A word with Lee Gientke about real estate capital

Lee Gientke is the managing partner at Pontifex Capital, a Boise firm that develops and manages real estate and serves as a real estate-focused private equity firm.

Geintke was a history major at the University of California, Santa Barbara, where he founded the College Republicans and pondered a career in politics. He participated in the management of some local political campaigns before deciding that the low-paying and high-travel life of a political consultant wasn’t for him, and he turned to marketing.

After doing online marketing for a vitamin company in Santa Barbara, he was recruited by a mortgage lead generation firm called Lead Point, a job that ended abruptly in 2008 as the real estate market collapsed. From there, Gientke moved to a friend’s company in Salt Lake City called Orange Soda, where he helped purchase online advertising from companies like MSN.com. He also acquired some partners and started building a real estate portfolio in that city.

Gientke moved to Boise for family reasons in 2015 and started his company from home. This year, he moved into an office at the Owyhee Building, where he says Pontifex is doing business in the “low eight figures.” He spent some time talking to IBR about the real estate business and the Boise market. The interview has been edited for length and clarity.

How is the financing you do for homebuilders different from what banks do?

Coming out of the Great Recession, because of Dodd-Frank and other governmental regulations, a lot of builders had their access to traditional capital sources, to banks, shut off. A lot of midsize builders throughout the Treasure Valley spend an inordinate amount of time sourcing capital to build homes. I believe a lot of the housing issues we face today are capital-related, because it’s so hard for a lot of these builders to find money.

Unless you have a pristine balance sheet and cash flows, a lot of the banks won’t lend to you. If you’re a good mid-size builder and had a credit challenge coming out of 2008, you’re not going to be bankable, so you need to find private money.

We have a variety of networks that give us access to institutional money on the coasts. We help supply those funds.

What did you learn when you entered the real estate market in Salt Lake City?

When I started and flipped a couple of homes, I realized, ‘OK, I can do this.’ I bought as much property as I had savings and credit for. I figured out what a lot of major developers do: It’s all about partners. Most developers don’t put a lot of their money into a deal, but they organize the deal. With partners, we went out and bought a 45,000-square-foot light industrial building, we bought a 15,000-square-foot medical office building, and we started condominiumizing. I started to sell pieces, and bought another multi-family building with partners, and flipped that medical office building… at that point, I figured out that this was working for me, and I could have a career in real estate.

What did you like about it?

I loved working with the people, and the different personalities involved in the real estate transaction. I liked the creativity of structuring a deal. There are a thousand ways to cut it up: Somebody can provide the equity, somebody else can provide the debt, someone else can manage the deal. How it goes down is interesting. Deciding what you do with a piece of land is also interesting.

Boise has apparently been discovered. It’s not overvalued?

There is value to be found in every market. There are deals to be found in every market. It may be fairly valued at this point, but given the way we are growing, over the long term we’re absolutely not overvalued. Particularly what we’re seeing here is a lot of early family office money moving into town.

Those guys are very sophisticated investors. You’ll hear a lot of these guys saying we’d rather be early and overpay slightly. The minute southwestern Idaho hits a million people, the institutional money is going to move to town and you’ll see valuations rise. They’ll buy your standard commercial stuff, multifamily – they’ll buy anything. Their baseline investment parameters frequently start at, ‘Does the MSA (Metropolitan Statistical Area) have a million people?’

Because we’re just shy of that now, a lot of the institutional managers won’t even come here. They see the growth, they see what’s coming, but their investment rules don’t allow them to come unless there are a million people or more here.

That’s why you see the family office money here now. It’s quasi-institutional; it’s just as sophisticated as the institutions, but they have a lot more flexibility. We saw that with the purchase of BoDo. That family will deploy tens of millions of dollars into the market.

What’s ahead for your company?

Our focus over the next 18 to 24 months is growing a debt fund. We’re actively working with accredited investors and institutions throughout the country to provide more capital into the Treasure Valley. I’m looking for people with money, and people who need money.

And what’s ahead for the Treasure Valley?

My sense is that we have 18 to 24 months left of this, and I think we’ll get a 10 to 15 percent correction on real estate values. Our biggest challenge is affordability. The average Treasure Valley resident is priced out of being able to buy a home.

We are utterly dependent on outside money, on people moving in from Seattle or the I-5 corridor to buy the homes we’re building.

We need to develop a wide variety of housing stock, not just homes that are on the higher end of the market. That’s a nationwide trend. To have a healthy economy and a healthy society, we need everybody, from the person who checked you out at the grocery store to a CEO of a Fortune 500 company. If we’re not building homes for that variety of people, people who can’t afford it are going to move away, and that creates greater problems for our economy.

I care about people having a place to live. I care about having a healthy economy, and I care about having a wide variety and diversity of people who live in the Treasure Valley.

What’s the solution?

I don’t think we need the Robin Hood subsidies approach to building more affordable housing here. It could be addressed through different policy initiatives, making it easier to build, allowing ADUs, relaxing some of the regulations that are involved with building more housing. Once we exhaust that, we can start looking at subsidies and tax credits and all that.

I don’t think the Treasure Valley has exhausted ways of building affordable housing. With the free market, builders and developers are allowed to be creative. If you drive around Portland and Seattle, you see a number of pocket neighborhoods where they put nine units on a quarter-acre. The houses are 1,600 square feet or even half that size. People love that kind of housing, and we have a historical precedent for it. But we need from a policy standpoint to embrace that.

There’s a fair amount of NIMBYism in the people who run the neighborhood associations.

And another issue is we need a local option tax so in certain regions we can do things that are called for and are beneficial. For a state that calls itself conservative, we sure have a lot of government, and it sure doesn’t like giving control to a lot of the people. Think about all the layers of government we have.

If we’re really going to be a conservative state and have conservative principles, the foundation of conservative principles is personal freedom and personal choice. If a city wants to ban or change something, and the citizens vote on that, that should be their prerogative.