In today’s episode, we have Shannon Robnett, the illustrious Founder and CEO of SRI (Shannon Robnett Industries) and the esteemed host of Robnett’s Real Estate Rundown. With a remarkable career spanning over 27 years, Shannon’s footprint in the real estate industry surpasses $425MM in construction projects.
Shannon’s expertise encompasses a wide spectrum, from multifamily housing to pivotal infrastructure like city halls, schools, and industrial complexes. His passion for delivering quality projects coupled with an adept understanding of syndication principles illuminated the path toward lucrative investments. Shannon Robnett is undeniably a trailblazer, providing a roadmap for anyone aspiring to thrive in the world of real estate and achieve unparalleled financial success.
Throughout this conversation, Shannon divulged invaluable insights into syndicated real estate and the compelling advantages of tax-incentivized investing. His dedication to economic trend analysis and astute financial strategies is evident in his track record, consistently delivering top-tier projects that generate multiple streams of passive income for his syndicate partners.
Shannon also shared his insights on leveraging commercial real estate for sustainable wealth creation. His grasp of these subjects unveils a wealth of knowledge that not only educates but also empowers individuals seeking financial freedom through real estate.
In This Episode
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Understanding the dynamics and benefits of syndicated real estate investments
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Leveraging tax incentives (45L Tax Credit) for optimizing investment returns and reducing liabilities
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Shannon’s approach to achieving financial freedom through real estate investments
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His insights into analyzing economic trends for informed investment decisions
Welcome to another episode of Wealth Strategy Secrets. In today’s episode, we have Shannon Robnett, the founder and CEO of SRI and the esteemed host of Robnett’s Real Estate Rundown. With an impressive career spanning over 27 years, Shannon’s impact on the real estate industry includes more than $425 million in construction projects. Throughout our conversation, Shannon shares invaluable insights into syndicated real estate and the compelling advantages of tax-incentivized investing. He also discusses leveraging commercial real estate for sustainable wealth creation.
Key concepts we discuss include understanding the dynamics and benefits of syndicated real estate investments, and utilizing tax incentives—such as the 45L tax credit—to optimize investment returns. We also cover Shannon’s approach to achieving financial freedom through real estate investing and his insights into analyzing economic trends for informed investment decisions.
Shannon, welcome to the show!
Thanks, Dave, for having me. I appreciate it.
I appreciate you being on the show today. I know you’re going to provide a lot of value to the listeners. Tell us how you got into this game.
Unfortunately or fortunately, however, you want to look at it, I was born into a real estate family. My father is a builder and developer, and my mother is a third-generation realtor. So, I became a realtor, and my son is a realtor too. We’ve got five generations of realtors in our family, and my brother builds custom homes in a resort area. I just kind of grew up seeing real estate deals get done. My parents were very entrepreneurial; not only did they own businesses, but they understood the power of real estate and its ability to provide long-term cash flow and wealth.
I always saw my mom come home and talk about the Johnsons down the street thinking about moving their business, and my dad would talk about a lot he saw. They would put a building together and find a tenant for it. It didn’t make a whole lot of sense to me until they retired at 50 years old with cash flow starting from absolutely nothing 30 years prior.
It was just part of my daily life. I remember telling Robert Kiyosaki the first time I met him that his book wasn’t very impressive. He cocked his head at me and said, “Really? Rich Dad Poor Dad is one of the world’s bestsellers on finances, and you don’t think it’s impressive?” I replied, “Well, I realized that I grew up with Poor Dad.” He started to laugh and said he had received that response from a couple of people. It was eye-opening to live out the lessons from Rich Dad, Poor Dad without even realizing it until much later in life. I had such a great education growing up.
That’s interesting. I have a brother who is an architect, and he knew from a very early age that he wanted to get into architecture. On this show, we’ve had a lot of syndicators—people doing multifamily projects—mostly from a value-added perspective. So, how did you know you wanted to get into the development side of real estate?
It is a whole different animal. I started my company back in ’94, and I was building. I built a couple of houses, and I realized I didn’t like working with homeowners, so I began to build in the commercial sector. I noticed that every time I finished a building, I stopped getting paid. The owner continued to benefit from it, while I created it. I started seeing owners come to me, trying to find value solutions for the plans they had. They might have purchased a very expensive piece of land or an inexpensive piece that had all kinds of issues.
