The Real Market with Chris Rising – Ep. 84 Tim Milazzo

Chris Rising (00:02):

Welcome to The Real Market with Chris Rising. The only podcast that brings the real estate conference panel to your headphones. You’ll hear from superstars from every realm of commercial real estate, the biggest brokers, the most well-known architects, the largest investors, and the most visionary developers. We’ll learn what they do, how they do it, and what drives their success. We’ll discuss the latest trends across regional markets, capital flows both national and global, and we’ll explore technology’s role in shaping all of them. We’ll take a clear-eyed look at where we’ve been, where we are now, and what’s to come. Real conversations, real experts, real insights. This is the Real Market.

(00:50):

Welcome to The Real Market with Chris Rising. I’m really excited to have Tim Milazzo here with me today who’s the one of the co-founders and CEO of Stack Source. I have a feeling that if you are under about 35 you know who Stack Source is, but if you’ve been in the real estate business and you’re over 35, you can’t imagine that maybe an entire financing for a real estate deal could get done with speed and efficiency, somewhat like the way you can with the Home Mortgage now. But Tim’s a guy that’s going to tell us how the future of where we’re going with finance, how he’s built this comp]any, and Tim, welcome to the Real Market.

Tim Milazzo (01:29):

Chris, thanks so much for having me.

Chris Rising (01:31):

Well, I was really excited when we first started talking because you were doing things and showing me things that I think intuitively we all think why isn’t real estate and specifically the mortgage brokerage business, why is it in here yet? But yet it’s still I think a tough sell to get anybody to say, “Hey, oh wait, I’m going to do a tens and twenties and millions of dollars and I’m going to do it with the kind of technology that you bring through it.” So why tell us a little bit about what you’re doing that got me going, “Wow, this is really cool.” And let’s talk about what the market is saying out there about this technology and bringing it to a pretty old school business.

Tim Milazzo (02:14):

Yeah, excellent. Well, thank you for the opportunity to tell what we’re doing at Stack Source and our story. I know we’re geeking out about multiple things happening in real estate tech and in tech more broadly. And so Stack Source, the company that I’ve founded and have been running for the last few years is a tech enabled commercial financing platform. At a base level what we do Chris, is connect the deals with the right sources of capital. That’s really what we’re doing at our core.

(02:46):

Now there are a lot of traditional intermediaries in our space and mortgage brokers that have the exact same goal in mind. We go about it in a little bit different way where it starts and ends with a web portal. And certainly it’s not dropping off users to figure it out on their own of how to use this web portal, but there’s some powerful features of actually taking the underlying information that lives in a deal, that lives in a typical deal package and using that information to connect to the right sources of capital and make this process as efficient and transparent as possible and really speed up and make the mortgage brokerage process just a lot easier to digest and get through and figure out, “Hey, do I have the right financing on my deal or not?”

(03:31):

We’ve built some technology, a software platform that our users log in. They can answer that question easy. It’s got some features like instant matching to different capital sources, browsing through who is algorithmically a great fit, whether it’s a capital source you know already or it’s not, and discovering those capital sources that could be a great fit based on the underlying information and a deal is really our sweet spot.

Chris Rising (03:57):

Well, you know what I find interesting about what you’re doing, I had a conversation today with someone who was asking about our company and when I would try to say, “Hey look, we use technology as a force multiplier.” They say, “What does that mean?” And I said, “Well, just give me an example.” “VTS.” “Oh,” and they go stop me right there. “Oh, that doesn’t make you a tech company.” I’m using that tech as a force multiplier allows us to do more with less people, which in my opinion makes us a tech enabled company who’s using technology as a force multiplier.

Tim Milazzo (04:29):

Yeah.

Chris Rising (04:29):

The things that I do on VTS where hours of meetings that used to come on fax of a printout of leasing updates. Then they became just an email of a PDF but now I’m dealing with VTS in real time and I think when we started talking about what you’re doing with Stack Source, it’s not like you’ve invented the new wheel of 2023. I mean financing real estate takes multiple parties, but it’s the platform that you’re giving people to interact. In a world where our personalized, we all expect to be on our mobile phone or at least on a laptop from anywhere in the world, but somehow there’s these elements of real estate that still people are saying, “No, no, I want to go old school. Bring out the ledger again, bring out that fax spreadsheet to work in.” So talk about how you address the problem of the friction points in technology so that we can get to that talking about how you’d finance a deal.

Tim Milazzo (05:26):

Yeah. So the way we started this and VTS is a great example of owners really pushed brokers to get on board with more transparency, more efficiency and that’s to my understanding really how VTS grew up in this industry and they’re doing a great job. In financing, we started with this tech prototype saying, “How much of the commercial financing process can we truly automate?” And now there’s multiple pieces that you need to nail. There’s multiple jobs to be done to take a deal and connect it with the right capital. You can think of the jobs to be done being the discovery of the commercial financing options all the way through to the closing and the signing of the papers. But for each discreet task that needs to get done, we want it to stress test how many of these things can be purely automate away, an algorithm matches a deal to a lender.

(06:20):

Can that be automated? The creation of a package of information that’s then sent to that capital source, that lender so they can decide how they quote that deal and how they process and for each piece we actually put out a prototype.

(06:35):

We put out a software platform that could be used by real estate investors, and this is 2017 as we launched this and we try to have a really basic prototype of every piece of the process and just said, “Let’s figure out which of these pieces fall apart and which of the pieces are our clients if they find some value in some of the features we’ve built. Where do they want a human to be back involved? Where are they asking me as the builder of the software for advice? Where are they asking me or where did I need to pick up and call the lender to explain something even though they already had this automated?” And so we took that tack of just building a simple automation, maybe not the end version with all the bells and whistles, but of each piece of that commercial financing process. And that’s what that’s left us with as we grant that intel. We figured out where do we need to reinsert the human support to really make this process successful.

