The Real Market With Chris Rising – Ep. 26 Andrew Kirsh
The Real Market With Chris Rising – Ep. 26 Andrew Kirsh
0:00:50 CR: Welcome to The Real Market with Chris Rising. I’m really excited to start the year. Our goal for 2018 was to put out 24 podcasts and we were able to do that. We’re excited about 2019, and continuing these conversations with interesting leaders in real estate and business. We’re trying to go deep on what’s going on in the world today and how do you run your business and how is technology affecting and how do you shut off, so really excited about 2019. Today, I’m pleased to have Andrew Kirsh on the podcast, Andrew is a lawyer who has a law firm called Sklar Kirsh, and I thought it would be really interesting to start the year with a new generational lawyer. Andrew’s got a big background in White-shoe law started his own law firm, and the challenges that faces here starting a law firm in 2019 are a lot of different than they were in 1999. So it’s an exciting conversation. We do get into opportunity zones as well. I think people are interested in that, in the cannabis industry, in real estate, so enjoy the conversation.
0:01:56 CR: Welcome to The Real Market with Chris Rising, I’m pleased to have Andrew Kirsh with me today. Andrew is a founding partner of a law firm called Sklar Kirsh. I thought it’d be really interesting to have Andrew on the podcast today, because I think he represents a lot of what’s new and what’s changing about the law business today and how it affects real estate, how it affects our lives when we’re not talking about big multinational law firms, but a small new law firm that’s making a real dent here in Southern California. So Andrew I wanna welcome to the podcast.
0:02:27 Andrew Kirsh: Great, thanks so much Chris for having me. I look forward to being on here.
0:02:32 CR: Well, why don’t we just start, just to tell our audience a little bit about yourself and your background, and the big law firm track record that you’ve had, and what leads us to the day you started Sklar Kirsh.
0:02:44 AK: Sure, well I’ll start… I grew up not too far from here in Beverly Hills and went through the Beverly Hills school system and Beverly Hills High School and played baseball at Beverly High, and was recruited to Northwestern to play on the varsity baseball team and ended up in Evanston for four years and loved it so much and so I went through the law school at Northwestern. And so after seven years in the Chicago land area when you got the bar application in the mail, you realize you only wanted to do it once. I was always gonna come home, back to California, so I took the California bar and my first job was with Latham and Watkins.
0:03:32 CR: Wow, so Latham is a top tier law school, you obviously went… A law firm and you obviously went to a top tier law school. What was your thinking coming out of college and then in the law school about being a lawyer and what that meant?
0:03:43 AK: Sure, so my brother’s a lawyer, my sister-in-law’s a lawyer, but really I have to admit, my favorite movie growing up was A Few Good Men and my ideal of being a lawyer was Tom Cruise cross examining Jack Nicholson. “You can’t handle the truth.” And that’s… I thought I wanted to be a litigator in the courtroom and little did I know that when you were at a firm of Latham size and you were in the litigation department, you probably were not gonna see the inside of a courtroom for years. I started out as a litigator, and then after 9/11, about 2002-ish, I started gravitating towards the real estate department and worked there until the end of 2006.
0:04:40 CR: And who just as you looked at what it meant to be a litigator, and then the personalities in that and then what it meant to be a real estate lawyer, the personalities there, what was attractive about moving out of the dream of being in a courtroom to reading documents all the time and being a mechanic with words?
0:04:57 AK: Yeah, well, specifically with respect to being a transactional attorney, I gravitated to real estate because you could see the fruits of your labor. You could see a building being developed and as opposed to being a corporate attorney, or an IP attorney, where it’s a little more esoteric and you can’t physically touch it, you can touch real estate. And that’s what drew me to the real estate department of Latham. And we worked a lot with McGuire, which I know you know a lot of. And other large companies who were doing fascinating deals at the time, cutting edge deals, and it was a department that just clicked with me.
0:05:40 CR: Well, now, our audience is probably taking a… Kind of rolling their eyes saying, “Why would Chris have an attorney on his podcast?” But there is a reason. The reason is I find what you’re doing is different than what most law firms are doing today, so part of what’s different is you left big law firm life, and started a firm. And one of the things that I find interesting about the world we live in today, especially as it relates to real estate, is that it no longer takes a big firm name to be able to represent big name clients. But let’s talk a little bit about how you went from a big firm life, and what the impetus was to starting a firm, and what were the frustrations that led you to start a firm that I think is very different than your typical White-shoe law firm today.
0:06:26 AK: Sure, so I was leaving Goodwin Procter. I was at Goodwin after Latham and it was in 2009. We were in the middle of the recession, and clients of mine were frustrated with the growing, and rising billing rates. They were chasing deals, buying notes, and pursuing deals that they didn’t know if they were gonna hit and they would have a lot of dead deal costs. And so, to have an experienced lawyer that could think more entrepreneurially with them, more business minded, more of a… A more efficient rate structure was appealing to them. And so initially, I left and went to a smaller firm called Raines Feldman and really developed my book of business during the recession when clients were looking for institutionally trained lawyers but not at those… Not at that price point. And so ultimately, at the end of 2012, beginning of 2013, my now partner, Jeff Sklar and I, who’s a former Loeb & Loeb lawyer, a corporate M&A, lawyer, we were introduced to one another, and we decided to joint venture and start what is now Sklar Kirsh. We started with about four or five attorneys, and we’re now up to 32 attorneys.
0:07:52 CR: So building up a practice based on lower billing rates in my experience doesn’t quite work. It can’t just because you offer services at the lowest cost.
0:08:00 AK: Right.
0:08:01 CR: What are some of the things that you’ve done in building your firm, the culture of the firm, that you think make it appealing to a big name client to hire? And what are some differentiators? Because I still wanna draw this distinction between having a real estate lawyer on the podcast as opposed to an entrepreneurial business person who happens to be a lawyer.
