Michael Episcope (01:51):
And so, I stayed on there. And I ended up pushing all my classes to night. And I was studying finance and econ. And I was burning the candle at both ends. And I did that because I just loved to work. And from a young age, I really always found myself, I wanted to make money. I wanted to, maybe had a desire for that financial freedom early.

Michael Episcope (02:09):
So, when I found the Chicago Mercantile Exchange, I didn’t want to leave. And so, I found a way to make it work. And I spent the next, I think, 17 years down there. And that was the start of my career. And it’s hard to believe, because I have a 19-year-old today, and I can’t imagine him actually starting his first career right now.

Michael Episcope (02:27):
Now, in hindsight, I didn’t know that was the case, but it was really in about 2006, I worked my way around. I was a cleric. I was making, I think $280 per week when I started. And then I worked my way up through the ranks, became a broker, and then decided I wanted to go on and start trading.

Michael Episcope (02:44):
And so, through my networks that I had developed, I got an opportunity in 1996 and then started actually trading for a group in 1997. And it turns out I was really good at it. And by 1997, was a great year for me. And one of the reasons why I went in is, I always wanted to take a chance on myself, and I knew my income was replaceable. And that was the best thing that I did.

Michael Episcope (03:08):
And I ended up meeting my wife in 1997. So, just a lot of change. And we ended up getting married in 1999. My career was taking off. By the year, I think 2001, I was named one of the top 100 traders in the world during that [time]. And I had a successful career.

Michael Episcope (03:24):
And then it was really near the end that the computers started coming in, taking away our edge, changing the dynamics. And I had stacked up a lot of chips in life, felt really good about it, and just decided I didn’t want to take the risk anymore.

Michael Episcope (03:36):
And at the end, in 2005 and ‘6, when I retired from that industry, my risk profile had changed. I was married. I had two kids. I had another one on the way. If I stay in here and keep making money, it’s not going to change my life. So I said, “I’m done.” I wanted to step out and step away.

Michael Episcope (03:53):
And then that’s what my transition into real estate at that time. I stayed home for about three or four months, and my wife thought I was retired. And I was not retired, and I’m actually looking to do something elsewhere. I was just too young at the time.

Michael Episcope (04:06):
But the next phase of my career was really about managing wealth and maybe not building wealth. And so, I went into real estate because it’s something I was exposed to at a very young age. My grandfather was in real estate. I did summer jobs when I was 10 years old, 11 years old, 12 years old. And I just saw the way that he operated real estate. And he was more on the multi-family side. He bought a lot of things through like tax sales and things like that. And he was just a grinder, and it afforded him a great lifestyle.

Michael Episcope (04:33):
So, I’d gotten exposed to that at a very early age. And I knew that since this next stage of my life was really about protecting and preserving, and making my wealth work for me, that real estate was something that just was a very natural fit. So, that’s when I went and I enrolled in the master’s program at DePaul University, decided to retool, educate myself and get a master’s in real estate. And that was the beginning of my career in real estate. So, that was 14 years ago. It was hard to think about it.

Michael Episcope (05:04):
And I think in the beginning when my partner and I put Origin together, we were honestly more like a family office, and we both shared the same values. We were both wealthy individuals who had come from other areas, where we had grown our wealth. And we both, “Look, we can do it better than others in the market.” And we wanted to take control and build alpha ourselves with our own wealth. And that’s how we started Origin. And that’s always been the ethos, is building a platform around our own capital.

Michael Episcope (05:32):
And so, today that’s grown into, from us two back in 2007, all the way to 1500 investment partners today, a team of 30 people. We’re in 12 markets. And it’s been a fantastic run. And I think it’s that alignment that has really attracted people. And our track record speaks for itself as well.

Robert Leonard (05:51):
Going back to your grandfather’s investments, did he pass it down to, whether it was your mother or your father? Were they into real estate as well? Or did it skip that generation and really just go to you?

Michael Episcope (06:01):
No, it skipped that generation. So, this was the grandfather on my mother’s side. And my father was actually an attorney. But my grandfather and I didn’t realize, like, what kind of impact it was having on me at a young age, but I really loved the tangible assets or the tangible nature of real estate and getting in there with tools and hammers, and watching the way he managed his buildings. And I think at 11 years old, you’re not really seeing the full picture. And it was only after I was older and looking back, that I realized how gritty he was and what it took to really run real estate well.

Michael Episcope (06:36):
But going back to school also gave me the advantage of understanding the financial side of the market, the macro view. And so, I have a little bit of the micro through that experience at a young age, but it really just sparked that passion for real estate. And more than anything, real estate has been a time test, that asset class that has been shown through its tax efficiency and its ability to produce passive income and keep outpace inflation, and even in many cases, bonds and equities. It’s just been a fantastic asset class, and that’s why I wanted to get into it.