(07:30):

Started hiring up our own capital advisors and that’s how we ended up as a tech enabled financing platform is we have software engineers that continue and now to build the right bells and whistles and to go deeper and to go broader with the automation. At the same time now we have real estate finance experts that provide all of those fill in the gap types of things that will not be automated away.

Chris Rising (07:53):

Interesting. I mean like everything you said, but when you came up with this around 2017, what were the first 15, you got to be craziest. Yeah, not 15, but I mean I know people look at you and said, “Look, JLLs pretty big. They do it every day. Mark Milam’s chat big. They placed debt and equity every day.” I mean, what was it that made you think if I create something like this, there’s going to be demand?

Tim Milazzo (08:20):

Oh man. Well first of all, it was more like 150 people either looking at me, cross eyed, scoffing at it potentially. I even got laughed at a couple of times Chris, with the idea that commercial financing could be made more transparent and it could be brought online, and that’s a simple concept. Maybe that’s down too much and being brought online, people think, “Well, it has to be a hundred percent automated. It has to be all programmatic.” The truth is it’s somewhere in between and it was always going to be something in between. But the way that a traditional financing broker would have thought about their business five or 10 years ago and thought, “Well, what pieces do I want to automate of my own process?” That ends up being a very different answer than if you burn it all to the ground and you start with a new prototype.

(09:09):

You get to completely different answers. You start with different assumptions. And that’s the thing. JLL is an amazing company. They do a ton of work in many parts of the commercial real estate industry and they have to this day the number one financing brokerage for sure, and it’s tightly integrated with their investment sales practice. But HFF is the heart of JLL’s debt and equity capital markets team. HFF was built in decades past based on different assumptions of what tools are available to us. What data sources are available or are soon to become available, and looking at the market a different way. And while they’re an amazing business, they have some old assumptions about what can or should be done in the process. And that’s only revealed if you burn it to the ground and start fresh as a startup.

Chris Rising (10:01):

Well, why don’t we make this a practical world example. I’m just going to use round numbers, but we are buying a multi-tenant line industrial facility in Sacramento. We’re far along the process, so let’s just say we’re starting, we just got picked as the buyer. My first call, my partner Scott McMillan’s first call is also XHFF.

Tim Milazzo (10:22):

Yes.

Chris Rising (10:23):

But our first call is going to be to the two or three lenders that we’ve already done business with, try to sniff it out. Our second is going to be, well CB or JLL is selling the asset. They’d like to introduce us to their debt team and our first conversation is going to be, “Look, we don’t really want to motivate you with a fee, but we got these relationships. Maybe we can work something out.” Then we figure out whatever we figure out and it goes to JLL or it goes to CB and they give us a list that probably has 50 to a hundred names on it and it literally is a PDF of their list of top lenders for this asset class at this size range for this much leverage.

(11:12):

Then we just start talking through a list and then they’ll say, “Well look, we’re going to go get quotes from these people.” And those quotes come in and we start to say, “Well look, we don’t want to have any recourse and you got to accept our entity.” So there’s all these conversations that are either emails or conversations that are happening in a traditional world that leads us to picking the one person. And then quite frankly after the term sheet’s done, that broker kind of goes on their way. So that’s the traditional process. Explain to me how Stack Source is different or not necessarily different but more efficient for that whole process.

Tim Milazzo (11:45):

Yeah, well good use case. So if we’re talking about a 30 million industrial acquisition. First of all, our database is also going to start with a fairly similar, especially for industrial if it’s cash flowing. There’s a lot of capital sources that would say at a base level. I’m interested in financing cash flowing and industrial and in primary markets. And so we’re going to start with a fairly wide database as well.

(12:15):

First of all, efficiency number one off the bat, if you’re looking at multiple deals and yes, you have the one tied up under contract, having to make a phone call to just kick off the process with somebody that then has another conversation and the back office and they have to create that list, we’re already going to have an efficiency there of saying, “Hey, give us the property address and a couple of key stats.” And you can see what the interface comes back with because the algorithm matching you to capital sources, we’ll work instantly.

(12:47):

So you can see for this deal, for that deal, for this one, maybe I’m under contract for one, but I have LOIs out for three more. Give me my matching lenders for all of these, right? And you’ll be able to see some lists. The second thing is that you can actually sort and filter through, “Hey, only show me the non-recourse. Only show me…” “Hey, who can go up to 75 LTC on this?” And in early 2023 here, that’s going to cut down the list significantly. And it might be the LTC, but it might be the DSCR that is implied by the 75% LTC that knocks some of these out of the market. And if you know need that and you know you’re going for maximum leverage on this particular deal, we’re already then screening out for you, “Hey, here’s the one that would be at 124 DSCR at the very best interest rate they could be and we know they need a 125, so we’re going to knock them out.”

(13:43):

So there’s this interface for actually discovering capital sources and you might come back with this source of, “Hey, here’s a regional credit union that I never would’ve thought of.” And they can do no prepayment penalty and they can do the 125 DSCR and they’re coming back. And not only that, they’re coming to the top of the list because other borrowers at Stack Source have to actually enjoyed the process of closing with them. And so they’re actually being ranked higher on the list than the same interest rate range from CMBS lender where other borrowers have given some less than stellar feedback.

Chris Rising (14:18):

Is that like a Yelp review feature you bring to this that if I have an experience with X, Y, Z bank and say they’ve retreated us at the last minute or they put in some covenants we didn’t expect, I mean you can get that feedback from your client?

Tim Milazzo (14:37):

Yes. Lender ratings is actually the very next feature launching because we’ve been collecting that data Chris for the last three years. On all of the borrower interactions with the lenders and all of our own capital advisor interactions. So we’re recording data on responsiveness, on trustworthiness and on everything that affects a borrowers and on typical closing timeline, and that’s actually the very next feature that we are launching on the platform is surfacing that data within the lender finding interface. All part of step one, which is this discovery process, which is an important piece, but just speeding that up in certain cases on multi-family, you can actually get an instant quote in most cases, “Hey, who are these capital sources? They’re going to need to review but what am I getting into here?”