0:08:20 AK: Absolutely. Yeah, it’s not just cost. That’s certainly a factor, but it’s the total package. So one is that I feel like I am a student, and market leader, thought leader, when it comes to real estate and truly understanding the real estate business. Not just having my head in the documents and making a perfect document, but not understanding the deal as a whole. Secondly, I’m constantly connecting my operator and developer clients and contacts with my capital clients and contacts, and just being at the intersection of deal flow. Almost like a broker. I enjoy that part of the holistic approach of being a counselor more than just a lawyer. So looking out for my client’s best interests, whether that may mean legally in providing them legal counsel, business counsel, introductions, strategic growth. All of that. I’m in a business that has been commoditized and there are tons of attorneys in this city, and they can all draft, and revise, and edit, and proofread documents every day. But what the added value that I feel that I bring is that holistic approach that my clients appreciate.
0:09:49 CR: Well, you’re more than a one man shop. And you started this with your partner, but you went from five attorneys to 35 attorneys. But when I first started in the business as a young lawyer and then as a young broker, starting a law firm was not an easy thing. It started with having to sign a long term lease. It started with having… And the lease wasn’t just for office space. It was on your copier. It was on a whole lot of other things, and you had to hire administrative help and you had to have paralegals. So when you were looking at starting this business at the… Not the throes of the recession, coming out of it, how did you look at that ledger that you had to create to start a business, and what did you do differently that you think is part of what makes your firm appealing today that’s different?
0:10:34 AK: Sure, so I did see a lot of inefficiencies at my time in large law firms. In the first part of the decade, I was on the global recruiting committee and the expenditures that a firm, a global firm, would spend on law students, junior associates, a very low assistant to attorney ratio, office space at higher levels of large office buildings with incredible views, that was expenditures that my partner and I felt we didn’t need to spend. And frankly, part of my mantra in developing business was, “I will not train attorneys on my client’s dime.” So we are much more top heavy with senior lawyers and we have associates, but there are more experience. We don’t have an army of junior associates, so no one is learning on the job, but frankly, Chris a lot of… At the beginning, because people praise me now and they say, “I can’t believe you’ve built a 30 plus lawyer law firm.” A lot of it was my head was in the sand, and I just kept chugging along, and I was servicing clients, and I was a little naive of what I was getting into.
0:11:57 AK: Our first office suite was a Regus office suite in Century City. We quickly grew out of that. It wasn’t functional for our needs and we felt with that type of office, based on the type of firm we wanted to be and the clients and the contacts that we had from our prior firms, we needed to step it up. And we went across the street in Century City to Bob Held’s building, 1880 Century Park East, and our broker encouraged us to get much more space than we needed. Now, obviously that was self serving to him, but it was the best move we could have made. Now, we could have been a flop and and gone out of business, and we would have had a big problem with a big lease, but the opposite happens and we grew quickly because the demand for our services kept increasing, and now we’re getting even more office space. So I thank our broker for giving that advice and the second bit of advice he said was sign a much longer lease than you think you need, because five years…
0:13:12 CR: You do know that these are all things that bring down law firms when times go bad. [laughter]
0:13:15 AK: Absolutely, I know. Five years is gonna come and go quickly and you’re gonna be renegotiating your lease in year three. Get a seven or 10 year lease.
0:13:25 CR: So let me ask you this. So law firms in the past, they had to think about where their law library was gonna go, and there were a whole lot of things that were just… There was a time when there was word processing, but obviously if you’re starting a law firm in 2013 or 2014, the law library wasn’t as relevant. Obviously, word processing is now called Microsoft Word. Talk a little bit about how you designed and thought about how were lawyers that were gonna work at your firm, how are they gonna work and how is it different than say, the white shoe law firms? The way they would put lawyers into cramped offices? How did you all look at it?
0:14:06 AK: Sure. Well, I do see the open space of our clients and especially your office. I would love to have that type of architecture within our office. It’s just not conceivable with the types of confidential conversations that we’re having with clients. And there’s still that mentality where lawyers…
0:14:28 CR: I think it’s more mentality, but because the confidential… The second you work in a law firm, you’re accepting the confidentiality.
0:14:34 AK: Fair enough. It is mentality and we have senior lawyers who were partners at Loeb and Skadden and Latham and they want their offices, so… But we are building out new space where it’s, say more democratic that everyone is gonna have similar sized offices. We don’t have a law library. Where when I was at Latham we probably had at least 15… Half a floor, so 12 to 15,000 feet for a law library.
0:15:06 CR: Yep.
0:15:06 AK: So we don’t have that now. We never did. The assistant to lawyer ratio, all of our lawyers are fully functional on all the technologies of word processing and redlining and emailing and everything that is needed. And so, from our real estate department, we’ve got… Gosh, I don’t know. 12 or 13 lawyers and we have two assistants.
0:15:29 CR: Wow, so that’s a pretty good ratio.
0:15:31 AK: Yeah, and on the corporate side, another 10 or 12 lawyers. I think we actually only have one assistant.
0:15:38 CR: It’s a 10 to one.
0:15:39 AK: Yeah, yeah. That’s a big change in it.
0:15:43 CR: That is a huge change for the efficiencies of how a law firm works. Now let me talk to you little bit about, so you started this law firm in 2013, you had your pick of technologies that you could make your backbone, and that had to have been a very serious decision because whatever you picked was gonna be it. Did you just say, “Well, Microsoft, is it because that’s what I know.” Or did you look at different… And I’m not talking about just Microsoft Word or the Office products. I’m talking about from your email to your servers, how did you look at that? Did you start with servers on site? Did you start with AWS? How did you look at the technology component of starting a law firm, and where are you today with that?
