know what I mean? Like less than half a mile, less than a quarter mile. If you do that, well, like the chances are people aren’t going to stop going.
It’s not only the street visibility – well, it is street visibility. But when you have the clients that are locked with you because of the area and where they live, because people don’t go beyond like 10, 15 miles to visit their veterinarians, usually if it’s not an emergency. So then if you’re still sort of within that area, you just inform all of your clients and then moving in, then essentially, they’ll just start coming to a different location. Is that the hypothesis that that will be?
Sometimes we have a saying called drive to our drive thru. Drive thru just means you pass by on the way to wherever you go, and drive to would mean, you got a big building like a grocery store, or Home Depot or something that people are going there for. Because the average family goes to the grocery store like 2.3 times per week. They’re already going there. It’s super easy for them to take their pet over and drop them off or do whatever, or they see them constantly and it reminds them, “Oh! I got to do this.”
Having like in a big retail plaza like that can definitely increase new business, but also, the existing clients you have, it might actually make it easier for them. The only problem is, this is not a new strategy. It’s very saturated. It’s very hard to get in with those good grocery stores, like Publix, or H-E-B or whatever. People are lining up ahead of time to go in when new developments happen. So you really got to keep your eye on when something becomes available, so you can go in and snatch it. Because there’s a lot of companies that are taking advantage of the foot traffic that is caused by those big grocery stores.
One thing that your company does, we talked before, it’s not that you just help to acquire a property or lease property. You also help to actually build. Is that common among the real estate businesses or is that something that you offer? This is sort of an x ray. What does it look like if someone is looking into starting to know, what does it look like you as a partner? What do you guys do?
Yeah. We like to refer to ourselves as the third-party real estate department without the overhead. Because we don’t make our fees from the clients that we work with. We make them from the sale side, not the buy side, not the vet consolidator side. I don’t know anybody else who does all four things in terms of like, negotiating leases, finding new locations, doing leasebacks and also doing development for new locations. What that looks like is essentially, we’re trying to find a spot and nothing is available. Then like, yeah, absolutely. We’ll go in, and we’ll buy a location and we’ll build the building out either from the ground or – usually, what development means is you’re buying an existing location or existing building or standalone building. Maybe not even have one or two other tenants for total of three tenants.
You’re buying that building and you’re repurposing it, you’re developing it for the use of the vet consolidator. So yeah, that comes up, like we always focus what’s the best for the business, what’s going to be the best thing for the organization as a whole, right? If two things are equal, and you’ve got the ability to lease an existing spot, or you got the ability to build the de novo, like from the – do a development. A lot of times, you’re going to be quicker just to go to the lease, so we go with that one first. But if nothing’s available, and you know where you want to go, and you got to develop it. That’s where we can really start to shine and be dangerous, and we’ll come in and we’ll buy, develop for the client.
But you also mentioned before that the development is not just sort of building from the ground up. But it’s also when you find a location, you help to sort of do the initial sort of box that they fit their business into. Is that part of what you do?
Yeah. Yeah. You start with the demographics and the data, right? Trying to find out where’s that best spot. Then from that point, yeah, if there’s an existing building, maybe it’s empty or maybe somebody’s lease is ending and they’re not renewing, then that’s when we would essentially buy the building, and go in and build it out. We don’t do the finishes. We can go in, and we’ve done a lot of health care, all around the country, because it is very – it’s quite different than like a restaurant, or coffee shop or something like that. Because you just have a lot of different stations, and you have a lot of plumbing, and electrical needs and stuff like that. So essentially, we would build it up to the specifications that the tenant requires. Then they would come through and they would put their finishes on to make it unique to them with the different, maybe they have a certain like pink color that they like, and like certain signage and certain finishes for their front desk or something like that. Does that make sense?
No, totally. Yeah, it does.
What I’m curious to is, so you’re helping people figure out how to do the leases, where to do relocation, but you have the idea of maybe office versus retail space. And obviously, we talked about the foot traffic that can come from a big anchor, like the grocery store. But how do you think that maybe an established place should be looking at the right spot to build out their business?
You talking about like an established vet consolidator?
Yeah. Let’s say someone listening owns 25 practices, and one of their practices is an older buildings, they need to relocate, they need to look at some additional spaces. And they don’t want to go through the building process from ground up, but they want to find an existing space. Should they be looking – we talked about the grocery store, but those are hard to come by. Let’s say, do you want to look at a retail space? Do you want to look at maybe more of like the ground floor of an office building? Where would you sort of drive people in those senses?
I got another story about this one. There’s a guy, he was in healthcare that we’re working with, and he was paying back $3,000 a month in rent. He’s in the back of this plaza. It was in the southeast, and he just wasn’t getting good visibility. We found them another spot that had great visibility, had great neighbor tenants. It was $10,000 a month in rent. On paper, it’s like, “Holy crap! I’m more than tripling my rent.” It’s like 300% increase or something like that. It’s very intimidating, right? But what happened was, you got to remember, your rent is only a factor of your overall expenses. From a percentage standpoint of your overall expenses, it’s only like, 2% to 10%,or something. When he went here, he actually ended up doubling his revenue monthly, from $50,000 to $100,000 a month in revenue.
