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Commercial Real Estate Investing with Drew Sterrett

George Grombacher June 5, 2022

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Commercial Real Estate Investing with Drew Sterrett

LifeBlood: We talked about commercial real estate investing, being the first company to securitize a building via IPO, what this means for ordinary investors, and how to get started investing with Drew Sterrett, CoFounder and CEO of LEX, a company democratizing commercial real estate investing.  

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You can learn more about Drew at LexMarkets.com, Instagram, Twitter and LinkedIn.

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Our Guests

George Grombacher


Drew Sterrett

Episode Transcript

george grombacher 0:00
Come on blood blood. This is George G. And the time is right. welcome today’s guest strong, powerful. Drew Sterrett. Drew, are you ready to do this?

Unknown Speaker 0:18

george grombacher 0:19
All right, let’s go. Drew is the co founder and CEO of Lex their company democratizing the commercial real estate market, the first company to securitize a building in New York City via IPO and now trading on the secondary market. Drew, tell us a little about your personal life some more about your work and why you do what you do.

Drew Sterrett 0:40
Thank you so much for having me, George, I would say on the personal life front, very grateful for having supportive friends, family and girlfriend and also my one year old puppy, since they put up with me working 24/7. So the work life balance is always there. But it’s great to have a support network. What kind of dog do you have? Half Cocker Spaniel, half poodle, hypo allergenic does not shed, which is a very key aspect to not having to clean the apartment every single day.

george grombacher 1:08
Nice. Tell us a little bit more about Lex.

Unknown Speaker 1:11
So Lex is the first commercial real estate securities market. We allow owners to access liquidity in the capital markets and allow investors for the first time to actually own commercial real estate directly be able to buy, sell and traded at any point in time and really enable and empower wealth creation and actual access to the oldest and largest asset class in the world. So it’s exciting what we’re doing here. So disrupting a $20 trillion domestic industry for the first time ever.

george grombacher 1:44
Now, was it hard to be first did I have other people tried before,

Unknown Speaker 1:49
there’s a reason why it hadn’t been accomplished before, it was extremely difficult. It took for over four years of like building the infrastructure. And putting all the pieces together. There are a lot easier ways to make money quickly. So buying real estate is one of them.

george grombacher 2:08
Who Who did you have to deal with? I’m sure you have to deal with the SEC. But who else? Sec FINRA,

Unknown Speaker 2:15
commercial real estate owners, which is commercial real estate is the slowest moving industry out there. And then on the other side, we were dealing with financial services, which are the major banks, financial institutions, which are usually thought of as slow, but are actually even quicker than commercial real estate owners. So we were dealing with the government and then two very large, slow moving bodies that are not used to immediate change. So actually, COVID sort of threw a wrench in it for our benefit, sort of waking up all the industries and saying, Hey, maybe we should reevaluate and actually give us a large opening to sort of tap in and actually educate the market on something brand new. Nice.

george grombacher 2:56
So we talk a lot about for better for worse, NF Ts and tokenization. How is this similar? How is it different? Is it that?

Unknown Speaker 3:08
So actually, it’s really interesting, right? When you look at security tokens in NF Ts, so from a fundamental perspective, right, it’s a decentralized asset in some way, shape, or form. If it’s an NFT, it’s slightly more obscure, so I’ll stick with security tokens, but even our traditional assets, right, that are buy, sell and trade, they can also go on the blockchain. And we are incorporating that right now as we speak. But these are traditional securities fundamentally, or they are registered with the DTCC Q said to have a ticker symbol can be held in any brokerage account, but actually has the ability to sort of have cross functionality, and also enter the web three world that we are now currently living in, and it seems to be booming.

george grombacher 3:57
Yeah. So how did you pull this off? Is it that you’re extremely stubborn? Is it that you’re really really smart? Is it that you’re hard working? You’re just lucky.

Unknown Speaker 4:09
What is a little column? A, B, C, and? D? Absolutely. No, all of all of the factors come into play here. And I won’t give it up for later. But the little tip at the end on the difference maker is, I would say comes down to all of the categories you just named because very lucky and blessed to be here today.

george grombacher 4:34
In what, what, what is your background?

Unknown Speaker 4:37
My background is actually in real estate private equity. I also worked on Capitol Hill and public policy. So I guess I’m used to large institutions taking really long time to do anything. Yeah, a little little bit of everything. But my background actually was in real estate, private equity, structuring these deals, didn’t have the ability to invest directly since the a the minimums were very high. So I didn’t have that capital. and also be if I was going into a deal. It’s bad diversification to put all your eggs in one basket. So it’s more like, Okay, how do we have the largest asset class in the world, no public and liquid market, we’ve got these synthetic derivatives on derivatives yet we don’t have even traditional finance for something that should have existed 50 or 60, or 70 years ago. So it more started with like identifying a problem. And it was a personal problem being like, I want access, and I don’t have access, how do I get access?

george grombacher 5:32
So it’s super exciting. You’ve essentially made a new asset class and a $20 trillion asset class available to regular retail investor.