0:16:22 AK: Sure, so everything is Microsoft. Our computers, our Outlook, Word, redlining functionality.
0:16:33 CR: Lawyers don’t know, but they also have this thing called Excel.
0:16:36 AK: I see it. Our COO sends us profitability calculations on Excel. I can get away with some simple math equations but anything more than that… I can’t run an Argus file. That’s for my clients, so everything’s a Microsoft product. The biggest change that we have made, and I think we made it a couple of years ago, we’re purely Cloud based. So anywhere in the world, if you have a computer, a tablet, you can access every single document on our network. That works fantastic for lawyers who work from home, and we can talk about that, lawyers who are traveling. It is just seamless.
0:17:26 CR: Well, actually that’s exactly where I was headed. I had dinner last night with a friend of mine who’s been in this business a long time, a well known person, and he said, “Chris, one thing I’m not understanding is that… ” Part of the things that he remembers from his young time as a business person, and then to where he is today, is the collegiality of the time in the office. And the fact is that today people are spending less time in an office, so what’s your view of… I’d say number one, the role of office as it relates to doing business today? And number two, the role of being in an office, in your office, for your team members? How do you see that playing out?
0:18:08 AK: Yeah, especially as we’re building out another 4,000 square feet I think about this quite often. There’s pluses and minuses. You can’t replicate the spontaneous informal conversations that develop in an office, in the kitchen, in the hallways with lawyers, with staff, with anybody. You learn more about their personal lives that way. “What did you do this weekend? What did you do for the holidays?” Also substantively, you think about a particular deal, or a client, or a pitch that I’m going on. “Oh, you should come with me. You know this person, you know that person.” That just… Seeing people jiggers things in your mind that you wouldn’t think about if you were only emailing them or talking to them on the phone remotely. With that said, I have lawyers that live in Orange County. I have lawyers that live in Calabasas. I have lawyers that live in Pasadena.
0:19:12 AK: They’re not gonna come to Century City more than they have to. They come for meetings, they’ll come for happy hours, and summer parties, and big closings, although there are very few in person closing these days. As the vast majority of our revenue is derived on an hourly basis, an hourly model, I don’t want them sitting in a car two to three hours a day.
0:19:41 CR: Yeah.
0:19:43 AK: With that said, they also really don’t want to work from home every day and have their kids barge in and Daddy’s home or Mommy’s home, because that’s what… I can’t really work from home because I get those interruptions. So what we have done and we’ve invested in our people by having little outposts, pretty much, in Calabasas, in Pasadena, in Orange County, so they can go to these places to get out of the home office, working in a more professional setting, interacting with people, both in a Regus or a WeWork, and being productive that way and not having to spend a good portion of their day on the 405 freeway.
0:20:29 CR: Well, these are real issues that… And it doesn’t really matter if you’re in Los Angeles or San Francisco, in New York or Chicago. Any of the major cities: Houston, Dallas, Denver. That because… There was a time where all your work was in my office when I was at Pillsbury and their law library was there, so to work meant you had to come to the office. To work on a weekend meant you had to come to the office. Today, I can get everything done at home at five in the morning off my iPhone.
0:20:58 AK: Yep.
0:21:00 CR: And there’s this tension though, because companies, corporations at the heart are people. Made up of people, not to be Mitt Romney there on saying they’re people, but they are made up of people. And there is a camaraderie, there’s a team work that has to happen and I think… I firmly believe that until I see Google and Facebook and Apple say, “You know what, we’re done, building novice campus and all that.” That they are underlying the fact that people need to be around people to work, but what we don’t need to do and where the world I think is so changed is what you said, the 405 Freeway comment, which is the worst time any of us can spend is the time we are in a car and if we’re gonna force people to come in arbitrary hours that are the heaviest traffic hours, I just think it’s ludicrous and I think you shouldn’t do that to people’s quality of life. But you’re also not managing people very well. How do you deal with the fact that someone may wanna work for you, but they’re young and they need to be mentored and where does that come in? Basically what I’m asking you is do you have feet roles for partners than you do associates? How does that work?
0:22:02 AK: No, we don’t treat partners or associates differently. I guess we do treat staff a little differently in that we feel that their job, it necessitates being in the office more. They are physically touching documents, putting together closing materials, collating signature pages. That requires physical attention, and that requires an office and to send them out for a closing, to an escrow company. Any of our associates, any of our partners, attorneys, can work from wherever they want. Home or their office. Wherever they feel they’re gonna be most efficient, work from that location. If we have meetings and we need you, then they’re gonna come in.
0:22:46 CR: And how do you track that? How do you monitor it?
0:22:49 AK: We don’t. We don’t. And we do have, because we had a bit of a space issue before this pending build out of attorneys hoteling offices, sharing an office. Not at the same time. We never had a two attorneys sharing an office at the same time, but I’ll have an attorney work Monday, Wednesday, and Friday from Calabasas, and another attorney will be in their office in Century City, those days and vice versa. That allows us to maximize our office space even more.
0:23:22 CR: So now, as it relates to technology itself, one of the banes of my existence are the fact that my interaction with my attorney is almost always email and I have real problems with email because email can not be tracked. You can’t hold people accountable and it becomes these long email trains. Especially with attorneys, especially around a closing. I haven’t found a better way yet. I’ve tried to encourage our people to use… And I think if we go towards a big deal again, we’re just gonna tell our attorneys, “You have to use a certain project management software.” But do you all think about that? Do you all think about how is the best way to interact internally? How is the best way to interact externally with clients?