I discovered that by problem-solving uniquely, I could add value. At 21, I was working on a job when my crane operator mentioned needing yard space and would love an old house. I got to know the lady living right next door—she was in her late seventies and had a mentally handicapped son. She was looking to sell her 3 or 4 acres with an old house on it and move to an assisted care facility for the two of them. I recognized an opportunity, so I put that deal together, not with my last five $100 bills (that would imply I had $500), but with my only $500.
Then, I had to navigate the county to get it rezoned and secure exceptions for the crane use and other requirements. I saw where I could add value because the crane operator knew about the old lady next door but couldn’t get it through the county for proper zoning. I was able to do well on that project. I was more than just a realtor for her; I was able to help the crane operator by solving the problem of getting the zoning and handling the necessary processes, allowing him to continue his work.
From there, in 2001, I built my first industrial complex for myself. I still have two of the original tenants in that project 22 years later. I realized that being the person who puts all the pieces together actually creates the original value. You start with sticks and stones—they don’t become anything more than that with a profit margin until you put a tenant in there. The moment you do, it’s like waving a magic wand; all the valuations change. I saw that by doing everything I was already doing and one more step, I could add tremendous value to the project. So, I launched into that in early 2001.
“I realized that being the person who puts all the pieces together actually creates the original value.”
That’s fascinating. It resonates as an entrepreneur, right? Just trying to solve problems and create value for people, particularly in the development and real estate space. That’s what I always find so exciting about real estate—there’s so much creativity in how you can generate revenue, build value, and reduce costs.
Exactly. Real estate provides not only that creativity but also opportunities on the tax side. We’re not talking about the kind of creativity that lands you in jail. Instead of viewing the tax code as a penal code, it’s better to see it as a guidebook on how and where the government wants to offer certain incentives for specific activities. When you combine the value of development with the tax code, you create something supercharged that leads to some of the best investment opportunities, which is why we’re so heavily involved in it.
Let’s unpack that a bit in terms of tax incentives for new development. We’re all familiar with using bonus depreciation on existing properties, but how do tax incentives typically work with new development projects, especially since that’s phased in through the build?
There’s something not a lot of people have heard about the 45L tax credit. It’s a federal tax credit worth about $2,000 per dwelling unit, based on the energy code to which it’s built. In 2003, it could be as much as $5,000 per unit. That’s just a Section 179 deduction available only when you put the building into service, offering a tremendous amount of tax savings. Additionally, you have cost segregation studies and bonus depreciation that you can leverage as well.
This adds something special to the equation. Then, you have opportunity zones. If you can stack these three elements—building an apartment complex in an opportunity zone while using the 45L tax credit—you have the potential to combine amazing benefits that can transform a good deal into an incredible one.
I think you hit the nail on the head. That’s what Tom Wheelwright always talks about—the tax code is a series of incentives for investors who know how to leverage it. It’s a pretty unique way to look at it and stack those incentives. How about on the industrial side? Is it viewed a bit differently?
The tax code is actually a series of incentives for investors who know how to leverage it.
I like to compare industrial real estate to a bond—not James Bond, just a regular bond. It’s slow and steady. We’ve seen a massive uptick in rents in multifamily properties over the last several years, skyrocketing values as a result of low interest rates. However, we’re starting to see that level off and cap rates realigning.
In contrast, industrial real estate never experienced that same spike. If you do a cross-comparison, industrial is a much more stable product. I’m referring to flex space, where you have tenants occupying anywhere from 2,000 to 10,000 square feet, with buildings ranging from 20,000 to 60,000 square feet, and complexes with four or five buildings. These spaces are where small businesses get their start—cleaning companies storing supplies, delivery companies, cabinet shops, and even one that makes gelato ice cream and another that Cerakotes guns.
We often overlook that 60% of business conducted in America is done by small businesses. When comparing them to multifamily, multifamily leases typically last one year, and landlords cannot pass on any additional increases in expenses. The tenant may have a decent credit score, but they often don’t personally guarantee the lease, which means there’s nothing substantial backing it beyond that one-year commitment. Moreover, tenants in multifamily properties tend to move frequently because their home address isn’t as important as their business address.