Unknown Speaker 5:42
Exactly, yep. And the nice thing is they are sitting side by side with the institutional owners and sponsors, it’s literally pro rata pursue. So it doesn’t get any more equal than that.

george grombacher 5:56
The headwinds that that you faced? So you, you’re putting this idea together, and then you go, and you’re talking to the financial services industry in the commercial real estate industry, and FINRA, and the SEC, did some people, do they want to keep this out? To protect access? Or, and or to some say, no, let’s, let’s let more in to bring more capital in.

Unknown Speaker 6:22
So I wouldn’t say that we’ve been excluded to keep capital out, I would say in the early days, there were the people who said it could never be done, which actually was a motivating factor. And being like, it absolutely can be, and we have the structure, and we know it is possible. So there’s a very short list of those people that I still keep. So But now, the exciting thing is actually we saw so much support in trying to make it come to fruition. And so that’s actually really what was motivating, is the ability to have access and sit down with the titans of industry, who knew that this should be the case and should be coming, and then having their support along the way?

george grombacher 7:03
Nice. All right. So how did you find the first building? How did you pick the one that you picked?

Unknown Speaker 7:10
The first asset that we actually took public is not the first asset we started with. Okay. So we went through talking about trials and tribulations, we had a real estate owner die on us that we were taking public, we went through truly everything going through test case after test case after test case. So if anything crazy could have happened, it definitely did. But the assets that we’re dealing with our core Core Plus stabilized cash flowing, so we take a D risk profile, right, we’re bringing a brand new asset class to the market. And so our biggest belief was trying to do risk as much as possible, just nothing goes completely sideways. And that’s been our approach and continues to be where it’s like we’re dealing with cashflow, turnover, flow, refinancing risk, at this point in time, it was really direct Eros de risk, because for everything else that’s out there, that could be a problem. We didn’t want the assets themselves to be the issues.

george grombacher 8:12
Got it. So not only dealing with these huge entities, you also dealt with life expectancy, and somebody actually died. Amazing.

Unknown Speaker 8:22
No, no. And he was a good friend. So

george grombacher 8:26
I obviously sorry to hear that. So all right. So the the deal that is now publicly traded walk us through, like how, how did you figure out how to value it and then how many shares to issue and how to price?

Unknown Speaker 8:45
Okay, so valuation is like traditional underwriting like you would do in an IPO or if you’re buying a building outright, where you have market comps, you have leases and the rent rolls and the net operating income. And in this case, right, we were dealing with Wells Fargo as an anchor tenant, and then to medical nursing offices above it. It was pretty straightforward, right? You get third party appraisals. Third party reports. We’re also partnered with Moody’s and race for third party data, alongside RCA alongside our other partnerships with NASDAQ and a whole bunch of other institutions as well. So the underwriting process is actually pretty simple and straightforward, where you’re underwriting to what could it be sold in the public market at any point in time to see if there was an outright sale. And at the same time pricing it in where it’s a good investment on the other side, from our perspective, and it’s saleable in the public markets. So all of that sort of came into account. We price all of our IPOs right around $250 This year, actually for liquidity purposes, where if the stock price it was ever to drop below 170 or $175. You can’t have a lit order book, which means it’s an open order book. It shows, bids and asks, not in just lots of 100, which is a full lot. But it’ll share, like the 25 share the five share. So it actually shows full liquidity and full depth of book at any point in time. And so going back to how many shares are in in single IPO, you take the total amount of equity that’s being recapped it out divided by that 250 number. And that’s your right, that’s your number of shares in any given IPO.

george grombacher 10:25
Got it. Nice. Okay. So what is the experience of of, of a would be investor, now that they’re traded on the secondary market, I go to my brokerage account,

Unknown Speaker 10:37
you go to your brokerage account, you pull up the ticker, type by you have placed an order it is then goes and sits right next to your Amazon, your Google your Berkshire Hathaway, or Coca Cola doesn’t matter. So it’s sitting right next to all your other stocks in your brokerage account? Because it essentially as it is a stock No, it absolutely is a stock. And that’s how it’s able to cross endeavor brokerage account is because these are actual real securities with ongoing reporting. And like there are requirements on their part to make sure that they’re healthy issuances. And right, you’re also under the auspices of the SEC and FINRA, so you the US government is also helping you out and protecting you along the way.

george grombacher 11:21
Nice. So each building is essentially its own company that has has gone public and its shares are now trading on the secondary market.