Michael Episcope (07:08):
But truth be told, when I was investing passively prior to joining Origin, this is one of the reasons why we started Origin, is I didn’t have a lot of luck out there. And I was investing with the multi-billion dollar institutions. I was investing with smaller individuals out there, smaller shops, medium shops. And you learn through that process what you like, what you don’t like. Some of them were pretty good, but it was always two steps forward, one step back.

Michael Episcope (07:36):
And my partner was doing some development at that time, and we just said, “Look, we can do better.” For people like us, unless you were coming into the market with 50, $60 million, and you could demand those institutional terms, if you were an individual, the choices out there in 2007, 2008, this is well before the JOBS Act, before deals were prolific, it was a different environment. And there weren’t a lot of good choices, because there was so not that much non-transparency in the world, that we decided, “Look, we want to be the adults in the room. We want to create an institutional platform with all of the benefits for people like us.” And that’s how we approached it from day one.

Michael Episcope (08:16):
And I think there’s a huge advantage when you’re putting your own money and you’re approaching the entire experience as the investor, but you’re also building a firm because we know what the customer wants. We understand that journey from day one about what it takes for reporting and what good deals look like, and what fee structures, and really how to get the most out of real estate. And then that was the ethos in the beginning and that never changed. And that what’s carried us through, and I believe what’s attracted so many people to Origin Investments.

Robert Leonard (08:46):
You mentioned that you chose to go back to school to get your master’s degree in real estate. Why did you go back to school? Did you feel like a master’s degree was required to do what you wanted to do?

Michael Episcope (08:57):
I didn’t go back to get the letters. I went back actually for the knowledge and the education. And I really was intent on cutting the cord from commodities trading.

Michael Episcope (09:08):
And I mentioned earlier that in my first career, I was studying finance and economics at DePaul University, but I was also down on the trading floor at the same time. And the juxtaposition of learning the theoretical at night, and then seeing how it unfolded in the commodity markets during the day, was just fascinating. And I think it was just a great way to learn. And I said, “Hey, that worked back then. And it was fantastic. Let me do it again here.”

Michael Episcope (09:36):
And so, I went back to really retool myself and learn about the business. And is it necessary? I don’t know that it’s necessary. People all have different paths. But for me, it was definitely a vital step in cutting that cord and saying, “Hey, I want to be an equal at the table and understand everything, and also be exposed to a new network and people, and areas that maybe I wouldn’t know about.”

Michael Episcope (10:00):
So, when you go through a master’s in real estate program, like any program, you start with real estate 101, which is the finance part, discounted cash flow, understanding how all assets work. Then what was great about that program is we got exposed to some of the greatest real estate minds, because Chicago has a ton of real estate companies here, Ventas and Equity Residential. And these would be the CEOs of these companies would come and speak to us. And also, some smaller real estate platforms. And you get to hear the insight and do the case studies, and how people think.

Michael Episcope (10:33):
And developing that network was really invaluable to me. And I didn’t know what to expect, but I knew I had a good experience the first time around in how I did this. And so, going in and retooling and making sure that I was an equal at the table and understood everything, but also expose myself to the world, I think it was one of the best things I could have done at that time.

Michael Episcope (10:54):
But at that time, CMBS was a huge market, commercial mortgage-backed securities, and understanding the very nuances of how structured finance works. And so, when we’re talking about it today, and we’re looking at new product lines, and it comes down to structured finance, I can go lean on knowledge that I learned back in ’07 and ’08 during the masters in real estate program, even today and apply those things.

Michael Episcope (11:19):
So, a lot of times you learn things and you may not know how they’re going to be applied in the future, but they’re valuable, even if you’re reading something or talking about something, or bringing new ideas into the firm about product lines. So for me, it was a great experience. And I would recommend anybody who feels that they are maybe deficient in real estate and wants to go into more the institutional side, getting that MBA, that real estate is imperative, but I know other people who just don’t need it. They’re doing it with their own money. They’re doing it more on a smaller scale. But when you’re running a real estate investment firm, it’s invaluable.

Robert Leonard (11:52):
Would you say that, if somebody is just looking to do their own small portfolio, they’re not looking to get to that institutional scale, both whether they’re managing it or they’re just looking to even start their own firm, is it unnecessary for their own personal investments that they’re doing themselves?

Michael Episcope (12:08):
So, I always tell people, you have to define what it is you’re trying to accomplish. And all too many times, people simplify real estate because we see, “Oh, I’ve owned a condo. I’ve owned a home, but it’s tangible. I can do this.” And so many times we have, even at Origin, many of our investors have done the do-it-yourself route, because there’s this propensity to simplify the world, right? To actually believe what’s on the proforma, that you are going to achieve all these things.

Michael Episcope (12:35):
And it’s only through that experience of learning and making mistakes, and doing all that, that you learn how complex real estate can be. So, I would say that if you’re going into real estate and your goal is to learn, then yes, you can learn two ways. You can go work for somebody or you can go and do it yourself.

