Colorado Real Estate Journal - February 19, 2014
When Marcel Arsenault sold his Mile High Yoghurt company to Beatrice Foods in 1982, he moved to Germany to write a novel about World War II. “The book is still on my shelf,” said the 66-year-old Arsenault, CEO of Louisville-based Real Capital Solutions (originally called Colorado & Santa Fe Land Co.) “It is an unfinished opus,” said Arsenault. “It is maybe two-thirds finished. I think about it now and then.” If his writing career had been anything like the one he has enjoyed in commercial real estate investing, he would be as well-known today as Stephen King. During his 30-year career, Arsenault has purchased and managed about $2 billion in income-producing properties, according to the Urban Land Institute. His real estate funds have never lost money for the few outside investors that have invested along with him. “Our 30-year returns are very similar to what you would have gotten if you had invested with Warren Buffett over the same time,” Arsenault said. Last year, he bought about $220 million in real estate and he plans to buy $330 million this year. He also plans to invest about $10 million in solar, but more for the social and tax benefits, as it is not as profitable as commercial real estate, he said. Arsenault also devotes more of his time to his foundations, including one that has taken aim at solving the Somalia pirate problem. “I don’t really care about money, except that it can fund our foundations,” he said. “My wife and I have decided when we die we are going to leave all of our money to our foundations.” Money also has allowed him to build a company that employs more than 75 people, which he expects to grow to more than 100 this year. “I love going to work each day because I am surrounded by bright, passionate people,” Arsenault said. “I don’t thank them enough for everything they do,” he said. “If I had any wisdom to share with others, it would be to hire and work with great people. I find that extremely rewarding.” Despite not caring that much about money – he doesn’t own “toys” like his own private plane or fancy cars – he has made plenty of money, in good times and bad. A hedge fund he ran from Louisville during the Great Recession was the third best out of 5,000, he said. Several years ago, he met with one of his business heroes, George Soros, a hedge fund operator who Forbes magazine listed as the 19th richest person in the world, with an estimated net worth of $20 billion. “I wanted to pitch him with a philanthropy idea” of gathering Nobel laureate economists to advise nations on how to avoid trade wars, Arsenault said. “George told me it was the right problem, but the wrong solution,” Arsenault said. Arsenault also said he suspects that Soros was willing to spend 90 minutes with him in his foundation’s office overlooking Central Park in New York because he was curious how an unknown player from suburban Denver could trounce name-brand hedge fund managers. This is how he did it. Arsenault, with a few others, saw the collapse of real estate coming during the go-go days of the mid- 2000s and bet against formerly high-flying companies whose profits were built on a house of real estate cards. Arsenault took a similar tactic as investors chronicled in the books “The Greatest Ever” by Gregory Zuckerman and “The Big Short” by Michael Lewis. Arsenault sold almost all of his 4.5 million-square-foot portfolio at the top of the market in 2006, bought U.S. Treasury bonds, and invested in real estate anchored by well-located Walgreens and Walmarts that he knew were “recession proof” and would pay their rents no matter the economy. More importantly, he shorted – that is bet their stock would fall – in companies and assets that had benefitted from the real estate boom. He took multimillion-dollar short positions in homebuilder KB Home, and later CBRE, as well as a NewYork-based real estate investment trust, banks and collateralized mortgage obligations that held subprime mortgages, which Wall Street was peddling as A-grade paper. Even prominent business leaders didn’t see the crash coming. Before he started to bet against the industry in which he made his fortune, Arsenault flew to New York to meet with people such as Jamie Dimon, the president and CEO of JPMorgan Chase, and Wall Street analysts. No one bought his thesis based on prodigious research, as well as the ridiculous prices his own properties were fetching. That is where Arsenault’s analytical mind came into play. “I started making ice cream and yogurt when I was working on my doctorate in microbiology at CU” in the 1970s, he said. “As a scientist, I was trained to look at things very analytically. Plus, I am very skeptical by nature,” he said. The trick, Arsenault said, is not to buy into “other people’s B.S., but also don’t buy into your own B.S.” Before he went on a selling spree, he was buying apartment buildings and converting them into condos. At first, he might buy a building for $100,000 per door, invest $20,000 into each unit and sell it for $170,000. As the market heated, similar buildings were being bid up to $160,000 and $170,000, and they were being resold for as much as $250,000. Unqualified consumers were buying them because banks were willing to give 99 percent loans to anyone who