Unknown Speaker 11:30
Correct. And it’s a portion of the equity willing to take a portion of the equity public. So that’s a part of the equity is still privately held. And then some of it is public. So yeah, really fascinating.

george grombacher 11:43
So your your future is, is what

Unknown Speaker 11:51
to continue to build, build financial literacy education, really bring the best product to market that we can to allow people to create their own diverse diversified portfolios. And then after we dominate commercial real estate, we can bring liquidity to all the other illiquid asset classes out there as well. Let’s go. We’ll never be boring that I promise you, George always.

george grombacher 12:15
So as as, as you look at the shares from in the opportunity from a from an investor standpoint, do you consider this to be a play that’s similar to other real estate plays? Is it a growth play?

Unknown Speaker 12:35
So each asset is has its own individual profile? Right, given what the market is some might be higher cashflow, some might be your betting a more appreciation. I personally invest in every single deal in this is not investment advice. Like I personally believe in every single asset that we do. And it’s actually funny, I have both my brokerage account here at LAX and also in my like IRA account, which is over at like TD Ameritrade and Vanguard and fidelity. So I sort of spread them out all over. But it’s really, it. They all have different return profiles, different credit, credit ratings, and all of that is reflected in how the asset is priced what the cash and cash returns are, and really what the fundamentals of each asset is.

george grombacher 13:22
And I don’t you know, I probably should just be able to ask these questions, or ask the right questions. What, what has the volume Ben have of trading?

Unknown Speaker 13:32
Much higher than expected, actually. So we’ve seen more trading volume than you would actually expect, right? Real estate is not a highly volatile asset, also the ones we’re dealing with are, right, you’ve locked in long term leases, and long term debt. It’s not like the market changes. But we’re seeing active daily trading, where I mean, these assets will turn more than their entire float in a given year. Yeah, much higher than expected. So I’m not one to judge and there’s arbitrage always to be had in different markets. But it is fascinating.

george grombacher 14:11
Yeah, it’s always interesting when you expect one thing and the opposite happens. Yeah,

Unknown Speaker 14:15
definitely missed the mark. We thought less than 30% would ever turn in like a given year. Like we thought it would be lower and like 20%, but we’re seeing much higher numbers than to be expected.

george grombacher 14:27
Got it. Interesting. Well, Drew Teesta. People are ready for that difference making tip, what do you have for them?

Unknown Speaker 14:35
Well, first off, be friends with George, second. And most importantly, is to really always grind to never give up in right. Take the feedback that you’re getting as positive critiques and they’re not personal. And with that, you’re able to expand, grow, learn, and really walk into every single meeting and walk away from every single meeting. Like not feeling down out in like hard on yourself, or really have the ability to take the reflections away and grow from them. And if you can do that and sort of enjoy what you’re doing at any point in time, you will be successful. Like you can in some respects will it into existence, because you are continuing to learn, grow and build. And with that mindset, you can really accomplish almost anything.

george grombacher 15:28
Well, I think that is great stuff that definitely gets can be friends with George, number one, and grind. Will it into existence, keep learning, being able to take criticism, take input, if you always been able to do that?

Unknown Speaker 15:46
I have three brothers say yes. And two of them are much older than me. So

Unknown Speaker 15:55
yeah, the dynamic has always been there. Since it’s right, Darwin survival of the fittest.

george grombacher 16:03
Got it. Appreciate that. Thank you so much for coming on. Congratulations on on the success. I’m excited to see what’s coming next. How can people where can people learn more about you? How can they engage? And how can they invest with Lex?

Unknown Speaker 16:18
Yeah, so they can come and check us out at lex markets.com. Go look at all of our social pages as well. So Twitter, LinkedIn, Instagram, and also feel free to reach out directly to myself or any of the team members. We’re always happy to speak with you. And then also, if they want to just check it out. They can go to whatever brokerage account they have right now and also view it from the secondary markets perspective and look up the tickers and purchase into wherever they’re currently banking. In addition,

george grombacher 16:47
what is the ticker on the first one?

Unknown Speaker 16:50
So the one the New York acid is test Lu T s Liu, which stands for 286 Linux and then each one is a PGP which is a publicly traded partnership. And so it ends in the letter you

george grombacher 17:06
got it. Perfect. Well, if you enjoyed as much as I did show drew your appreciation and share today show the friend who also appreciates good ideas go to the lex markets.com. It’s le x markets.com. Check out everything that they’re working on into your favorite brokerage account, type in T S L au and check it out, see if it’s a good fit for what you’re working on. And we’ll see what’s happening next. Thanks Kendra. Appreciate it. Thank you so much, George. And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai

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