0:24:02 AK: Yeah. Well, I feel like you get… You’re so used to email and you use it as a crutch and you rely on it too much, and I… Today’s a perfect example. I’ve spent the whole day out of the office. I visited a client in their new development in El Sereno near Alhambra, a very cool biotech development. I was on a pitch meeting with another client out in Rosemead. I’m here in downtown. After this, I’m gonna meet with another client for coffee.
0:24:39 AK: The only way to make meaningful relationships is with face to face communication. Now, that’s one aspect of the job. The other aspect of the job of getting just substantive work across and communicating with a great deal of people. When you’re a real estate attorney and you are closing a deal, you need to communicate with your client, the opposing party, opposing counsel, title, escrow, lender, equity, equities counsel, lender’s counsel, you’re talking about a checklist of 15 people on an institutional deal. So we keep very detailed checklists, and right now email is the most efficient way to communicate your thoughts to that many people. We have Slack internally. Some people like it. Some people are dinosaurs. They don’t like it. I like it. It’s a quick way to communicate, usually with my internal team.
0:25:37 CR: Yeah. It’s another vehicle or a pipe to talk to people through.
0:25:44 AK: Yeah.
0:25:45 CR: I think it works really well if you’re an engineer. I really see that in trying to solve problems and write code. We use internally… We’re a Google based business, so we’re much more on Docs, and Google Docs, Google Sheets and Slides. And then we use Google Hangouts for things and then we use ASON as our project management based system. But I think one of the challenges that has long been is these systems don’t talk to each other very well, is going away quicker and quicker. And so really, I think the issue becomes at what point does a client say to you, “I just… The problem with email is I can’t really follow what tasks are being done.” And have you seen that yet? Where someone says, “I’d rather see you work with us in a project management software than an email?”
0:26:35 AK: No, hasn’t happened yet.
0:26:37 CR: Interesting, I think as these project… Especially Microsoft’s got one of the better ones out there. They’ve got a great project management system. I think it’s coming in time but…
0:26:47 AK: Yeah, I’d like to inquire especially… This is a real life example where an attorney of mine has to leave the office or the firm. Her close family members are all on the East Coast and so we have to make a transition. And she had several outstanding matters, and to transition that to another attorney, you can’t build the attorney for the transition. What is the most efficient way to get everything in her brain to my next attorney’s brain? Right now, it’s just a data dump of emails and appointing the new attorney to where documents are saved on our system. We use Net Docs. But a project management tool, in that case I could see being very helpful.
0:27:39 CR: And what about just AI as it relates to legal documentation? I’ve had Gabriel Safar on my podcast who’s LeasePilot. LeasePilot is a software that I think works with Microsoft, and it’s a really interesting product. I still don’t… It’s not the… For those of us who are hoping we could live in a world where you don’t need to use lawyers as much, I don’t think we’re gonna be in that, but it’s a way to perhaps lower your legal costs or make it more repeatable. Is there any software out there that you’re seeing that is helping you interact and getting the job done to help clients on billing, or to just be more effective so that you can have less attorneys, but do more work?
0:28:18 AK: Yeah, all of these technologies and AI technologies, although you may think, “Oh, that could remove my career, it enhances my career.” Because you have to be as a lawyer substantively perfect, you have to be responsive in a nano second, and you have to be efficient with your time, and so the technology really helps all three. And so one technology that we use is a system called Litéra, an AI system that allows us to efficiently get through a large document and point out section reference breaks or define terms that aren’t correctly used or an undefined term that should be defined. And the things where clients may not appreciate, but if you mess those up, you’re talking about a different way to interpret a legal document.
0:29:26 CR: What you’re basically saying is the first year typical transactional job is out the window. That was my first year. Was if you change Section 1A, where are the other 18 places that are being changed?
0:29:30 AK: Sure… A miserable task for our first year.
0:29:40 CR: But you’re learning the document. But there is… And that’s a lot of what LeasePilot is too, which is it’s making it more efficient. So then outside… Is there other technology that you’re using that… I’m amazed that you guys are on the Cloud because I think it makes all the sense in the world, but one of the biggest issues in dealing with all law firms is, “Where are we gonna put our server and where are we gonna… ” And I find that very antiquated thinking, but what gives you the confidence to run your business on the Cloud as opposed to with a server in your office space?
0:30:10 AK: My technology consultants telling me that it works perfectly and we rarely had a problem. And look, lawyers have to work at all hours of the night. And inevitably, if something breaks down on a Friday night at 11:00 PM, there’s gonna be an attorney working on some crisis. And so we have to be fully functioning 24/7, 365 days a year, and we’ve used it for multiple years, being on the Cloud, and we have not had any issues. And in fact, it’s the ease of working remotely, of putting… I don’t even know the website. It’s just the first website that opens when I open up my… Whatever. Internet Explorer or Google Chrome. It goes straight to it, and I feel like I’m on my system at work. The AI apparatus software more and more of our attorneys are learning it, and they’re becoming believers. Look, you know the law firm business. We’re dinosaurs. And they hate change.
0:31:21 CR: But I think the reality is, is you’re gonna change and keep up. One of the things that just drives me nuts is why I have to physically sign documents. I just… So what we do now is, I’d rather beg for forgiveness and ask for permission. So we start everything with Adobe Sign or DocuSign, and then if they say they need quote unquote, “wet” signatures… We had a classic one recently, where they said, “Oh DocuSign is fine, you can use that, but then we need the wet signatures.” And they accepted us… They didn’t even really look at it. We’d printed off what I’d signed and sent it to ’em, and that was the wet signature.