Chris Rising (15:23):

So I can just hear some of the guys I used to work with who are in offices over yelling right now saying, “Well, it’s about the relationship. I go to the conferences. I talk to the lenders. I have the relationship. You can’t do it in an algorithm.” How would you respond to that?

Tim Milazzo (15:40):

Yeah, well for sure. So we have relationships with these capital sources as well and we’re one of the fastest growing intermediaries in the country at this point over the last three years. Still a small player compared to some of the major brokerage names and especially the public companies. But we’ve grown and every single year over the last four we’ve done more origination volume than our history combined. I don’t know that we can keep, well we certainly can’t keep that going forever, but the lenders know who we are. There are two components to the relationship.

(16:12):

One is do you actually know the person in the conferences? The other component Chris, is actually do you make the lender’s job really easy and efficient too, and that’s the lender side of our interface. They have a login where they are reviewing the deals that have been matched and reviewed and sent to them getting to the top of the pile for a capital source, be it a lender, be it a Prefequity source from a PE. You want to be efficient on that side too.

(16:43):

We’ve heard time and again the feedback on the interface saying, “Hey, you’ve just made it so easy to screen and review deals and to interact.” Because instead of sending them a PDF over email and just hoping they’re opening it and then making all these nagging follow up calls, we can actually tell through our interface, “Have they opened it? How fast did they share it with their analyst? How many times have they opened this thing?” And that actually helps our targeted follow-ups with these capital sources too. They can actually interact with this digital offering memorandum. They can reject it. They can quote. They can download attachments from it and we’ve kept it extremely simple and streamlined for them as well.

Chris Rising (17:19):

So let’s dive into that because obviously step one, once you hire somebody is the analysts start sharing Argus files, goes back all to create a debt financing offering memorandum.

Tim Milazzo (17:32):

Yes.

Chris Rising (17:32):

That process still happen between human beings. It was Stack Source this all now digital. How much does the client side? How much work do they do versus how much work your side does? Explain that piece of a very important puzzle, which is an offering memorandum for financing that looks attractive to somebody.

Tim Milazzo (17:51):

Yes. So you have a main point of contact to Stack Source who is your capital advisor and they are the ones that are playing the role that a traditional commercial mortgage broker would play. But with all these efficiencies at the fingertips and giving you transparency to do what’s happening. The digital offering memorandum itself is automated and that is because lenders have told us time and time again, they do not want 40 or 80 pages about the deal. They don’t need you to paste in the right views of the maps. They want the address. They want the metrics. They want to be able to download your Argus or your Excel and we structured it in a way where they’re not having to then type in some of your proforma numbers into their own model or their own underwriting system. They can just download and work with that information. That is the way that lenders actually prefer to work.

(18:43):

It’s a bit of showmanship that traditional brokers usually use a very fancy long offering memorandum. It’s a way of justifying fees in certain cases or more precisely justifying an exclusive arrangement or a semi exclusive arrangement. “Hey, all this work goes into the way we do it and the way we do it is superior because lenders want the data. They want to screen a deal quickly. They want a clean summary and they want the data.”

(19:11):

So we have a team of analysts that part of understanding was this underwritten correctly, that’s human. The part of taking the data and putting it in a form that’s predictable that the lender can comb through quickly and get the data, that’s automated. And so you’re talking to a capital advisor, if you want to email something over by all means email something over, but whether it’s you or your capital advisor that’s getting uploaded to the platform, that’s getting processed there, we calculate some key metrics. We make it really easy for these lenders to screen and there’s not a multi-day delay after these screening calls of, “Oh yeah, here are the potential options.” “Hey, do you have the right attachments we can get out to market today.”

Chris Rising (19:52):

So now the skeptic coming out again here. So I kind of remember spending hours watching young people put together. Well this is the market report and they go take the four biggest firms, kind of filter it all down and create a market report for that lender to talk about the market of Sacramento and the submarket, whatever submarket there. Does that all still happen?

Tim Milazzo (20:19):

Well that is an old assumption coming back to play. So lenders today, well there’s two answers to that question. One is that a lender at this point, I mean most of the universe of commercial real estate lenders at this point, even the community banks that you might hook up with for some small deal in some niche county. They’re mostly have their own data logins. They have their own CoStar reports. Now certainly like you’re using Stack Source, our analyst team is going to attach the relevant rent comps and sales cap rate comps and a lot of that stuff is going to be in the package.

(20:59):

We’re actually working on additional data integrations so that you give us a property address that’s pinging a bunch of real estate data providers that are then automatically attaching data into that digital offering memorandum that will be another feature that we’re adding to Stack source in the future based on user feedback. But part of the answer is the lenders are going to have the data they need whether or not it’s a broker prepared market report and that’s really going to go back to the major data providers. The other thing is that there’s still human analyst support and that is not automated. “Hey, are we choosing the right comps here? Was this underwritten correctly? Are there errors?” That’s still going to be a human task.

Chris Rising (21:41):

Okay. So as I envision the process to the next step, you got to get a lender to come meet some better terms and that’s usually a real estate investment banker picking up the phone and calling that lender and saying, “Look, you really need to move this here or I’m going to play against this guy over here, or I’ll play against this woman’s LOI over here.” How does that process happen?

Tim Milazzo (22:07):

Yeah, that is one of the key non-automated pieces that will not be going away, not withstanding some major advance in AI or something. This is a human capital advisory role to say, “Hey, not only are here are starting quotes that we’re working with, but here’s where the market is flexing right now. Here’s where the CMBS market is right now. This life go says that they can do X, but there’s a deal comp where they’ve done Y.” And so that is a very capital advisory piece of the process. We’ve built up our capital advisory team nationwide at this point. They are former lenders, they are former mortgage brokers and those are the two dominant backgrounds that they’re coming from. The reason they are at Stack Source is because they can be more efficient with less busy work and can spend more time with clients and so this is not a… Well, I don’t have as much access to an expert.