On the other hand, an industrial lease is typically a triple net lease, meaning all expenses are passed through to the tenant on a prorated basis. So, if property taxes or insurance costs go up—an issue we’re seeing nationwide—it’s not the landlord’s responsibility. Plus, you’re working with a credit tenant who has signed a personal guarantee, often with a solid balance sheet, which means they’ll cover increases related to municipal functions and insurance.
Businesses value their addresses significantly; it’s akin to our email addresses now. They don’t like to move. Setting up a business takes time, money, and effort, and they can’t just call their friends over to help them relocate on a weekend. Most industrial leases are for five to seven years, providing stability. Many of these leases include a bump clause that stipulates rent will increase by an agreed-upon percentage each year.
We put a unique spin on that clause that no one seemed to mind for about 18 years. But suddenly, in 2022, people started having issues with the phrase that stated your rent would increase by 3% or CPI, whichever is greater. As you know, last year, CPI surged nearly 9%, which affected all my rents.
There are interesting advantages there. How many units do you typically have in your buildings? I’ve seen some industrial centers that might just have one really large tenant, like Amazon. To me, that seems to carry a bit of risk in terms of vacancy if you encounter some kind of issue. What kinds of assets and tenants are you looking at?
I think your analogy is very accurate. If you look at who’s buying Amazon-sized buildings, they usually have 10 or 15 of them, which helps them maintain a 5% vacancy rate across their portfolio. I prefer buildings with a minimum of about 20,000 square feet, housing tenants in the 2,000 to 4,000 square foot range. These smaller tenants typically don’t require a lot of tenant improvements; they mainly need an office, a bathroom, and a roll-up door in most cases. We recently put a 20,000-square-foot building into service in January that has seven tenants. The only custom tenant improvement we made was removing one of the bathrooms as requested by a tenant.
We also just purchased another center in Houston, Texas, completed in 2020. The previous owner had placed very short-term leases on it during COVID, doing whatever he could to fill the spaces without any rent increases. As the tenants came up for renewal, we raised the rents by about 12% and included a clause for future rent increases. I agree that having a single large tenant, like in an Amazon building, can be like owning a duplex. If one tenant moves out, it creates a significant vacancy issue.
On the other hand, multi-tenant spaces with 2,000 to 4,000 square foot users are ideal because there are many of them, and they’re generally easy to refill. Plus, the management is less of a headache since industrial tenants usually cover improvements on their space, plus a profit margin. They treat their workspaces differently than their living spaces, making it a simpler product to own.
Rents typically rise at a steady rate, and life insurance companies love to finance these properties. You can often secure long-term debt, like 10-year notes with a 25-year balloon, and even in today’s interest rate environment, you might find rates in the low sixes. From an LTV standpoint, how are you structuring deals in this environment?
We typically aim for about 65% loan-to-value on the debt. While that lowers returns, it increases the safety margin. When I did my first deal in 2001, the interest rate was about 9%. So, anything we’ve seen in the last 15 years has been a phenomenal improvement.
Bringing in more equity means more cash flow and less risk of vacancy derailing the situation, which I consider more prudent even when higher LTVs are possible. Regarding our Texas deal, we secured 4% financing and are at about 51% LTV with nine more years left on that fixed-rate debt. It’s a great product.
Bringing in more equity means more cash flow and less risk of vacancy derailing the situation.
It seems like, on the commercial side, especially for industrial, it typically involves lower LTVs. I’ve seen projects even with zero debt, which helps reduce risk. That can create a good balance in an overall portfolio for investors.
Exactly. When building out a portfolio, having diversification with different risk profiles and debt structures is essential. In the multifamily space, we saw a lot of investors buying at historically low cap rates and planning on executing business plans that included new paint, carpets, or maybe new deck chairs by the pool, followed by raising rents and then exiting. You don’t see that as much in industrial.
