CPA Beginnings

Kushner spun Lido Advisors out of a consulting firm (also under the Lido brand name) he had launched in 1995. A CPA by training (he is son of an entrepreneur whose retail and wholesale business distributed Blaupunkt car stereos in the United States), Kushner spent the first 12 years of his career doing personal financial planning for high-net-worth individuals, passing through the halls of accounting giants like Price Waterhouse and Peat Marwick Mitchell. At the end of the ’80s, partnership at a CPA firm beckoned, but he didn’t want it. He said to his mentor: “I don’t know if I want to be a partner at a firm where one of my other partners who I don’t know can do something bad and take down the entire firm.” Accountants are also conservative about investment management, he says, noting that many of them don’t have the entrepreneurial gene.

While doing a stint at Chase Manhattan, he got tapped by a recruiter to run a family office in L.A. for a clan in the garment business. While there, he launched a network of other family office heads who would meet six times a year and have an annual conference with educational seminars. It attracted family offices and high-net-worth investors (speakers from D.C. speak on things like tax policy, and the event has also drawn the likes of former President Jimmy Carter, Howie Mandel, Magic Johnson and Jay Leno to speak or perform). Soon, other managers were showing up asking how clients who were slightly less wealthy than super-rich might get this sort of family office treatment. Lido was born in 1999.

The firm cites a couple of reasons for its enormous growth. One is that family office model, so popular in Lido’s first 10 years.

But in a decade when many advisors have embraced index funds and non-investment services, Lido has marched to a different beat. For the last decade it’s been real estate—the asteroid that brought down so many financial giants but offered unique opportunities for a firm like his, Kushner says.

Shadow Banking Takes Off

Real estate was a great opportunity for the ultra-wealthy for the purest of reasons: taxes. Among high-earning Californians who can face state and local tax bills of 14% of their income, this investment strategy resonates. Lido clients may hold between 5% and, in a few cases, 30% of their portfolios in various real estate vehicles.

“All of our clients pay a lot of taxes,” Kushner says, “and real estate ownership is still one of the very few things that is given tax-advantaged status in the tax code.” That’s mainly through the advantages of legal depreciation, he says. He points to properties the firm has owned in the Dallas-Fort Worth area for some five years, as an example, that haven’t triggered any income taxes from cash flow.

“It’s not an aggressive tax position or anything like that,” he says. “It’s the fact that you can depreciate the entire value minus the land, including the amount that you financed. That’s where you get the big boost. So if you buy a building for $10 million and let’s just say the land is worth $2 million, you get to depreciate the $8 million, even though you might have only invested $4 million.”

Lido’s first big real estate push started in the lending space. In 2009, at the height of the recession, Kushner’s team was asked for bridge financing help on a Beverly Hills mansion selling for $5 million. It was around the time Lido’s Jason Ozur joined the firm.

The firm heard through other family office acquaintances that a developer needed help for a deal that sounded too good to be true. “He felt he was getting a smoking hot deal on this opportunity. He had $3 million to put down and he wanted a $2 million loan,” Kushner says. You would think that would be an easy accomplishment, but not in 2009. The usual suspect bank lenders were suddenly staring blank-eyed at developers, he says. This buyer was willing to pay a bridge financier 12.5% interest plus 2 points up front. “We did our own homework, did our due diligence, did our own appraisal,” Kushner says. The house, they found, was actually worth $5.6 million.

As a real estate lender in this case “you’re in first position,” says Kushner. “You’re the mortgage holder. Basically, you’re the bank.” Even in foreclosure, Lido figured it was ensnaring a $5 million property for $2 million. So it struck a deal, and eight and half months later got paid back when the developer found cheaper financing.

Realizing it was onto something, Lido later went to operators and asked them to set up pooled partnership vehicles so that multiple qualified clients with multiple operators could put their money across multiple real estate loans. Different geographies. Different building types. But they were all doing the same thing. “So they created funds, and these funds created multiple deals. So from a diversification perspective, as I would tell my clients, ‘I’d rather you own a small piece of a dozen loans or 30 loans or a hundred loans or in some instances hundreds and hundreds of loans [in many geographical areas] depending on the fund vehicle versus owning just a single loan.’”

In 2012, the firm started investing directly in distressed real estate, especially taking advantage of some markets like Las Vegas, which had been crushed during the financial crisis. “The houses that we started to identify were selling in the low-$300,000s, and we were actually able to start buying them at an average price of $141,000 a house, which was far below the cost to replace and build the house.

“We started buying as many houses as we could that we would be able to buy and provide our investors with a 6% return on an all-cash basis. We didn’t even bother getting debt. We just said, ‘This is a bond substitute that’s going to give our clients a 6% [return] … partly sheltered with depreciation. So you get a 6% return on your money while we’re waiting. … In the time we do this, the 10-year [bond] had dropped all the way to 1.41%. It was a great opportunity to sell bonds and buy these houses.”

Around the same time, the firm got into distressed office space. Another deal, again in Vegas, with another family, included a medical office building. The building was only 40% occupied. “We bought this building at what I believe was $65 a square foot,” Kushner says. “To rebuild that building, it probably would have cost closer to about $200 a square foot. So again we bought it well, well below replacement cost.

“We were getting a decent cash flow even at 40% occupied,” he says. The building is now 80% occupied, the firm got all its original capital back and it still owns the property today, he says. “We got cash flow for five, six, seven years. Let’s say we put in $3 million and we borrowed $5 million. The total is $8 million for the property. Let’s say the building [is later worth] $16 million. We go to the bank. They are happy to give you a $10 million loan because you have $6 million in equity. You pay off your $5 million original loan out of your $10 million in loan proceeds. You put $5 million in your pocket. And you only put in $3 million originally, [so you have] an extra $2 million, plus whatever cash flow you’ve been collecting for seven years.”

Lido has since pursued other deals in multifamily housing in places like Dallas and Austin, gussying up properties where the previous operators are doing a bad job managing the places. In many cases, what the firm offers is an ability to see through onerous fee structures offered by some pools and poor financing in other cases.

He mentions one apartment complex in Fort Worth that the firm bought with 65% financing. The firm paid $27 million. After getting all the value out, the firm turned around and sold to another company for $44 million. That buyer put only 15% down and paid 85% financing at a variable rate. There’s a lot less room for error in that case, Kushner says. “If they start running into operational problems, if they have to drop rents, they are going to have a tough time meeting debt service. When they lose the property to foreclosure and then lose their equity, that’s the time we might be opportunistic and be able to repurchase the property at a substantial discount.”