Michael Episcope (12:54):
But I tell everybody, “Be very, very careful because there are always things that are hidden.” And I think what we’ve done so well, my partner and I, is that we have surrounded ourselves with a team of people. I mean, there are 30 people at Origin now, including us, but we started from a very early stage, hiring some great people who help us, what I call, “de-risk” the entire process.

Michael Episcope (13:17):
So, when we’re going, either buying an asset directly, or we are doing a ground-up construction deal, it’s a team of people who are involved in this, who help to vet every single variable in a real estate investment. And there’s a lot of ways that things can go wrong.

Michael Episcope (13:33):
So, I would just caution people, if the idea is to learn, learn small, make small mistakes, because generally, you are going to do better from a financial standpoint, investing in a fund or on a passive basis. You’re not going to have any of the headaches.

Michael Episcope (13:49):
And the other thing with individual investors, real estate is a leverage game. And if you are levering and you’re using your own personal balance sheet, and you are guaranteeing loans, be careful, really. I know people from my past experience of commodity trading, who left that business with 20, $30 million, they went into real estate, levered up during the financial crisis, used personal financial guarantees. And they’re practically broke today.

Michael Episcope (14:16):
So, real estate and leverage, it’s a game that you have to be careful and you have to know what you’re doing. And sometimes you’re better off learning by investing with others along the way and then maybe doing it in a parallel process. But stay away from recourse debt. And we do as a firm, by the way, we don’t use recourse debt in our financing. We use nonrecourse debt. And that’s one of the greatest things about buying and owning larger real estate projects, is that non-recourse, that is available. And that’s what I’ll call one of the three best advantages of investing real estate, non-recourse debt. Then you have your depreciation and the ability to use 1031 exchanges, and non-recourse financing as well.

Michael Episcope (14:57):
So, when you refinanced assets, after you held them for four or five years, you can actually refinance out tax-free. And so, those four things are, if you’re not taking advantage of those, then you’re not really getting the full benefit of real estate.

Michael Episcope (15:11):
So long-winded answer, but I’ve just seen so many different sides. Some people who go on and have really successful careers, then other people who end up being wealthy. And unfortunately, they’re losing a lot of money in real estate.

Robert Leonard (15:25):
For those who aren’t familiar with what that the difference is between recourse and non-recourse. Can you define those two terms for us?

Michael Episcope (15:32):
Absolutely. So, recourse debt simply means that you as an individual or a fund are guaranteeing the repayment of that loan in the event something goes wrong with the property. So, if we go back to 2008 and nine when people were doing five, six, seven, 10 projects, and they had recourse loans out to the bank, that might’ve been $40 million. Well, when your net worth is five or $6 million, and you have $40 million of recourse, you might think that you have the projects to be able to cover that. But when the bank wants that money, they want that money now, and today. Since they are in the senior position, they have the right to call that money, foreclose on that properties, put in a receiver. And things went really upside down quickly.

Michael Episcope (16:16):
When you have non-recourse debt, non-recourse debt means that the lenders’ only recourse is to the property. So, we have seen this throughout ’08, it was a great time, nothing really that I saw on the pandemic, but I’m sure there were some hotel loans out there, where the only thing you can do is you can hand back the keys to the lender. So, the most you can ever lose in a non-recourse situation is the equity in the deal. The most you can lose in a deal where there’s the recourse situation is the entire value of the deal. And that’s something that people should be really understanding. And when you’re doing it by yourself in smaller projects, generally, you’re almost always going to have to provide recourse to the bank in order to get along.

Robert Leonard (17:01):
How does somebody go about finding recourse versus non-recourse debt?

Michael Episcope (17:05):
So, these are banks, these are life insurance companies. Generally, when we are looking at a project, whether that is a ground-up construction. So, if we’re doing a joint venture, that would be the responsibility of our partner to take on that recourse. If we are buying something directly, non-recourse debt on generally on stuff that we’re buying, which is 150, 200 a unit projects, it’s available in the market, it’s very standard. And so, we’re using two to one debt to equity. So, generally about 65%.

Michael Episcope (17:37):
So, to a bank out there, or life insurance company, or a pension fund, who’s lending to these projects, when they look at us as experienced borrowers, and they look at the project, and they look at our borrowing history and our repayment history, it’s not at all difficult for us to get non-recourse debt on these properties. But I can tell you from ’07, it was a very different story because we didn’t have a tracker. We didn’t have a name. And some of the banks we were going to, wanted us to sign recourse.

Michael Episcope (18:04):
And this is my partner who coined this phrase, but it’s one that everybody should know, and you only have to get rich once. If you’re already wealthy to be signing recourse to a bank or doing projects that require that, then you really have to think long and hard about what you’re doing and what the consequences, because as much as we all want to think that the world is going to improve and go in the right directions, things like ’08 and hidden risks do happen, and you have to always consider a worst-case scenario.

Robert Leonard (18:31):
So, would you say that it’s okay to take on recourse debt as you’re growing your wealth? If you haven’t quite got to that point where you have massive wealth, is it okay to take on recourse until you get to that point?