(23:03):

This is the experts are freed up and their teams and their support teams are freed up through this automation and through this transparency to spend the time doing the things that matter, including negotiation, maybe not just with a senior loan at this point, “Hey, there needs to be an intercreditor between this senior and this Mez player, otherwise we’re going to have to spin it into Prefequity.” I mean these are the types of things that are getting deals done today Chris because we have interest rates that have risen as we have cap rates that have been sluggish. It’s requiring deals to have multiple crunch use of capital and so that’s like another major expansion of our platform that’s begun.

Chris Rising (23:42):

Well, let’s talk a little bit about these real estate professionals that are on your team. There’s some basic assumptions if I go to JLL, if I go to CB, I go to Cushman & Wakefield, I’m going to have a senior person who’s probably in their fifties or sixties seeing everything that they could see. Then there’s a junior partner to that. Then there’s a few analysts. How have you set up the system? And how many real estate professionals do you have on your team today across the country?

Tim Milazzo (24:11):

Yeah, so we’re at more than 20 real estate professionals specifically on our team out of a total company size of 35 that also includes software engineers and marketers and the operations people that make the platform run. We have some gray hair in the fifties and sixties with a few team members. We’ve got a lot of very high energy and very well versed and veteran real estate professionals in their thirties and forties as well. Our analyst team is actually a much younger, average age younger people that are in their first couple of hops in the industry that have a lot of analytical firepower and understand modeling and are very good with Excel and Argus and making the numbers work and using the data. And so we’re at more than 20 real estate finance professionals specifically at Stack Source at this point.

Chris Rising (25:06):

So the way I hear you describe it, if you took out the technology, this is Tim’s mortgage company, but when you add the technology you start talking about a different level of sophistication. So that matters when your clients want that technology because if you can say, “Hey…” You have said, and I agree with you. You’ve got professionals there who have been at all these big shops. They’ve just decided they like this mouse trap better. What is it that you think has really brought your clients there in terms of using the technology?

Tim Milazzo (25:42):

Yeah, well some clients, they’ve developed such a relationship with their capital advisor that it is their first move to call Beth at Stack Source or to call Chris at Stack Source and actually we have a Chris. He’s very smart real estate professional like you Chris and he’s in our Chicago office and so we do have clients that they formed that bond with their Stack Source capital advisor. It is totally a relationship game at this point for some of them and some of them they found Stack Source online because they were curious. They gave it a shot saying, “Well hey, we’re talking to our own lenders, but instead of hopping over to a traditional mortgage brokerage, we’re going to give this a shot. We’re going to see who we’re matched to and I’m going to have a conversation before I decide.” They were impressed enough they went through the process and they loved it so much that now they’re coming to Stack Source again and again and maybe it’s right through that capital advisor.

(26:36):

And so certainly we have that segment of clients that are mostly tied to a human being at Stack Source and we have others that are, “Hey, let me touch the buttons. Let me touch the screen. I’m uploading this file. I’m reviewing on platform what my options are.” And it varies. I do think back to some of your initial thoughts of maybe younger people know more about Stack Source. I do see a generational shift in who wants to click the buttons versus who wants to talk through it. Now there’s a healthy mix of both for most transactions, but there are some people, “Hey, I’m emailing in some stuff. I’m getting on the platform.” The value of this is that I can use the platform and I don’t have to have all these phone calls. And there are others where, “Hey, I want to be on the phone and that’s my preferred way.” Both of them are considered part of our platform to me Chris. Having a call with your capital advisor is absolutely part of the experience.

Chris Rising (27:34):

Well, one of the things I think it’s important that the audience understands as we’re talking about this is there’s really one thing going on. You have put together a great team of capital advisors and you’re giving them tools that the other shops don’t have.

Tim Milazzo (27:52):

Yeah.

Chris Rising (27:52):

There’s not much more secret sauce than that. It’s just you spent the time to really think about you and your partner to really think about it and say, “Okay, how do I make a mortgage broker more efficient? A real estate investment banker more efficient and make it easier to be a client advisor?” Well, that just doesn’t come out at thin air. Tell me a little bit about your background and tell me a little bit what inspired you to be in real estate finance.

Tim Milazzo (28:20):

Sure. Well, so I grew up in New Jersey outside of New York City and my dad commuted in on a train into New York. He was a leasing broker. So he was a managing director for a boutique leasing firm in New York that was later bought by CBRE. And so when I was in college, I was studying finance. I was trying to figure out my own career path. I interned for the Big Green and in finance roles and ultimately I was in love with software and technology and innovation. And so rather than working full-time in real estate, I went and worked in advertising technology for Google first and then later for a startup that got acquired by Facebook and I saw lots of things in the way that a technology company can operate, worked with a lot of smart people, but I still had friends and family in the commercial real estate industry.

(29:14):

I started getting involved and actually intended a real estate tech meetup in New York while I was still working at Facebook. And my eyes were open to, “Hey, this is a little bit different than my internship. This is a little bit different than the way that my dad told me about the industry in the nineties and I’m really interested in this intersection of technology and real estate.” I saw the asset management platforms and the listing tools and the marketing tools and crowdfunding was just getting going within real estate. And that was a trigger to me, “Hey, FinTech and real estate, is it really…” Like crowdfunding is amazing. And as a matter of fact to this day, some of the crowdfunding portals, not most of them, but a few winners have really put their face on the market. But what else is going to be happening in FinTech?