It ended up being a very, very good trade off, even though it was tripling on paper. What we say is, if you look at rent as a factor of marketing, it can quickly start to pay for itself. Because with digital ads, and print ads – digital ads are a good example, because there have been plots, and they’re like – it’s auction based. They’re only ever going to go up. Because as more and more people start to do them, and as you’re competing against other businesses, at least the thing about your rent is it’s locked in. We always kind of encourage people, “Hey! Pay the extra money, pay a couple bucks extra per square foot.” Like yes, it will cost you several $1000 a month. But at the end of day, when you really think about how many patients, how much more visibility, how many more clients, how many more people you’re going to see, if you do it correctly, it’s going to pay for itself.
This is – we’re talking about the price of the lease, what are the best strategies to negotiate for lease?
Yeah. First of all, it has a general rule. It’s never good to be desperate, right? You don’t want to have one spot that you’re looking at, because they can just feel that. They can feel you’re desperate. We always recommend, maybe you pick two trade areas that you want to go, and when I say trade area, I mean, like a three-to-four-mile radius. Or if you are going – if you know you want to go in one trade area, trying to identify at least three like viable buildings. Sometimes you might not get that many to be honest. But hopefully, you can or at least get two. In that way, like you’re negotiating back and forth. That’s the first step, is don’t be desperate. Once you have that, then you just want to kind of find out what the landlord wants or what they need. What I mean is, if they’re buying to flip or they just own it and they’re trying to flip it, they’ll be willing to give you TI money. That will increase your rent, and then you get a higher number for that building, right?
What is TI?
Tenant improvement. When you move into a practice. Yeah. When you move into a practice, usually a new building, usually they’ll give you some amount of money, maybe it’s $50,000, maybe it’s $100,000. It’s usually based on a square foot, like it’s a certain dollar per square foot. If they want to hold a building, maybe their older landlord, they have no interest in flipping and they just want to hold and let cash flow. You can negotiate cheaper rent by getting less TI. On the flip side of that, if they’re trying to sell this, they’re trying to flip it, you can negotiate really high TI for exchange for a little bit higher rent. Because now, they’re going to be able to sell that building for hire because what you sell the building for is oftentimes based on the amount of rent coming in. Finding out what the landlord actually needs is a good thing.
Then, just making sure you’re clear on what you want. If you want good street signage, which you should, have good visibility. Making sure that you’re voicing that to them if it’s not meeting some of your things, and you can always go to them and say, “Hey! You’re asking this, but it doesn’t have true visibility. Are there trees blocking it? It doesn’t have enough parking, now we’re going to do this.” It’s like being able to identify to them like extra cost you might have to incur by taking their building. You can also help them come down with the price too.
Very nice. It’s kind of interesting too, because in a lot of the situations, for the consolidators, your landlord might be your selling doctor as well. There should be some alignment on what you both want. You both wants success for the business and in a different situation than a landlord that’s looking at like my own – I have a gym tenant, I have a vet clinic, I’ve got a frozen yogurt shop and a Jersey Mike’s or something all in the same place. It is kind of neat that I guess, when you’re looking to do those negotiations, hopefully you’re coming with these clients in a place of mutual growth and mutual benefit. I guess that’s kind of the other thing that comes from the value of doing a partnership model or doing an equity roll in of the clinic and those sorts of things. Because then the success of the consolidator is tied to the success of the location, success of the tenant, success of the landlord and everybody.
Yeah. Actually, I skipped over this, but really, the most important thing is getting somebody in your corner who’s going to work with you, like a really good broker. That doesn’t necessarily have to be us. But what happen, we see this all the time, is like, people think, “Oh, yeah.” Okay, cool. Let me check the box.” Real estate broker, and it’s their golfing buddy, it’s their cousin, it’s their brother-in-law, it’s somebody they’re trying to help and trying to throw a bone. But unless you get somebody that’s really an expert in your field and by expert, I mean more than 10 deals. Then you’re going to be costing yourself a lot of money. Because this is like often the first most important decision that you make is where you’re going to go with your location and when you relocate. Because it’s very, very expensive to relocate.
We just see people that are shooting themselves in the foot, by picking somebody who’s not well qualified. And especially, local guys can work, but it’s not often that we see that, simply because they know the market, they know the market very, very well, but they might not know your specific industry that well versus working with somebody national. They know your specific industry very, very well. They might not know the market that well. The lens that they’re looking at it through is reverse instead of thinking like, “Okay. I know can make that work.” It’s like, “No. Where can we go that’s going to make it work for the vet?” I think that’s one of the biggest things is just picking somebody who’s really qualified and has done multiple deals in the vet consolidator industry.
Really cool. Well, we blew through 25 minutes almost and we usually promise our listeners about 25. We usually ask a couple questions at the end. Is there a book that you could recommend our listeners to kind of dabble in their knowledge that you have and to learn more?
I mean, yeah. On negotiation, Never Split the Difference by Chris Voss. That’s a great book. That’s just about negotiation in general. I think that would be very useful. Whether you’re doing mergers and acquisitions or trying to negotiate a lease. I think all those things will help with all those things.
That’s awesome. Who else do you think could benefit from being invited or actually, our listeners who they can benefit from inviting someone else on to this show?
Yeah, sure. I work with a guy who does virtual tours, his name is Corey. I know him. Talking about virtual tours can be really interesting.
Awesome. That’s great. Thank you so much. We really appreciate having you on the show. This was great. Ton of information that I know Ivan and I want to dive into and learn more about. If people want to reach out to you or find your website, what’s the best contact, or website or place to learn more about you?
Thanks, Austin and thanks for listening everybody. Have a great day.