Michael Episcope (18:42):
Yes, I would. A lot of sponsors do that because they might have a small balance sheet, but the risk-reward for what they’re making makes sense. Because if they’re taking on recourse and then they’re a sponsor in the project, and they are in the day-to-day, and they understand it, and they have the experience, and done this so many times with somebody else, then the risk-reward might be worth it in those situations. Because if they’re putting in, let’s call it a 500,000 or a million dollars in the project, and for them being in a promoted position, maybe they’re going to take out three or $4 million at the end when the project is done, it could be a great way for them to build well in those situations.

Michael Episcope (19:24):
And sometimes what we’ve seen with sponsors is they have to bring in actually somebody with a larger balance sheet, and then they pay them for that recourse. These are situations where the borrower might have experience as well, or be a large fund that does this, or somebody who can add value to the project.

Michael Episcope (19:40):
But recourse in the right situations is correct. But I’ll tell you for me in my life personally, right now, I don’t want to give recourse. As I said before, you only have to get rich once. And our job, I think at Origin, one fundamentally, it’s to keep people rich and make sure that we’re allowing them to use their wealth to the maximum, whether that’s generating passive income or building growth or a combination of those, right? That’s our job. And we’re generally dealing with people who’ve already made their wealth and want to put it to use.

Michael Episcope (20:14):
But if you’re a new sponsor and you really want to make this a business, you’re going to have no choice, but to provide non-recourse debt. And I’ll tell you that I know people who’ve been in business for 40 years, they provide non-recourse debt. They do this on a day-to-day basis, and nothing has ever gone wrong. Where I’ll be really careful, is if you are doing this on a part-time basis, it’s very challenging. You have to be all in or all out.

Robert Leonard (20:37):
Since you started Origin Investments in 2007, we’re talking about some of these types of market events that could lead to disaster with recourse and non-recourse debt. You started Origin right at the beginning of The Great Recession. How were you and the business impacted? Was The Great Recession a catalyst to get started, or was it an unlucky timing?

Michael Episcope (20:58):
It was actually really good timing, because when my partner and I got together in ’07 and started Origin, the beginning of Origin, the birth of the company, we were really just two guys looking to invest our money in real estate. And we didn’t know at that time where we wanted to invest. We came from an industry where we knew we wanted to have an edge, protect our capital. We didn’t want to get into deals that were too risky. We had no outside investors at that time, and it was only our money.

Michael Episcope (21:23):
And what we realized as we went out to the market and we were defining what our business plan was, we started talking to banks and investors, and all that, and you could start to see the inklings of what was soon to be The Great Recession. And we were getting calls from banks and other groups out there who were looking for rescued capital, “Hey, this project has a senior loan and a second loan. Will you guys do a third loan on it?” And we’re looking at this stuff, “No, we’re not going to do a third loan.” And I think at that time, we really wanted to be more on the lending side, in that protected position. And we were starting to look at this and nothing made sense.

Michael Episcope (22:00):
There was somebody who walked into our office and wanted us to make a bridge loan to him because his senior loan had just gotten sold. And our light bulb went off and said, “What do you mean your senior loan just got sold?” He said, “Well, I had a loan on my property for $9 million, and these guys bought it for $3 million, and they want me to buy it back for them for $4 million.” And so, we’re looking at this going, “Wow, that’s really, really interesting because we’re in a protected position, we’re swimming upstream and things.” Then we were like, “Okay, we have to look into this area.” Because as we saw banks starting to sell loans, we got into that business and buying loans at that time, and it was absolutely the right thing to do in late ’07. We were probably a little bit early to the game, but we were in such a protected position and we were unlevered. And we did really well for the next few years.

Michael Episcope (22:51):
But then as that business dried up, then we were more looking at already built assets that really required value adds. So, some of these were REO, real estate owned assets by the banks that they were unloading. And that’s when we started really adopting what our strategy would become from there, which is buying multi-family assets that were in need of some value add renovations. And so, that started in 2011 and that carried us forward. And that was the beginning of our new strategy.

Robert Leonard (23:22):
When you got started with Origin Investments, prior to that, what was your exposure to real estate? Had you done any deals yourself personally, any smaller stuff before you went in, or did you just jump in right to the large stuff?

Michael Episcope (23:34):
So, my passive investing, what I’ll say, and I had some active investing as well, started in about 2001 when I started to just generate some wealth through commodities trading. And as you generate wealth, the other challenge you have is, “Okay, what do I do with this wealth? Where do I invest it?” And I was never one who really loved the stock market. And we started to get deals pitched to me, and deals from wealth managers, investing with institutions, the large groups back then, and then some individuals syndicated, and one-off deals. And they were like country club deals back then.

Michael Episcope (24:07):
So, what I had learned through that process is really a little bit of insight into the market. And what you realize with multi-billion dollar institutions is that, look, they’re really good at finance, but they don’t really add value at the property, and they don’t understand the nuts and bolts or get them her hands dirty. And it’s more about, “Hey, I can raise capital, use really cheap financing, and try to create value for you in that way.” And that’s not really alpha, that’s financial engineering.