Industrial is more like the “set it and forget it” model. It creates constant cash flow and appreciates at about 3% annually. Investors often hold these properties for 6 to 10 years because they function like bonds—providing steady cash flow and value. This allows you to engage in more speculative or aggressive investments in your portfolio while knowing you have reliable income coming from the industrial properties.
That’s spot on. Do you typically have an exit plan for these properties? Are you looking to exit after some time, or do you prefer to keep them and cash flow them for longer?
I always consider an exit plan because not everyone wants to stay in a deal forever. There’s always the opportunity to exit at the right time. We’re building a ground-up facility for a 40,000-square-foot international tenant in Florida, projected for about a seven-year hold. We have a 10-year lease with the tenant, which provides the new buyer with approximately three years of strong tenancy before they need to renegotiate the lease or refinance. This structure gives them stability and bankability.
You won’t be looking at a situation where they end up with an empty building just 12 months down the road. The property is currently at its peak value. We’ve managed to avoid any prepayment penalties associated with the loan and have made significant payments toward the principal.
In seven years, with a 3% annual appreciation, the property’s value has increased by about 20%. We achieved a 7% cash-on-cash return in the first year, which has continued to improve. Overall, this investment generates a return of about 14% to 16% annually, even without any tax incentives related to depreciation. It’s a steady investment that you can rely on.
I believe it’s always prudent to have an exit plan in place, especially when using the syndicated model with limited partners involved, as not everyone wants to stay in a deal indefinitely. That makes total sense. What’s your perspective on opportunity zones?
You mentioned them earlier, and I’m not sure how familiar everyone is with the concept. Are there particular opportunity zones or markets that you favor, as well as specific asset types in those zones?
As you know, I’m based out of Boise, Idaho, but we have projects ranging from Washington to Florida. When I evaluate markets, I focus on nine key markets across the United States, and I look for opportunity zones within those areas.
We have completed industrial projects in opportunity zones and are preparing to launch a multifamily project as well. To clarify for your listeners, opportunity zones were established during the Trump administration. If you sell a property for $1,000,000, you need to invest more than that amount in your replacement property. However, in an opportunity zone, you can invest your capital gains from any source—real estate, stock, or even the sale of a boat.
For example, if you sold a building for $1,000,000 that you originally bought for $500,000, you would only need to invest the $500,000 or a portion of it in the opportunity zone. This allows you to defer the capital gains tax until 2026 when the tax will be due. If you hold the asset and make improvements for ten years, you can exit the deal entirely tax-free.
In essence, it’s a choice between paying the tax now or deferring it for a couple of years while enjoying the benefits of tax-free exit on the other side.
We recently purchased an industrial warehouse near the mall—just two blocks from our central mall—and it features 45,000 square feet of multi-tenant space, renting for about 50% of the going rate. I was confident we had a backup plan if rezoning didn’t work out, but we did secure the rezoning for 200 units of multifamily housing. It’s conveniently located on a bus line and near a freeway exit, making it ideal for a seven-story project.
When we purchased it, we were able to take advantage of bonus depreciation on the property, allowing us to recover almost 60% of every dollar invested by our limited partners. In 2024, we plan to demolish the existing building to complete the depreciation process, which is one of the few opportunities to take 100% depreciation on the project.
This strategy means that my LPs will have sufficient tax offsets to minimize any tax liability when that tax bill comes due in 2026. After that, we’ll build an approximately $80 million project on the site, where we’ll also leverage the 45L tax credit and other incentives to maximize our benefits. Ultimately, we plan to hold the asset for ten years, and when we exit around 2036, it will be tax-free.
Brilliant! That’s solid information. Regarding the 45L tax credit, is that classified as a passive loss or an active one?
The 45L tax credit is primarily available to developers. It’s designed to incentivize the construction of green buildings. If you have a zero energy-ready building that meets prevailing wage requirements, you can receive up to $5,000 per door.
If you’ve got a 50% savings over the 2006 IRC, you’re able to receive a $2,000 per door tax credit, which really helps because it’s only available to the development team. So when we’re building from the ground up and our LPs (limited partners) are involved, they’re considered part of that development team and get to benefit from that, which in many cases will offset most of the gains coming out of the project.
So does the LP get a share of that tax benefit?