(30:04):

What else is going to be happening between the relationship of money and real estate that only technology could do? As a matter of fact, in residential, Rocket Mortgage was on the upswing. I mean they were getting their first Super Bowl commercial. You fast forward to today, they’re at 10% market share of all residential mortgage. Now there are people you can talk to at Rocket Mortgage, it’s a lender, but they automated key pieces of the process. They brought it online, they made it so that you could keep up to date or upload documents from your phone and they just simplified the process. They didn’t change the process, they didn’t disrupt, they just simplified. They didn’t invent.

Chris Rising (30:44):

Yeah, I think Rocket Mortgage is the best example because the banks never ever thought that their home mortgage business would ever be automated. They weren’t ready for it. They weren’t ready for someone to be able to have the ability to access non-traditional lenders. And that’s what gave Rocket a real opportunity. And then they become a brand name and once you’re a brand name, it’s hard to lose that.

Tim Milazzo (31:11):

Yeah.

Chris Rising (31:12):

One of the things, I haven’t done a home mortgage through Rocket Mortgage, but one of the things that people I know who have said is that the mobile app is so easy to use.

Tim Milazzo (31:22):

Yeah.

Chris Rising (31:24):

Is that where commercial real estate is? Do you have a mobile app like that? Are you headed towards that?

Tim Milazzo (31:29):

We don’t have an app. What we have is the web platform that you can log into. We actually have a new interface version coming just this quarter in Q1 of 2023. If someone’s listening to this in the future, which is even better on the phone. It’s been simplified further. We actually started kind of focusing on desktop computers because that’s where people store their Excel in Argos files. But now we have a new version of the interface, “Hey, you kick off the process from your phone. You can screen and look at your match lenders and you can upload your files later from another device when you log back in.” It’s not an app, it’s just an interface you can log into through your mobile browser. Actually, we’ve been live on mobile for lenders for quite a while. Only on the borrower side are we now making it much more mobile friendly, kind of decoupling it from, “Hey, here’s where you need to upload documents versus… Yeah, feel free to look through your matches here and you can upload documents later.”

Chris Rising (32:28):

Well, I think one of the things VTS has done well is they’ve taken away the need for me to look at emails or go to the web and sign up through notifications that just come to my phone, come to my iPad. I think that’s the future of all of these things, but you can’t really just do it without putting a lot of thought to it. And I know you have a partner, your CTO who really thinks about this stuff. Why don’t you talk about how the two of you got together to form the company and how you guys work together on an ongoing daily basis?

Tim Milazzo (32:56):

Yeah. So Nathan, who is our chief technology officer, he is the co-founder. He’s in New York and we both, we were in New York together starting this for the last few years until I just moved down to Florida last year. But we actually met, he was a software engineer at Google and I had previously worked at Google, but not at the same time. And so a lot of people assume, “Oh, they worked together at Google.” As a matter of fact, it was a WIS that introduced us at a social event in New York City. And we got to talking and he was rising up as a software engineer and I was only just kind of beginning to have an inkling of this interest in real estate and tech. And so we became friends, we started getting together talking about building different technologies and which friends of ours had gotten out of advertising and into financial technology and FinTech and we kicked it off and we tried working on some things together, ultimately built a prototype for Stack Source together.

(33:57):

Didn’t make any money with the prototype, but got enough traction and attention to say, “Hey, we’re onto something here.” Ultimately we quit our full-time jobs. I was at Facebook at the time, he was at Google. He’s a really good software engineer. He leads our engineering team, which has included engineers in the US and overseas doing coding on our platform. We collaborate on like what are the needs of the clients and how can we get that reflected in what features we’re building next in the way that we design this. And so we collaborate weekly on exactly what the customer needs are and what features we’re prioritizing. We’ve since that at a lot more firepower obviously on the real estate finance side with an advisory board and really building the business but he and I have been going strong for several years at this point.

Chris Rising (34:49):

So couple questions. The first one, who was the capital advisor who did the first deal on the platform?

Tim Milazzo (34:57):

That would be me before we had any. We didn’t hire any capital advisors until we got the first couple of deals done and said, “Okay, what are the deals that didn’t close? On the deals that did close, how much work did I have to do? What type of work did we have to do?” So that would be me.

Chris Rising (35:13):

That’s a good one. Then how did you finance yourself to get started? Did you raise friends and family? Did you just do it yourself, bootstrap it? How did that happen?

Tim Milazzo (35:23):

We raised Angel investment in the beginning. So my former coworkers from Google and Facebook knew very little about real estate finance other than maybe they had bought a rental property or been small time investors. They knew me and they saw my passion for it and they knew that I was doing my homework and talking to 150 industry professionals and setting up a prototype the right way. And so some of those former coworkers became our first angel investors. We later fleshed out that round with some professional FinTech angel investors and we went through an accelerator program called Techstars in early days. But you know what? Just like syndicating a real estate deal, angel investment and raising angel investment is very similar in the first stages. “Hey, here’s my plan. Here’s what can go right. Here’s what can go wrong. Me as an operator, you can trust me and here’s what we’re trying to do.”

(36:21):

It’s different than a real estate syndication or a fund in that the upside can be very large, much larger. While technically you have unlimited upside in a real estate deal, practically speaking, you don’t make a thousand X too often. In venture or angel investing, there’s that chance say, “Hey, you invest with me now give me 25K, give me 50K. We can turn this thing into a billion-dollar company but there’s also a binary downside. If this doesn’t work or we’re wrong about something or we run out of cash or your capital’s gone.” That is the game for angel investing. They lose seven or eight out of 10 times and the one or two out of 10 you can make a huge return and it returns all the capital and more that you invested.

Chris Rising (37:11):

So one of the issues that jumps to mind just through my investments in PropTech and other VC related things, which is kind of minimal now, but is that WeWork was the biggest example of this. They were a real estate company just like Regis and they sold this dream that know that they were a tech company and they were going to change the universe and all these other things. How do you look at yourself? Did people look at you as a real estate company-

Tim Milazzo (37:43):

Right.