Michael Episcope (24:35):
And so, those were some funds that I was in ’02, ‘3, ‘4, ‘5, and they didn’t really go that well. And you learn after the fact, how they were trying to build value or what their edge was in the market, or their value proposition.

Michael Episcope (24:48):
And then, on the other hand, there were some good investments that I had invested in, and as the majority partner. So, I was very involved in those. The challenge with those is they’re smaller investments, and you’re generally dealing with people who don’t have a team and the infrastructure, and the balance sheet, and everything you need. And your fees are going to be higher because they want much more of the project.

Michael Episcope (25:10):
And those experiences to me were invaluable, even though they weren’t great, but they helped form a lot of the policy and practices that we put in Origin. Because while my partner and I, we had a lot of money, we also just didn’t want to hand it to an institution because we just believed we can do better. And that’s been one of the best choices we’ve ever made, is actually building Origin for ourselves and our own money.

Michael Episcope (25:36):
What I like to tell people in the beginning, we hired well ahead of growth. And so, those employees and the cost of those employees were really born by my partner and I to the benefit of other investors. And this really goes into ’10, ’11, ’12 as we were building the company. But let’s say, look, we were paying about a 3% management fee, my partner and I, and everybody else was paying one and a half, but that ultimately came back as we built the business and added more employees, added team members, grew the company and grew the asset base. Because what you realize as you build a company, a great company is always about a great team and the people you have around you. And the right people are expensive. And you have to then amortize those costs over larger pools of capital.

Michael Episcope (26:22):
So, the bigger we got, the better talent, the more talent, the more infrastructure we got, and it just fed on itself. And I think the version of Origin today is better than the one a year ago, better than the one three years ago, five years ago. And what will be in two years will be better than what we are today, because we always believe in investing in the right people to deliver the objectives of the firm.

Robert Leonard (26:45):
How did you become partners with David? How did you know that David was the right partner for you?

Michael Episcope (26:51):
Good question. David and I met in about 2003, so well before we ever started working together. And we were introduced through a mutual set of friends. I heard his name for many years through this group. And ultimately, we met one night and we honestly just hit it off. We really did. And we talked, and we just chatted for hours that night. We were like kindred spirits. We were talking about everything from politics, non-profit, to the trading, to investing, and we just became really good friends after that.

Michael Episcope (27:22):
And then, we actually started working together on a nonprofit that he went and built. And what I loved about David was his story. David is an individual who grew up in a very meager means and was self-made and is self-made today. But he grew up in Florida. And he ultimately went to Harvard. And he was one of the only people there on financial aid. And he used to tell me these stories. And so, he’s got a really, really big heart. He was actually from the commodity trading industry as well. And that’s why we had these mutual acquaintances, but I never knew him down there.

Michael Episcope (27:56):
And [a] sad story, something that came out of it, but it was really good, but his partner in his group ended up passing away at a young age, and partners all got some insurance proceeds. And what David did is, David ended up leaving the business in ’01, and taking those insurance proceeds and forming a nonprofit, which is today called the One Million Degrees, and it’s going on a national scale.

Michael Episcope (28:18):
But essentially, what One Million Degrees is it helps community college students. And nobody was helping in this area. [It] provides all the soft skills and social support, and some, a lot of mentoring. It’s been a great program. But in the early days, it was called the Illinois Education Foundation. And he brought me into that as a board member. And so, we got to work together on that. And he and I were always sharing ideas and doing this.

Michael Episcope (28:42):
And so, it wasn’t as if I knew him casually, and we decided to start. It was somebody who I knew I could learn from and who would offer a tremendous amount of value. His work ethic was fantastic.

Michael Episcope (28:53):
And I always say, there are two people who are really, really important in my life who I met and really changed [my life]. And one is my wife, and the other is David. And I think about both of those chance encounters and how that has just formed my entire life and where I am today. So, I’m blessed to have met both of them. And I have a great family, a great partnership with David, and we’ve built something that I truly love and believe in.

Robert Leonard (29:19):
I know a big piece of what you guys do together is opportunity zones and opportunity funds. For those listening, who might not know what those are, explain those two concepts for us?

Michael Episcope (29:29):
Yes. So, an opportunity zone, this came out of the 2017 tax cuts and JOBS Act. And what an opportunity zone is defined by a sense, this track, and it tends to be the low to moderate-income census tracks. And these were layered over new market tax credits, and it really follows the same boundaries, which was another federal program that was passed many, many years ago.

Michael Episcope (29:52):
And what the act itself does, is what they were trying to do is get money to flow into these areas. So, it was actually something that was very bipartisan. It was unanimously approved by both Republicans and Democrats for very different reasons.