drew a breath, he said. It struck home when he was looking to buy a Class A apartment community in Dallas for $35 million. “I didn’t think it was even worth $35 million, but a bank was willing to give us a $33 million nonrecourse loan on it,” he said. Before he bought it, he required the seller to find out what would happen if the market suffered a 2001-style recession. Arsenault found that if that happened, after debt service, he would be feeding it $700,000 a year, instead of the projected $500,000 a year profit projected at the current rents and occupancies. “I didn’t want that kind of risk,” Arsenault said. “I had been through that before and it was not fun. I didn’t want to live through that again.” When Arsenault first returned to Boulder in 1984, with his unfinished manuscript, he was not an instant success when he started buying real estate. “When I came back, I had a pretty good amount of cash,” he recalled.“I had a couple of million from the sale of my company.” While he was building Mile High Yoghurt, he had invested in a few properties and had done pretty well. When he returned, he decided he should follow the real estate path. “A couple of my friends, who are still my friends today, told me I would do really well in real estate. In fact, they said I would make a lot more money than they do,” Arsenault said. He asked why. “Because you work hard and we don’t,” he was told. He started buying more properties in September 1984. Little did he know, he was buying at the top of the cycle, before the savings-and-loan crisis crushed values in the COLT states of Colorado, Oklahoma, Louisiana and Texas. “It was the worst possible time to be buying real estate,” Arsenault said. “Oil prices and real estate prices collapsed.” The Denver area was overbuilt on the promise of $65 a barrel oil. Instead, at the low point, oil fell to about $8 a barrel. 1984 to 1987 were very difficult years for him, he said. “I call them my years of blissful stupidity,” he said. “It was a slugging match for tenants,” he said. “I had industrial properties in Broomfield that were 50 percent empty because StorageTek was going out of business,” he said. He did an analysis of his situation and had an epiphany. “It’s like that old joke about guys running from a lion. You don’t have to run faster than the lion. You just have to run faster than the guy next to you.” He started leasing his buildings at rates below his competitors and began to fill them. “I became an expert at filling empty buildings,” Arsenault said. “I would meet a tenant anywhere, anytime to make a deal. I was working 80 to 100 hours a week.” Most times, he offered them a deal they couldn't refuse, but that still was enough for him to make a profit, because his cost basis was so low. “By the late ‘80s, we were kind of the gurus of filling empty buildings,” Arsenault said. “A lot of banks and insurance companies that had empty buildings were coming to us” with properties they acquired from borrowers, he said. By the mid-1990s, he had acquired a 4.5 million-sf portfolio. “Life was kind of boring,” Arsenault said. “We weren’t buying anything because properties were too expensive.” Unlike today, however, the condo market was hot. “That is when we started buying apartments and converting them into condominiums,” he said. He did that until August 2005, when he realized the market was overheated and he started to unload the empire he had built. Unlike a lot of real estate moguls, he doesn’t raise his investment money from either institutions or a number of small investors. “I have a few, very loyal investors who have been with me for years,” Arsenault said. One of his longtime investors is a friend in Germany who years ago sold a big company there, he said. “But for the past 20 years, most of my funding is my own money,” he said. When he is not working on real estate deals, he likes to ride his bike, something he did when he found himself with a few spare hours on a sunny, but cold day in January. He also loves to ski and river raft, although he injured his shoulder when his raft flipped on his most recent trip, and he is questioning the wisdom of it now that he is in his mid-60s. However, his foundations eat up more and more of his time. One of his foundations that he is especially passionate about is called Oceans Beyond Piracy, which focuses on problems in Somalia. It may seem odd that a real estate entrepreneur from landlocked Colorado would tackle a piracy problem off the coast of Africa. “From a big-picture standpoint, I think the world is one global village,” Arsenault said. Overall, during the past 100 years, most “nation states” have functioned fairly well, but not countries like Somalia, where young people are forced into plundering ships because there are no jobs. Somalia suffers from a 70 percent unemployment rate, he said. “I think we have created about 350 jobs so far in Somalia by giving people there zero-interest loans through our foundation for things like beekeeping and buying fishing boats,” he said. A few months ago, Arsenault travelled to Somalia on a mission from the United Nations. He spoke to several pirates in prison. “Every one of them told me they hoped that young people would not follow their career path because they are doing 10 to 20 years in prison.”