Chris Rising (37:44):

… first with tech enabled or are you a tech company that just happens to be in real estate?

Tim Milazzo (37:48):

Yeah, I mean I guess that’s in the eye of the beholder Chris, and for each individual to decide. I think the most important thing is not positioning ourselves for a VC to believe something about us. The most important thing for us is what are we trying to do for our clients and what problems are we trying to solve and are we doing a great job? I think while that might impact, especially in the short term, something like what a particular investor or type of investor might believe. I think that’s the right way to go about building a business in the long term is the focus on the client rather than the focus on the investor. I do think there’s been a glut of startups in the last several years. Easy money era for real estate, also easy money era for tech. Tech valuations have come down in the last year and in a much stronger way than the broader S&P 500.

(38:43):

We didn’t raise money at some crazy high valuation. As a matter of fact, we’ve had competitors raise money at a nine figure valuation. You blank and then 18 months have gone by, they haven’t lived up to the billing and they might have a little bit more revenue than we do based on some massive marketing budget, but we actually have technology and solutions that are pleasing to clients. I think that is the only way that I can conceive of to feel good about taking an investor’s money is I say, “Listen, I’ll explain the business plan as well as I can. You’ll understand it the best way you can.” But at the end of the day, this is me trying to build a great business for our clients and that’s the only way I could personally conceive of it.

Chris Rising (39:33):

Well, it all makes a lot of sense and I do think ultimately the IP is going drive evaluation that makes you different than evaluation of a traditional mortgage broker. But let me ask you, since it’s in the news all the time right now, the role of artificial intelligence and trying to have term papers written by ChatGPT or business plans or songs, what role does artificial intelligence play in your platform?

Tim Milazzo (40:01):

Yeah, well I’m very excited about this space. I think there’s a role in the future for AI back to like… First of all, not really in the matching of capital sources. We’ve seen a couple people advertise or a couple startups try to get some buzz going that way. Honestly, it’s like there’s a box of the types of deals that a firm or a lender or bank are going to look at, and then you’re in the box or you’re out of the box. I think it has a role in sorting through the most likely candidates to give you best terms. That’s an interesting use case. Another one is writing deals summary you further automating the presentation of a deal. Right now we calculate the key metrics automatically and we set up the OM automatically. But even in something like writing an executive summary based on the right inputs about a deal probably needs to be human reviewed.

(40:54):

But you think of what kids are doing in school and this is I mean we’re just a couple of months in with ChatGPT, but it’s already changed how students write essays and whether that can be graded and whether you can tell whether they’re cheating or not. I think the same implication, I think it’s an interesting use case. Look at what students are doing and how they’re cheating because students and they’re cheating often ends up being shortcuts to automate things in business and the writing of a summary or the writing of a writeup about a deal. I think it would have a huge implication on the appraisal industry. When you have the right comps put in and you’re comparing values. I don’t think it’s there yet for real estate specifically, but I think there’s all sorts of interesting implications.

Chris Rising (41:41):

So as you look at the next few years, is the investment in people more important or less important than the investments you’re going to have to make to continue to iterate the product?

Tim Milazzo (41:58):

Oh well I think culture first because it’s people that create the solutions for the clients and some of those people are software engineers building great features and part of them are, “Hey, I’m going to be hands-on on deals as a capital advisor or an analyst.” So the first investment is certainly to the people and to the culture where you’re going to have great work done on both sides of those houses for a year to come.

Chris Rising (42:23):

So as you look at the future of your business and how you think it’s going to grow, is it going to grow… I mean we could be heading to a recession, so who knows? How do you look at marketing yourself? Are you going to be attending all the mortgage broker conferences and ULIs and BOMAs and that, maybe not BOMA, but ULI and those kind of things. How do you get the word out about source?

Tim Milazzo (42:50):

Well, I’ll be at MBA CREF in a couple of weeks talking to some of our lenders that have done business with us in the last year, or will prospectively do some business with us this year. Certainly talking to capital advisors that are interested in the platform is a big focus of mine personally as the CEO of course. But honestly our biggest driver, and it’s not close of new business at Stack Source has been referral. So if we can make a client happy, if we can do a great job on their deal, if we can solve for a buyer that didn’t have the right capital structure and that we solved a problem for an investment sales broker. They’re going to be referring in business. Referral is the number one way that we get business. We haven’t had the luxury of being the top-funded startup in this space.

(43:37):

I told you we raised a little bit of angel capital. We raised a seed round as well. We’ve raised $3 million and so we’re not running a $5 million marketing campaign. So it’s referral, it’s doing a great job and I think that’s a broader life lesson as well. That’s something that I really believe in. You do a good job with the opportunities you’re given and new opportunities will find their way to you.

Chris Rising (44:01):

That’s a very well said. Let me ask you this. You’ve built this business. You started in New York, you moved to Central Florida, near the beach there. Tell us a little bit about how you balance. I’m always curious with people who are really tech focused like myself. How do you balance family, work, travel? Do you have any hacks that would be interesting for us to know or how do you do it?

Tim Milazzo (44:25):

Oh well, first of all, my time is largely business and little kids right now. So I’ve got four young kids. We moved away from New York so we could get a nice big house by the beach, which is great for the kids and the wife. So certainly having a great life partner and I have one in my wife and she’s able to take a lot of the burden off with the children during the day and it is a big part of it. So it’s not a story of, “Hey, I have all these disciplines and I do it alone and I’m this monk that meditates at 4:00 AM.” I do have a morning routine. It starts at 6:00 AM not 4:00. But the morning routine is a really important to get in the right frame of mind. I like to be learning, but I don’t have time to sit down and just look at a book.