Michael Episcope (30:07):
But the way the program works is that if you are developing a project, there are nuances. I’m not going to get into all these. If you are investing in a project in a qualified opportunity zone, there are three tax benefits to the investor on the backend. The first is that if you have capital gains, and this is really what the crux of the program is about, you can invest capital gains into a QOZ fund, into a QOZ investment. And you do not have you have to pay those capital gains this year.

Michael Episcope (30:38):
So, we’re in the year 2021, everybody’s getting their K-1s. On your K-1, if it shows up that you have a million dollars in capital gains, well, you can invest those in a QOZ investment, and you won’t have to pay those this year. However, you will have to pay those and recognize those in tax year 2026, payable in 2027. So, what I like to think about it is, this is like a 0% interest loan from the government for five or six years, and you can put this money to work during that time period.

Michael Episcope (31:09):
Now, the other element of this is called a step-up in basis. So, if you have a million-dollar gain this year and you invest in a qualified opportunity zone, when it does get recognized in 2026, in that tax year, you will only recognize $900,000, because this year 2021, there’s a 10% step-up in basis that disappears at the end of this year. So, another benefit to the program.

Michael Episcope (31:33):
The biggest benefit and this is why everybody’s coming into the program, any gain you make on that money if you’re in for 10 years and one day, is not taxable. So, your million dollars turns into $2 million, $3 million, $5 million, $10 million, and you take it out after 10 years, and one day, you pay zero taxes on that money.

Michael Episcope (31:54):
It’s an amazing program. It came out in 2017. And we like everybody else really approached the program with skepticism. We were like, “Look, we don’t think that we invest in those areas, but let’s take a look.” And that’s when we really tasked our team with looking at the market, where are these opportunities zones? Are they viable for us to invest in? And what we found was that we were already investing in these areas. Because the opportunities zone census tracks were drawn in 2010. And you can think about how much cities have changed since 2010.

Michael Episcope (32:28):
And we have always been from an investment strategy standpoint, investing in transitioning neighborhoods, where the growth is happening, looking for catalysts. And in fund three, which we were deploying at that time, we had three or four assets that were actually in qualified opportunity zones. Two others that we were looking at, but we weren’t getting the benefit of being in qualified opportunity zones.

Michael Episcope (32:51):
So for us, it made all the sense in the world to open up a qualified opportunity zone fund, because number one, we were in these markets already looking at these deals. And number two, all of our investors are taxable. We’re dealing with individual, high net worth, ultra-high net worth, and family offices. And so, for us, we can call this business as usual for Origin. And that’s why it made a lot of sense and what we loved about it. And again, building products around our own capital.

Michael Episcope (33:19):
David and I have $10 million invested in this fund. And truth be told, if I can find more capital gains in my K-1s, I would put more into this program because it has such great benefits for real estate, which is already a tax-efficient asset class. But you layer on the QOZ benefits, and it just jumps off the charts.

Robert Leonard (33:40):
Who is best suited to take advantage of opportunity zones. Do you have to be a massive fund like you have to participate in these opportunities or can everyday investors take advantage of them as well?

Michael Episcope (33:50):
So, everyday investors can take advantage of them through our fund, and that’s what we’ve done. So, our minimum and our fund is $50,000. And so, what we do is we aggregate commitments from individuals. And the way we’ve designed this fund is that if you have a capital gain, you can invest 100% of that capital gain in the fund today. And we’re taking money on a rolling basis.

Michael Episcope (34:11):
So, we get investments as small as $50,000 and as large as $10 million, or more into the fund. A lot of people who are just now really learning about this and the skepticism is disappearing in the market. And one of the reasons is because they get to see the deal.

Michael Episcope (34:27):
So, in our current QOZ fund, which is only open until the end of this year, we have eight deals that people can look at. They can see, they can feel, they can touch. They know where they are exactly. And they’re all in different stages. Some are in lease-up, some are going vertical and some are just land parcels. But I think that is also gotten people very comfortable. Because the original notion was that, “Look, I don’t want to be investing in QOZ areas because these are blinded areas. These are distressed areas.” And you come to learn that, no, a lot of these are the areas exactly where you want to be investing in. And this is the greatest risk-reward in the markets today on a pretax basis, not even on an after-tax basis.

Robert Leonard (35:05):
We often avoid politics on this show. So, my next question is not one that’s meant to ask who you voted for, where your affiliations lie or what you think is right or wrong. But in general, will the political environment impact the availability of tax programs and advantages like opportunities zones?

Michael Episcope (35:23):
It absolutely will. Yes. It’s not going away though. As I said before, this was bipartisan. And when you look at Harris and Biden, Buttigieg, the people who are in charge of this program, they will maybe make some changes, but we think that’s going to be more around the compliance, around the edges. Some of it might just be things that aren’t material.

Michael Episcope (35:40):
What is likely to happen, and this is something that we welcome, is that the new opportunity zones will be drawn based on the 2020 census and not the 2010. And that makes all the sense in the world. And we’re going to have to adjust to whatever those new lines are when they come out with those. And that hasn’t been announced yet. The new administration just got in there. This is something that’s on their list, but it’s not part of the priority within their list.