0:31:54 AK: So you’re preaching to the choir. Up until 2017, never signed a legal doc… Or never had a client sign a legal document through Adobe or DocuSign. Of course, my home transactions all of those are DocuSign. In 2018, it just got to a point where so many of our clients would refuse to sign essentially our engagement letter to non-recordable documents. We’re not talking about deeds of trust or mortgages, but we’re talking about other PSAs and other documentation. It’s happening more and more, and I’ve got my attorneys and staff well equipped on how to prepare a document for DocuSign. I know it sounds so elementary, because the brokerage community and escrow communities can just do that with a snap of their fingers, but it seems so unprofessional in the legal world. But, I’m sorry, in 2019, that’s what your client wants and expects and if they’re traveling and they’re in New York or Chicago or on the slope skiing or in Hawaii, or wherever they are, it’s easy.
0:33:08 CR: Yeah, so and I asked this a lot of friends who are attorneys, how long are we from the notary being a national thing instead of a state thing, and how far away are we from where we really can do closing documents and deeds of trust digital? I think the digital signature is a more authentic signature than mine. It really is.
0:33:29 AK: You’re right.
0:33:30 CR: It says this is when it was signed, and I authorized that I did it. I mean, that’s better than someone scrawling out my signature.
0:33:37 AK: Yeah, I haven’t thought of having a federal notary block, but I’ll tell you, because we do transactions essentially in all 50 states. Although 90% of our clients are in Southern California, half of our deals are outside of California. And so one of the questions that I get is, “How do you do a transaction out of California, if you’re not license there?” Well you can and you co-counsel or you use escrow companies and the number one… I don’t wanna say it’s a road block, but the thing that we always have to pay attention is, the notaries, because every state, even counties, they all have their own rules and formats. And so, to get something bounced from a recorder’s window when everyone is excited about the closing and then it gets bounced, everyone just looks bad. From the lawyers to the title company, the escrow company. Sometimes it’s not our fault, but would be in favor of a federal notary block. This is real sexy conversation.
0:34:40 CR: No, but it’s important because this is where I think the world’s heading and I think your law firm is representative of the fact that we are in a new world. That you can start a law firm without the overhead that other law firms bring to it, that technology is lowering the head count, making people more effective, and really, we’re only gonna move as fast as the lawyers allow us to move because all of us as business people ultimately say, “Talk to my lawyer.” So if you are moving in that direction, I think we’re gonna move slowly. Have you had any interesting interactions with tech company? I always find when we deal with tech companies, they’re blowing me away on what they’re willing to just do because it’s easier, and it’s tech, and it’s hip.
0:35:22 AK: Recently, I am exploring with tech companies, of how to use social media effectively for our law firm. Our client is not retail customer. Right? It’s a sophisticated user of legal services who… They’re not going through the Yellow Pages to find us. If a client comes to us other than through a referral or someone that I met at a conference, that’s not… Usually that’s not a client that we’re gonna want to have a successful relationship with. So how do I use Facebook, LinkedIn, Twitter in a way to enhance our brand, attract attorneys, and get more business. I’m figuring that out, and I’ve been shown ways of why I should be using it, and how I should be using it. And it’s not gonna be some random person sitting in their living room in their underwear on Facebook seeing a Sklar Kirsh page and wanting to contact me for a small condo purchase. We don’t need that. That’s not our business. So how do I get decision makers of real estate and corporate institutions on social media seeing a Sklar Kirsh piece and thinking of us in a positive way?
0:36:58 CR: Well, you put it right next to some of the ads I see on my Facebook. Next thing you know, I’m buying the new belt from Indiegogo.
0:37:05 AK: Yeah, like my whole wardrobe is pop up ads.
0:37:10 CR: So let’s talk a little bit about where you see law as a business going. Because I think what’s unique about you is, I know you’re in the YPO chapter, Malibu chapter, the business community looks at you as much as a business person as they do as a lawyer. So as you’re building this widget, which is lawyers, which is a firm full of lawyers, where do you see the law business going over the next few years? What do you think are gonna be some big changes that we see?
0:37:41 AK: Sure, so there’s always changes in laws that we have to stay up with the times and I’m not talking laws that change things on the margin. I’m talking about laws that dramatically change the way people do business. Cryptocurrency. We need to get our arms around that, because more and more businesses are gonna wanna use blockchain as a technology for real estate. Cannabis. The legalization of cannabis has been huge, huge game changer in the legal industry. It went from you don’t want it to touch it because you’re afraid the FBI is gonna be knocking on your door as an accomplice to if you don’t have an expert you are missing out on big opportunities. Both in the corporate world and in the real estate world. Opportunity zones. Our tax lawyers, and myself have become experts in opportunity zones. I’ve told this to people, I haven’t received more phone calls… Or I should say it conversely, I have received more phone calls about opportunity zones than any other piece of federal regulation in my 20 years as a lawyer.
0:38:58 CR: Well, that’s a great segue into something I wanted to get into. So as a real estate firm, and you as a law firm, we were very focused on opportunity zones. I think from our perspective when I first started to read about it I said, “This is a joke. This isn’t gonna make any sense.” So someone’s gonna defer tax and then do something in an area where there’s no hope for success and the rules didn’t quite add up to one plus one equals two. Well, here we are, almost a year had passed. We missed a big date, I think it was this week, where we were gonna have another hearing from the IRS. Clarifying the rules.
0:39:34 AK: Yeah.
0:39:35 CR: But why don’t you give our audience just… Give us just the basics of what, when the trigger word opportunity zone is said, what should our audience know what that means and what are you seeing as this evolves?
0:39:47 AK: Yeah, so to be at a 30,000 foot level, a way to reinvest in a tax efficient manner, and ultimately tax deferred manner, capital gains, and this is the biggest change, capital gains from any type of investment, whether it be…
0:40:06 CR: So no longer the passive and active rules?