(45:08):

So I’ll do eBooks while I’m doing some physical exercise after dropping the kids off for school. I think then the next piece that becomes important is having a really good team and being able to delegate the things that would suck time but not multiply the value. So that’s something that I’ve had to learn. I didn’t know how to do that when I was founding this and doing everything and I had to learn that getting from two people to 10 people to 35 people, that’s a skill that I’ve had to learn. Setting goals, the right goals so that when you look up and you have that check-in with a member of your team. They’ve made progress in all the right areas and you didn’t have to handhold them. That’s become a real focus area for me is delegation even after you have yourself. You can have yourself optimized all you want, but if you still take on all of the work. There’s only so optimized one person can be.

Chris Rising (46:08):

So let me ask you this because it’s relevant to your business because you could be financing office buildings. How do you all run your company? Are you a remote only company? How do you meet up with people? You got these producers out there out across the country. I know they’re in Los Angeles and Chicago and other major cities. What’s the culture of Stack Source as it relates to office and interaction and camaraderie and culture?

Tim Milazzo (46:34):

We are mostly remote. We use Slack internally to chat with each other about everything from deals to new features of the platform. We have every Monday a Team video call where we’re talking about what’s what’s going on. But we do meet up in person from time to time. So we have a few offices in a couple cities like you mentioned, including Los Angeles. But we do get together for a team summit once in a while. We did that last June in Atlanta. We’re outside the Braves stadium and the hotel there, which is a great piece of mixed use real estate by the way.

Chris Rising (47:11):

Yes, yes.

Tim Milazzo (47:13):

But we certainly get together from time to time and have some special events, but we’re mostly online. So I’m a remote CEO. I was in person New York, our CTO’s there, but we’ve learned to operate online through Slack, through our platform, which is our proprietary platform hooks up with the CRM. So there’s very little data entry to do and it’s all syncing back and forth from what work is being done on the platform. What quotes are being made on the platform. Everything is just synced into the CRM that makes it very easy so that when you’re online you can be focused.

Chris Rising (47:49):

So are you basically a Microsoft operating system company? Do you use Teams and Excel and that kind of stuff?

Tim Milazzo (47:55):

We use Google because that’s what I’m used to Chris. So remember that I started my career at Google.

Chris Rising (48:01):

We’re a Google workspace too.

Tim Milazzo (48:02):

Yeah.

Chris Rising (48:02):

Yeah.

Tim Milazzo (48:03):

Yeah. Google Meet and the whole thing.

Chris Rising (48:05):

Let me ask you this, what about CRM, did you create your own CRM or did you use it off the shelf and then Salesforce and made it your own? What do you guys do for CRM?

Tim Milazzo (48:13):

Yeah, we use not Salesforce, but a different off the shelf, one that has a simpler interface. It’s called Pipedrive. It’s got a very simple interface and so for our capital advisors there’s one or two things they need to do in Pipedrive. It handles e-signature. It handles the deal stages and client notes. Everything else is done on the proprietary platform that hooks into the backend of Pipedrive. I think it’s a common mistake from someone that’s trying to become tech enabled to build their own CRM.

Chris Rising (48:46):

I agree.

Tim Milazzo (48:47):

As a matter of fact, even when I was at Google in advertising technology get this one of the world’s top technology companies of all time. They pushed my division, which was like 150 people from using a Salesforce instance that I was actually the admin. So this was one of my early jobs at Google. I was the administrator of a Salesforce like internal operations for this a hundred person advertising technology sales team. They forced us to use a Google built homegrown CRM that was built for another division and it ended up being way too messy and it created problems. People that are trying to tech enable and trying to go too far. Building your own CRM is like one of those rabbit holes that a lot of people get wrong. It’s just almost never the right way to do it. Customizing one I’m sure, building one, no.

Chris Rising (49:37):

I agree. That’s the route we’ve gone. We looked at Pipedrive and HubSpot and we’re a HubSpot, we’re at IMS, now we use Juniper Square. I just firmly believe that there’s people getting in VC dollars to create a great product. Why am I going to go pay some engineers to try to make it great-

Tim Milazzo (49:54):

Absolutely.

Chris Rising (49:55):

… on its own. I’ve been down that rabbit hole in the old days of spending money on that. However, I guess where that does get difficult is how you create mobile apps and things like that because the APIs always have to match up.

Tim Milazzo (50:09):

Sure.

Chris Rising (50:09):

So do you see a future where most people can negotiate a 30 million deal financing on their phone just with an app?

Tim Milazzo (50:20):

Two years ago I would’ve had to say, “Yes, that’s coming. It’s coming.” While it’s not an app. We are doing a bunch of larger deals on our web platform interface that you log into. The largest deal that we just closed in December, early December was more than a hundred million. And so we’re no longer… At the beginning when we were launching, a lot of people viewed us as this small loan platform and to a large degree we were. We were like, “Hey, we’re tracking all these banks and credit unions. Here are our capabilities.”

(50:53):

We were a great solution for someone looking for their first commercial real estate loan. We were a great solution for those that didn’t have these old lender relationships. We’ve really evolved beyond that with the debt and equity solutions with the capital advisor team, with the way that we get responses from different capital providers now. We’re closing $75 million loans, we’re closing $140 million loans and every single year we’ve eclipsed the lifetime value of all the loans we’ve closed before. We won’t keep that going, that’s impossible. But it’s growing, it’s resonating in the middle market as well as the small market.

Chris Rising (51:29):

So we got a lot of pundits saying 23 is going to be awful. I’ve seen some others lately saying, “Yeah, probably it may not be that bad. Inflation’s coming down.” What are your biggest fears about how the company’s going to grow and navigate 2023?