Absolutely. The way we set it up, they do. We make sure that the benefit passes through to them.
That’s fantastic! I love the idea of tax stacking, and putting it all together. It’s really about knowing how to leverage the tax code and figuring out the game.
I wanted to ask you, Shannon. You have a diverse portfolio with different projects. You started your career in real estate early on as an entrepreneur. Have you developed a personal investment thesis or wealth strategy that guides you?
The first thing I look for in any investment is cash flow. I don’t care if it’s a value-add project; if you’re buying a value-add property that does not cash flow prior to executing your business plan, in my opinion, that’s not a deal I would pursue. If it’s not a standalone income-producing property, it becomes a difficult acquisition. If anything goes wrong with your business plan, you’ll quickly find out that you’ve overpaid.
In development, we focus on specific markets. We look for areas with not just growth in population but also strong wage growth because that’s key to appreciation—raising rents. If wages are stagnant, it’s challenging to raise rents effectively. Currently, across the United States, people are paying 38 to 45 percent of their income for rent in average C and D-class properties. If you’re trying to raise rents in an area where wages aren’t increasing, you’ll quickly run out of room to do so.
For me, it must be cash flow before I invest additional time and resources. It also needs to be in a market that’s growing in both population and wages. I like to factor in the tax benefits as the “cherry on top.” If I can find a way to retain more of my money from the government, it brings me great satisfaction to be tax efficient in that regard. Those are my primary considerations because markets are cyclical. Whether you’re in oil and gas, stocks, or real estate, cycles will continue. If you’re not prudent in your purchases, you might find yourself overextended, which complicates matters unnecessarily.
On the cash flow side, you mentioned always having cash flow in properties. Are you anticipating, say, in a 5-year hold project for a new development, that you won’t be cash-flowing for the first couple of years due to the build-out and lease-up phases?
When I develop my model for new construction, I aim for an 8-cap rate. If I can’t achieve that based on my expenditures, I won’t proceed with the project. There’s certainly that initial build-out phase where you won’t receive income, but you also aren’t paying interest on it. We factor in the lease-up period in our models.
These projects are more about appreciation during the development phase. However, when acquiring an existing asset, many investors get overly optimistic, thinking they can drastically improve it, raise rents, and see great returns. I see some people who did that in 2021; they executed their business plans flawlessly but now find themselves underwater when it comes to converting to permanent debt because their properties didn’t generate cash flow.
That makes a lot of sense. I think from an LP’s standpoint, as investors build their portfolios, it’s essential to prioritize whether they need cash flow now or are looking for growth. It’s crucial to allocate a certain percentage to each, as everyone has a different investment approach.
I agree. There are essentially three types of investors. There are those who want cash flow. Some are looking for appreciation, and there are those seeking tax benefits. These typically fall into three clear categories. The first group includes individuals approaching retirement who are considering converting their assets into something that will provide ongoing support.
Next, you have individuals aged 30 to 50 who have established careers and are earning a substantial income, but they find themselves heavily taxed by Uncle Sam. They realize they need to change their approach to wealth-building, particularly in a way that can significantly reduce their tax burden.
Then some enter the investment space thinking they want cash flow. However, after discussing it, they often discover that the cash flow from their current investments won’t be sufficient for their needs, and they really should focus on appreciation. I love development deals for appreciation because they can be very strong in that area.
We typically find ways to exit these investments tax-efficiently, such as moving from ground-up development into an opportunity zone. We help investors strategize so they can maximize their wealth growth.
That makes perfect sense. What is your philosophy on financial freedom? I imagine it stems from what you’ve just described.
You’re asking the wrong guy because my definition of financial freedom is being able to do what I want with my time and energy. For me, it’s about continuing to work on deals I love. When someone asked me about my retirement goals the other day, I joked that my goal is to die with a letter of intent (LOI) in my pocket—I want one last deal!
For most people, though, financial freedom is about understanding how much money they need to live the life they desire. In Tony Robbins’ book, Money: Master the Game, he discusses how much cash flow is really necessary. Many people think they need $50 million when, in reality, they only need a couple of hundred thousand in annual cash flow.