0:40:08 AK: Right, and it could be real estate, it could be stocks, it could be the sale of a company, art. What have you. If you were gonna pay capital gains, and you reinvest that gain within 180 days in an opportunity zone fund, your capital gains on your sale is deferred and reduced by up to 15%, if you hold it for seven years, 10% if you hold it for five, and then the big bonanza is on your, I’ll call it the up-leg, but they don’t use that terminology. But on your acquisition if you hold it for 10 years and it’s in an opportunity zone, in a qualified opportunity fund, then it’s tax free for that 10 year period, and it’s a step up in basis.
0:41:00 CR: The step up in basis is a big key.
0:41:01 AK: Yeah.
0:41:01 CR: So then when you go to do your next deal your basis is stepped up.
0:41:05 AK: Correct.
0:41:06 CR: Who decides what an opportunity zone is?
0:41:09 AK: It’s been decided. So each state drew the maps for their particular state. And I know you said you thought they would be in areas that you may not wanna invest in.
0:41:22 CR: Now you… Don’t steal my punch line, go on. Keep going.
0:41:25 AK: Okay okay, so I will…
0:41:27 CR: Well, my punch line, I said this recently on a panel is who knew that the highest rent lease… The highest lease rate, that was done in 2018, which was Spotify, in the arch district is in an opportunity zone.
0:41:42 AK: Exactly.
0:41:42 CR: Somehow I don’t think that’s how they planned it when they were drawing up opportunity zones, so there are some haves and some have nots.
0:41:49 AK: True.
0:41:49 CR: It really depends on what county and what state.
0:41:51 AK: Yep.
0:41:52 CR: But what was the basic premise of identifying an opportunity zone?
0:41:55 AK: Well, it was to encourage investment in areas that haven’t been exposed to real estate and also corporate investment, and that… Almost like an enterprise zone. The way the map has been drawn at least here in Southern California, it’s in parts of Hollywood and the arts district, and other places where there’s been a lot of activity. There’s…
0:42:21 CR: It seems to me that they drew the map around manufacturing. What someone from 30,000 Feet said was old manufacturing, so that should be an opportunity zone and not necessarily getting boots on the ground to say, “Well, there’s gentrification and things happening here that makes this property more valuable,” because some of the areas too, that we’ve looked at, these are rougher areas where you would love to see dollars come in. And I don’t know if gentrification is the word I wanna use it, but at least improve the area. If you care about climate change what we really wanna see is adaptive reuse, not new development. And this really encourages that. One of the issues that I’m not quite figuring out, and I’d love some thoughts or advice on this, is we have a lot of closed ended real estate funds that have a variety of investors from people who don’t pay tax, like the CalPERS of the world, to high net worth individuals who do pay tax. Is that gonna be the model for opportunity zones or are you gonna see opportunity funds that are really only high net worth individuals? Tax payers?
0:43:28 AK: That’s a good question because it really doesn’t benefit those if you’re not paying taxes anyway, right? But if you believe what you read… And there are institutions of all sizes raising enormous amounts of money for opportunities owned funds. In order to get to that level, it can’t just be high net worth individuals. So why are these CalPERS, if it is, why are they investing in an opportunity zone? Unless if there’s some tax reason, I don’t know. The first thing that I tell my clients when they’re considering making an opportunity zone fund investment is the real estate has to speak for itself. The investment has to be a good investment. Then if you get a positive a tax benefit. Great, that’s gravy.
0:44:22 CR: Well, I think that’s… The scariest thing that I see happening is every a failed real estate broker is saying, “I’ll start an opportunity fund.” And what we’ve tried to say to people is that we’re looking at it. We’re looking at very seriously. We are in the market with a strategy that’s around using impact as Alpha and adaptive reuse. They cross over between opportunity zones, but we have not yet felt comfortable that we could raise the kind of money because you’re really… We initially said this is only gonna work for high net worths. We’re seeing maybe that’s not the case. That CalPERS you see or any of the pension funds are saying, “Well the adaptive reuse piece is appealing, the returns aren’t any less so I’m happy going into it even if I don’t get the tax benefits.” But there’s still things that aren’t decided, so can we talk a little bit about where the grey lines are? And we thought, we were hoping, outside of this government shut down we were gonna have some answers this week, but it sounds like until the government re-opens, we’re not gonna hear anything.
0:45:23 AK: Yeah, it’s been postponed. We know more than we did when it first came out and in the summer, there was a conference every week and then every answer was, “Well, we don’t know enough information till the IRS gives more guidance.” They gave more guidance in the October, November time frame. One of the biggest things that they did was they removed land value from the equation of you having to spend essentially two X of your investment or the same amount as your acquisition price.
0:45:56 CR: So let’s break that down ’cause that was a big non-starter for a lot of people.
0:46:00 AK: In California would have been almost impossible for any deal to work.
0:46:02 CR: Yeah.
0:46:02 AK: Because of the…
0:46:03 CR: Explain what it is.
0:46:04 AK: Alright, so if you bought a property that’s in the opportunity zone for say a million dollars. Because land has been excluded from the equation. But let me take a step back. Just generally speaking, you buy a property for a million dollars, you’re required then within 30 months of your close to spend another million dollars on the redevelopment, adaptive reuse or ground up development, into the property. That was going to be extremely challenging to spend that within 30 months on a property that was not yet entitled.
0:46:44 CR: The entitlement is the biggest in a state like California, and that’s a huge issue. And when you were excluding land, California is one of those states where maybe 80% of the overall asset value is in the land. And then they were told… And when you were told you couldn’t include the land that was a big issue, right? And so that’s changed.
0:47:02 AK: That has changed, so…
0:47:03 CR: And so now, it’s really the entitlement issue. Can you get something approved by a municipality and get going in 30 months is a real issue here in a state like California, and it is in Illinois and it is in New York.