Michael Episcope (36:07):
But certainly, there are some politicians who are asking for more reporting compliance. They want to see what the benefits are to this actual program. And even though this was passed under the Trump administration, the genesis of this program really goes back to the Obama era. They just didn’t get it passed during that time.

Michael Episcope (36:25):
So again, this has brought forward by now two administrations, and it has a lot of support. We don’t think it’s going anywhere. And certainly, anything that we’ve done that already complies with the law or anybody has done, that we’ll all be grandfathered in. So, we’re excited about this program. It goes through 2026. At the end of this year, this current fund that we have will be closed, but then probably in the third or fourth quarter of this year, we’ll be opening up our second QOZ fund.

Robert Leonard (36:54):
Origin has units across a bunch of cities and a bunch of states. How do you determine which cities and states to invest in? What exactly is it that you’re looking for?

Michael Episcope (37:04):
We take a macro view first. And you have to understand what drives real estate performance, are population and job growth. And then you have to look at supply and demand, and fundamentals. And so, when we talk about the 12 markets we’re in, they’re all markets that generally people are familiar with and they would say, “Yeah, those were the high growth markets.” Tell them one is Sun Belt, general. We’re in Nashville. And we’re in Atlanta. And we’re in Charlotte. And we’re in Raleigh and the secondary markets. And we’re in Houston, Austin, Dallas. We’re in the Southeast and Florida. We’re in Phoenix, that area.

Michael Episcope (37:36):
So, we’re in low-tax states and a lot of the lifestyle cities. And this is really when you look at what’s happening with the pandemic and people working from home, and that whole shift happening, these cities are disproportionately benefiting at the detriment of some of the Northern cities.

Michael Episcope (37:55):
Now, what I do take solace in is, the fact that the pandemic was over so quickly. It’s not over yet. And I don’t want to say that. But I think mentally the pandemic started in March, and then within six months, the stock market was hitting new highs. So, financially we were fine. By nine months we had a vaccine, and now we’ve seen the rollout.

Michael Episcope (38:14):
And I think when you contrast that with what happened in The Great Recession, we were in The Great Recession, I mean, there were cracks in the foundation in ’07, and then ’08, and ’09, and ’10, and ’11. And people started feeling better in ’12, but still, we are always looking through the rearview mirror. And contrast that with what’s happened today, in 15 months, I think everybody’s feeling a lot better.

Michael Episcope (38:35):
So, I don’t know what the permanency is going to be long-term, but I don’t think it’s as much as what people are saying. But you still have a longer term secular trend where people are moving to low tax, warmer climates, lifestyle cities. And this whole proliferation of the work at home is only going to accelerate this.

Michael Episcope (38:56):
So, that’s the first thing we do is we look at the cities because the macro bet in many ways is so much more important. And that’s where a lot of the decision-making happens, and the wealth. I’ll say, even if you have the very best location in a city that is dying, not to pick on a city, so I won’t say anything, but you can imagine a dying city in the Midwest if we had the best location there, or the worst location in Phoenix, you’re going to do far better in Phoenix. Now, that’s not our philosophy. We want to have a great location in a place like Phoenix and build a high-quality asset that meets the renter’s criteria.

Michael Episcope (39:33):
What we found, I’ll say that is one of the best predictors of investment performance on a macro level. I already mentioned that. But then it comes down to affordability. And so, if you’re not building or you’re not renovating, or you’re not meeting the market and people are paying 35% of their income on rent, it’s very hard to actually get a rental increase. Your rental increases are going to drive your investment performance.

Michael Episcope (40:00):
So, what we typically look for are affordability ratios of around 25% or less in our properties. So, if we go in and we look at a development, even though it might be a great location and a phenomenal project, but you’re building it at a price where the area within a one-mile radius, they’re going to be at 33%, 34%, we really have to look hard at the numbers and reconsider that project.

Michael Episcope (40:24):
So, what we focus on are the garden and the [inaudible 00:40:26] products. These are lower costs to build. And I don’t want to say we’re not in the affordable market, but we’re in the market of delivering luxury apartments at a rate that people can afford. And with prices skyrocketing in the market today and rental percentage, delivering that to the market is so important today and making sure that we’re really meeting the market and delivering a product that is going to be in high demand. And today it’s about the amenities within the projects, but also, yeah, what we’ll call the chunk price, so the affordability of the renter.

Robert Leonard (41:00):
Earlier in the conversation, we talked about how The Great Recession and the pandemic, and things of that nature have impacted business and real estate in general. How about you personally as an entrepreneur and as an individual, what has been the biggest lesson you’ve learned from the pandemic over the last year?

Michael Episcope (41:17):
When I look back on the last year, those were some emotional times. I mean, I’ve been in the market and a student of the real estate game and just the financial game for my entire life, since I used to sit down with my other grandfather when I was 15 years old and talking about stocks, and looking at the market and all that. And I’ll say that when March came along, I did a webinar on this. I’ve never seen anything like it.