Unfortunately, people often position themselves to have big houses and fancy cars, which consume their wealth instead of creating a more economical lifestyle. If they could focus on building a cash flow of $10,000 to $15,000 a month, they could have much greater freedom.
True financial freedom is being able to say no to a job relocation, to tell your kids they can go to any college they want, and to decide on vacations anywhere in the world. It doesn’t necessarily mean giving up your job or your work, especially if you love what you do. It’s about having control over when to work when to go on vacation, and how to allocate your time.
I think investors need to unpack what financial freedom means for them because it’s often an overused term. It’s crucial to keep asking why and peeling back the layers. Are you seeking more time with your family? Is it about having the freedom to pursue your purpose?
Waking up every day excited about what you’re doing is key. There’s also this whole FIRE movement where people aim to have their income exceed their expenses at an early age. But it’s important to remember that achieving that shouldn’t mean relocating to a low-cost country and drastically cutting expenses just to claim financial freedom. What comes next? Are you truly living the life you want?
I enjoy exploring the psychological aspects of investing and understanding what drives individuals. Each type of asset, whether it’s industrial or involves tax strategies, requires figuring out what makes the most sense for you as an investor at your current life stage and for your family.
Additionally, when people discuss financial freedom, they often showcase large houses, luxury cars, and private jets. However, I think when individuals truly understand what they want out of life, it significantly influences their investment strategies and time horizons.
Many people enter real estate thinking it’s a quick path to wealth, but, as I’ve seen with my parents, it’s more of a snowball effect. Starting with an initial investment of $100,000 is just the beginning; being able to replicate that investment on a semi-annual basis—or even two or three times a decade—will get the ball rolling. By the time you’re in your 40s or 50s, which I just crossed this year, the impact can be substantial.
I know I don’t look it, but thank you, Dave. When you look at that, you start to understand how you’re going to spend the rest of your time. It gives you the motivation to push forward and make the sacrifices needed to get that ball rolling early on.
I couldn’t agree more. It’s so important, and investing is a process. That’s why we focus on creating an overall wealth strategy in our community—one that supports your goals and aligns with your investor DNA. From there, you can start to explore different asset types and determine how they fit your time horizon and risk tolerance. All of those components drive the strategy.
You share a similar philosophy with me. You lead with education, right? Because the worst thing that could happen—honestly, I believe that the crash of 2008 could have been largely avoided if investors had a better understanding of negatively amortizing loans and the dynamics of that marketplace. Leading with education helps people who come to a deal with enthusiasm but may not understand if it’s truly the best fit for them.
Real estate is just like people; different deals fit different profiles. Not everyone fits into a single deal. We’ve seen syndicators pile everyone into a deal regardless of their individual goals or circumstances, and then the investor ends up disappointed because it doesn’t provide the tax benefits or cash flow they were expecting. Educating investors is crucial so they truly understand their profiles, goals, and time horizons.
I agree with you, Dave.
If you could give just one piece of advice to our listeners about how they could accelerate their wealth trajectory, what would it be?
I believe that tax strategies are the number one thing. If you consider that you’re targeting a 12%, 14%, or 16% IRR in real estate, if you’re a high-net-worth individual working with a tax strategist or employing advanced strategies, you could save up to 37% of your income. That becomes your highest rate of return by far, giving you more money to invest. There are scenarios where the IRS will pay you to invest in deals, and I can share several of those that I use consistently. So, focusing on the tax aspect, especially if you’re in that 37% tax bracket, is crucial.
I appreciate that, Shannon, and your time today in educating our audience. If people want to reach out and connect with you or learn more about what you’re doing, what’s the best way?
The easiest place to do that is at shannonrobnett.com. You can find all my social media there and even access my calendar to grab 15 minutes for a chat. Whether it’s pointing you to textbooks, and opportunities, or simply sharing what I’ve learned over the past 30 years in the business, I’m here to help.
Awesome. Thanks so much, Shannon.
Thank you, Dave. I appreciate it.
Thanks for listening to this episode of Wealth Strategy Secrets. If you’d like to get a free copy of the book, visit holisticwealthstrategy.com. If you’d like to learn more about upcoming opportunities at Pantheon, please visit pantheoninvest.com.