0:47:16 AK: Right, so the way my tax layers have been interpreting the code and obviously there’s no commentary or case law, this is all coming out and everyone’s learning on the fly, is in the example of a million dollar acquisition, and it’s complete scraper and you’re building a ground up development. Well, the value of the building is probably de-minimus maybe $100,000 of that million, if that. Example, in the land is the vast majority. Well, now you don’t have to spend the same amount as the land. You take that out of the equation, so now you only have to spend 100 grand and it’s a lot easier to spend that 10% than 100% within the 30 months, and that’s all you have to do. And so if the entitlements take longer than 30 months you can add on more money of subsequent sales, subsequent capital gain events, and then build your new development.
0:48:19 CR: And I think in a perfect world for a developer, not necessarily, cause I think it actually works better the way it is now, for the society. But in a perfect world, you would not have any of that 30 month issue. You could go through the entitlement, you could take an old manufacturing site and turn it into apartments, and if it took you four years, it took you four years, and that’s fine. The advantage of having the requirement on 30 months is, it really does play to the adaptive reuse. Saying, “What can you do in the short term to fix this up, to bring activity, and if you wanna go get your entitlements, go get your entitlements.” I do think there’s a societal benefit by having that. My bet is though over the long term, they get rid of the 30 month.
0:49:00 AK: Interesting. I know why it’s there. I could understand why it’s there, because if you didn’t have a time clock, then the impetus to put in money and re-energize these communities, is just not there. And so they want to put in as much money as they can in the communities that they felt were underserved and therefore drew the maps that way. So we’ll see.
0:49:29 CR: Yeah, we will see. I think it’s very easy to get into these very partisan talks about Democrat, Republican, and what we think. I think there’s a lot of good that this is doing and I think it’s the uncertainty that has made things lag, but I think there’s a big explosion. You, going back to the whole premise of our conversation as starting a law firm a few years ago, you’ve really jumped on this. And in fact, I’ll give you a free plug. I know that we’re sending some people to something you’re doing. Maybe talk a little bit about that and where you see your firm’s role in this new world of opportunity zones. So can talk a little about the event you’re having, and then what the role that your law firm is gonna play you think in understanding opportunity zones?
0:50:13 AK: Sure, so I get questions all the time on opportunity zones, and I know there are a lot of events out there on opportunity zones, but for our clients and contacts, we felt it was important to just sit down and have a seminar in a relaxed setting on January 30th at Bartow Country Club in the late afternoon. My tax colleagues and myself are gonna speak about the latest updates and how opportunity zones work. Because there’s a lot of misinformation out there and a lot of confusion, and so we just wanna set the record straight of… At least at that time, as of January 30th of what the rules are in. We are front and center in this space because our clients are asking us everyday about opportunity zones, so we go where… A mentor of my Lew Feldman from the Goodwin, he said, “I go where the money goes, and I adapt my practice to where the money goes.” And this is where the money is going. And so, if I don’t become an expert on opportunity zones then I will miss out on that opportunity of providing service to my clients. No different than cannabis. So many of my clients are wanting to have some investment exposure, whether it’s as a landlord, whether it’s as an investor, whether it’s as a debt fund who lends money to cannabis operators, or as an operator themselves. So as laws change, our clients will dictate whether it’s an area that we should spend money on and become an expert in.
0:52:01 CR: Well, I don’t think there… I look back on my career, starting in the late 80s, early 90s, and then as a lawyer in the early 90s, I don’t think there’s been a more fundamental shift in land use law than those two things that you just mentioned. Change in the cannabis laws and the change in opportunity zones. We as a state don’t have community redevelopment anymore. Opportunity zones are gonna fill that void, so I think it’s terrific that you’re out in front of it. We’re getting near the end here. And I haven’t even talked to you a little bit about something I always wanna talk about which is, tell us a little bit about how you are building this law firm that’s going from five lawyers to 30. It’ll be 50 before we know it. And maintaining your life and tell us a little bit about your family and kids. And when does that iPhone get shut off?
0:52:48 AK: I’m always available. So I’ve been married for nine years to a wonderful woman, Courtney. We just celebrated our ninth anniversary on New Year’s Eve. I tell people we got married in Vegas, and they look at me, “Was it planned? Was it not planned?” It was a beautiful wedding at the Four Seasons in Vegas. 150 people on New Year’s Eve and it was an excuse for our friends and family to go to Vegas for a New Year’s Eve celebration, so next New Year’s it will be 10 years. We have a wonderful four year old girl, Clementine, and a precocious two year old boy named Maverick.
0:53:30 CR: One of the great names.
0:53:31 AK: Yep, and can’t wait…
0:53:32 CR: You’re too young though for Top Gun. Come on.
0:53:34 AK: Wait a minute. I’m 43.
0:53:34 CR: Alright, alright.
0:53:37 AK: And I already said that my favorite movie is A Few Good Men.
0:53:41 CR: Yeah that’s true. That’s true.
0:53:41 AK: And so, Top Gun is one of them as well, and the next Top Gun movie is called Top Gun: Maverick, and so I guess, he’ll be four. It comes out in 2020. My four year old Maverick will definitely be seeing the movie with me. Your question was, this is the hardest part of my life and I’m sure your life and anyone’s life is balancing growing a business, growing my law firm, being there for my clients, being there for my wife, being there for my kids. Gosh, it was a lot of easier before kids. But it’s so much more fun with kids, so things have changed. I get home. Look, my wife will say that I’m out a lot more than I actually am, but I try and come home by 6:00 most nights. Now, there’s gonna be events and certain travel that requires me to be out, but for most nights, three to four of the nights, I’m home by 6:00. I then have dinner with the family and you have bed time routine and my kids are a little and the bath time and putting them to bed, and then that’s about 8:00. I turn the computer back on and I do another two to three hours of work and respond to emails and do substantive drafting, and I find time when they’re sleeping, and the kids are sleeping when I am working.