Michael Episcope (41:37):
And I’ve gone through the long-term capital debacle, the Asian contagion trading, you name it, 2001, 2008, and I just never heard of anything of shutting down the global economy. I couldn’t fathom it. I was scared. And I didn’t know what was going to happen in real estate, what was going to happen in Origin, what was going to happen diversified from a family perspective. As I said, it’s really important and I have assets in other places, so we wouldn’t have been impacted, but it was a scary time.

Michael Episcope (42:05):
And what I always worry about, and I said something a year ago to my business group, and they said, “What keeps you up at night?” And I said, “The things I can’t control.” And that was a great example of something I can’t control because there are things that I can do on a day-to-day basis, where we invest, the projects we invest in, what we do, but we can’t control things like a pandemic coming along.

Michael Episcope (42:26):
And thank God that we got out of this quickly. Real estate is actually been somewhat of a beneficiary of it. But it was a rough year for me personally. I was disconnected from the team because we went virtual and I’m not a fan of the virtual office at all. I think you lose a lot of the creativity, the culture. I enjoy walking around, going to lunch with the teams, just that socialization.

Michael Episcope (42:48):
So, I locked myself in my third-floor office, and I’m sure many people can resonate with this, but it was just Zoom all day in meetings. And we had a pretty bad winter here in Chicago too, where you didn’t want to go outside. And I think mentally it was a toll.

Michael Episcope (43:02):
But I’m feeling just a lot better now because the sun is out. Things are getting back to normal. I’m coaching my son’s baseball game. And so, it feels much better. But I’ll say that I was on pins and needles for a while. I was a little bit grumpy around the house. I think my wife was excited and is excited for me to get back to work a little bit. I don’t have really one takeaway, but it will be one of those things that I’m sure an experience that I draw on in a year, in two years, in five years. I

Michael Episcope (43:29):
will say this though, that my partner and I really pride ourselves on risk management. And that’s something that I was great in, in training and something we think about all the time at Origin. And we think about it in the context of how we pay the bills, how do we manage our assets. And you have to make sure that before a crisis like this happens, that you have your house in order because when the crisis happens, there’s not much you can do.

Michael Episcope (43:54):
So, we use a moderate amount of leverage. I talked about non-recourse debt. I talked about the other things that are so important because you want to be able to continue to fight and play another day. And so, I’m proud of our team and how they reacted through this, and how everybody rose to the occasion.

Michael Episcope (44:12):
But overall, personally, I’m good now. I’m in a great position. And then I think Origin is better than ever. Our investors are happy as well. We did a lot of communication during that time.

Robert Leonard (44:22):
When you think back on your life, whether it be personally or investing-related, what piece of advice have you received that has really had an impact on you, and you continue to use it and think of it to this day?

Michael Episcope (44:34):
Very simple, bet on the jockey, not the horse. When I heard that, I’m like, “That makes so much sense.” And you go through life and you realize that every business, no matter what you’re in is about people. And then you really have to love the people who you’re investing with, make sure that they are aligned culturally, that they have the work ethic. They have the knowledge. They have their skin in the game. And when you hear about the success stories out there about these businesses, it all comes down to people. And my mistakes in life and investing, and other things just came down to partnering with the wrong people along the way.

Michael Episcope (45:06):
So, it’s less important, like the project that you’re in or the asset class, and more important, the people who you’re investing with. And that can save you just so many headaches in life. And none of us wants sleepless nights. I’ve had those. I’ve written a lot about it in the blog. We’ve got 400 pieces of original content out there. And I try to share these life lessons with individuals out there about mistakes I’ve made in the past and what we do going forward.

Michael Episcope (45:32):
But I think when we look back, even as a company or me individually, the best experiences have come from being with the right people, and even a good experience with the wrong person. Life is short.

Robert Leonard (45:43):
Michael, thanks for joining me on the show today. For those listening that are interested in learning more and might want to connect with you, where’s the best place for them to go?

Michael Episcope (45:51):
They go right to the website, origininvestments.com. We make everything super easy to download, and you can fill out forms. You can download our decks. You can connect with somebody in our investor relations department. We have a phenomenal team there, who are all well-versed in real estate and everything at Origin, and can help answer any of your questions. So, super, super easy.

Robert Leonard (46:12):
I’ll be sure to put a link to that website in the show notes below. So, for anybody interested in looking at more about Michael, Origin Investments, some of the things they’re working on, you can find that link below in whatever podcast player you are listening on, or if you’re checking this out on YouTube, it’s below in the show description. Michael, thanks so much for joining me.

Michael Episcope (46:31):
Thank you, Robert.

Robert Leonard (46:32):
All right, guys, that’s all I had for this week’s episode of Real Estate Investing. I’ll see you again next week.

Outro (46:38):
Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin. And every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.