Tim Milazzo (51:44):

Yeah, well we look at the Mortgage Bankers alliance and their outlook for the market as like our first frame of reference for the market size. They are saying that commercial mortgage origination will be down 5%. They update these things quarterly and we’ll continue to look at the quarterly outlook. I don’t feel great about cap rates staying where they are. I think we’ve actually seen treasuries come down. So like treasuries are not to be all end all. It’s actually interesting that overnight lending rates are now surpassing treasuries. And so that’s a level of yields curve inversion. So the yields curve and the treasuries to the two to 10 yield curve, which two year treasuries are more expensive than 10 year treasuries. That’s a classic recession signal. That’s been in place for six months. But only now in January are we seeing overnight lending rates, not two year, but overnight lending rates are more expensive than treasuries.

(52:34):

And so we have this complete yield curve inversion that is the market and the bond market. I can’t presume to outsmart bond traders on this. The bond market is absolutely signaling recession. Now, how deep will that be? How long will it be? That’s too hard to predict. But should commercial real estate asset prices broadly come down? I think a lot of people are predicting it. People that have economic knowledge above my pay grade.

(53:04):

While Stack Source doesn’t have an official economic view, I am personally cautious on asset prices and asset values. I’m cautious on cap rates. I think we’re seeing that a lot of the market is. There are exceptions, but right now you want to be in the exception, you do not want to be in the rule. You want to be in the hot industrial that has 1% vacancy and Tesla’s opening up a new plant. You want to be in the multi-family in central Florida where the population growth is ridiculous. You do not want to be the rule of, “Yeah, I’m just buying standard asset in whatever secondary market right now. It’s just whatever the cap.” You don’t want to be in the rule right now. And that’s what I’ve seen sophisticated investors doing. You want to be in the exception rather than rule at this particular moment in time.

Chris Rising (53:54):

Yeah, all very good points. It’ll be interesting because at some point we got to pay our own debt, not personally, but the country. The higher those rates go, the harder that is. And then I think you just said some of it on the overnight rate, which I’ve kept my eye on as well. It almost feels to me that we’re not going to get ourselves out of high inflation with higher interest rates. We got to have quantitative efforts and not fool around with interest rates. But that’s why I’m not on that board so.

(54:26):

In any event, this has been such a great conversation. I don’t want to get off yet without… Liberty is a school that keeps coming up in my screens because of the football, it’s been playing over the last couple years.

Tim Milazzo (54:40):

Sure.

Chris Rising (54:40):

You’re a Liberty graduate. Can you tell us a little bit about the university and if you had to come out and said, “I was thinking about being a pastor.” I would understand. I didn’t recognize until recently-

Tim Milazzo (54:50):

Sure.

Chris Rising (54:51):

… what a quality business program they have or people who are doing big things out there who have Liberty degrees.

Tim Milazzo (54:59):

Sure. So I studied finance at Liberty. You do take some Bible classes and that was a key piece for me because I was eager to learn about both business and the spiritual side as well was the reason I selected to go there. Now it’s been definitely in the news for sports and it’s been like a growing D1 kind of competitor. In sports, they sent a quarterback to the NFL last year who was on the Titans in Malik Willis. And that’s been fun to watch. It’s also been rocked by a few scandals. In the past years with the president of the university, reportedly sleeping with some students and some weird stuff, which honestly came as a shock for someone that attended the university and met a lot of, not only intelligent, but really heartfelt, sincere people. And that was my experience there. I loved it there.

(55:53):

Got a good finance degree. Still stay in touch with some students and professors and talk to the people that are part of the alumnus group. It is now the largest private Christian university in the world. So they have a very large online program in addition to about 15,000 or 16,000 students on campus. So it’s a major institution at this point. It’s the largest online school for Christian education with hundreds of thousands and it’s got a really rapidly improving business practice and business degree practice. It was a really right fit for me. It’s a little bit warmer than New York. It’s not as warm as LA.

Chris Rising (56:40):

Yes. Wow. I just think it’s great. I’ve met a few people now as the university’s grown since the turn of the century. I mean, it’s been around a long time, but that’s when I really started to see the growth. So this is interesting because I’ve never interviewed somebody who graduated from there.

Tim Milazzo (56:54):

Yeah.

Chris Rising (56:54):

I appreciate your comments there.

Tim Milazzo (56:57):

Sure.

Chris Rising (56:57):

Well, Tim I think you’ve been spot on. A lot of the things you’re talking about with the challenges, I think your product, I would encourage everybody to just go to stacksource.com and check it out. And for those people who’ve got lenders that they really like, it doesn’t hurt to go check out Stack Source and see if they can beat what your preferred lender might do. So Tim, I really appreciate you being on the Real Market. It’s been a great conversation and I’m looking forward to watching your success.

Tim Milazzo (57:21):

Yeah, Chris excellent. Thank you so much for having me on. And thank you also broadly for the support for the tech ecosystem and bringing things to light that I think ultimately are going to be everyday knowledge and they’re not yet and you’re minding this information. All the entrepreneurs that you have on, not only on the real estate side, but the tech side is a great encouragement to people that are building these businesses.

Chris Rising (57:43):

Well, I appreciate that. All right my friend. Thank you so much.

(57:46):

And please don’t forget to follow us. We’d really appreciate it if you subscribe to the podcast. You can do that on Apple iTunes or any of the other podcasting services. It’s the Real Market with Chris Rising. And follow us on Twitter at Chris Rising or at Rising RP, and please follow our blog, chrisrising.com or risingrp.com. Thanks so much.

Speaker 4 (58:11):

This episode of The Real Market is brought to you by Rising Investor Platform. The platform provides accredited investors with exclusive real estate investment opportunities on a deal by deal basis across various asset classes, including office, industrial, hospitality, multi-family, and data. The platform also provides an inside look at deals in our pipeline while giving investors the chance to indicate interest before it’s too late. We recently funded our acquisition of 9320 Telstar, a mixed use office industrial property in El Monte, California using our investor platform. To learn more about how accredited investors can join the Rising Investor platform, please visit risinginvestorplatform.com.