0:55:12 AK: And my clients, a lot of them are in the same boat, so that 6:00 to 8:00 PM, window seems to be where the least amount of email traffic is happening. And then people are re-engaged and working. And you find some time early on the weekend mornings, and you just make it happen. Right? You could have all the excuses in the world and everyone has them, and you just… You find a way.
0:55:38 CR: Yeah, I also think it’s setting boundaries for even clients. I think lawyers gotta do that just as much as I have to do that with others.
0:55:45 AK: Sure.
0:55:47 CR: I’m really excited to hear about the opportunity zone and the cannabis. Those are things that are in place and happening. Is there anything that you see out there that you think is gonna be transformative to the real estate business as it relates to the law?
0:56:04 AK: We’re in an interesting market. I don’t know if it’s specific to law, but I feel like I’m in the market just as much as you and all my clients are, because if my clients aren’t doing transactions, then I’m not doing transactions. Last year, 2018, was the busiest year for our law firm and definitely for our real estate department. And I think if we were to have this podcast in January of 2018, and you asked me that question, I would have said I’m nervous about this year. I don’t know how we’re gonna equal 2017. And in 2018, not only did we equal in terms of a transactional volume and billings, we exceeded it by a lot. By a healthy percentage. So we’re sitting here at the beginning of the year of 2019, how are we gonna do that again? I’m more concerned. Concern’s not the right word. I just feel that we’re one year later in the cycle. People are more cautious. Political speak interest rates, cap rates, but then you go and you look at the counter balance and there’s a lot of money out there that it needs to be placed somewhere and I actually think the choppiness of the stock market that we have seen over the last couple of months helps our business.
0:57:24 CR: You’re expanding your space, so you’re making a bet on the future. I’ll tell you from our perspective and our five million square feet, or so. I’ve never seen as many tours as we’re seeing. Everybody’s talking about… I think the biggest difference we’re seeing is people breaking up offices, especially law firms. I think people are making… Have come to an understanding, if you’re a litigator you really need to be downtown. It’s really hard to go from the west side to downtown to go to the courts. So we’re seeing big law firms break up their space, but every number we see is a good number. And I think there’s a lot of noise that people have to deal with. I think it’s gonna really kinda go up and down month to month. The job numbers and all that, but I think it’s all gonna be pretty strong because there isn’t a geopolitical risk, wars, terrorism. I can’t… You really can’t talk about that, but I see for the most part two things happening: People are recognizing if they’re an old space, it’s not working to attract talents, so we have to have new space and secondly, really being conscious of commute, and so people are looking at breaking things up.
0:58:31 CR: And I put that together, I think it’ll be a good year. I think this is a good time you’re raising capital though, because there’s gonna be some fracture. Trees don’t grow to the sky and things like that. But for the most part, we’re cautiously optimistic recognizing that the runway, the horizon, may be getting closer.
0:58:49 AK: I think so. I’ve seen my first broken deal that a lender is selling at a crazy high cap rate on a shopping center space in a rust belt state. Clients are starting to talk about note purchases again. I hadn’t seen a note purchase deal in a year. At least four or five years. Real estate entrepreneurs find a way to stay busy and so my busyness will just be a little different, I think, in 2019. And maybe for the next year or two, than it was for the last several years. One thing we did as a law firm last year to hedge against a slow down in the economy is build up a litigation group. Now, I hate litigation. I’m a former litigator. I can’t stand it and I encourage all my clients, even if they feel they’re in the right, settle. You’re gonna end up… I tell them this, you’re gonna pay someone you’re either gonna pay me or you’re gonna pay to your opposing party. Just pay them, and get on with it. If you pay me you have to live with this and have an opportunity cost, and sit down for depos and discovery and go through that horrendous process we call litigation. With that said, it would be foolish of me as an owner of a law firm not to have litigation and if the economy goes south, there’s more partnership disputes other types of disputes.
1:00:16 AK: And the core of our firm for the first five years was we are a transactional only firm of corporate and real estate, and last year we started getting a lot more calls for litigation and we were referring that out. Or two years ago, we were referring it out. We decided as a business model to bring it in and so we now have five litigators. I see that the depositions taking place in my conference room. It’s another reason for why we need more space is for conference rooms, for that.
1:00:50 CR: Litigation is the property management, the continuous cash flow of the law business is what you’re telling me?
1:00:55 AK: It is. At least it’s…
1:00:57 CR: Good times and bad times, someone’s suing someone.
1:01:00 AK: Yeah, more bad times. Counter cyclical, so it’s a hedge against our business and hopefully we’ll be using those additional conference rooms and putting them to good use. Hopefully more for closings and less for depositions.
1:01:12 CR: As long as I can do it on Adobe Sign. I don’t wanna come in. The days of having the big table with the closing documents I think are over. DocuSign and do the closing dinner.
1:01:21 AK: I could tell you stories at Latham where we were doing the McGuire deals, 12 building acquisition, and 25,000 square feet of conference rooms filled with documents that needed to be signed.
1:01:31 CR: Yep, we’re hopefully moving away from that, but…
1:01:33 AK: Yeah.
1:01:34 CR: Well, Andrew I appreciate you taking the time. It’s been a great conversation. I have a feeling I’m gonna have you come back as opportunity zones becomes more clear, as the cannabis laws become more clear. There’s still a lot. There’s still a lot that is gonna be learned over 2019 on both these subjects, so thanks for being here. I really appreciate it.
1:01:51 AK: I appreciate you inviting me. This was a lot of fun.