The Real Estate Dish: 20 Minutes with David Caveness of Carpenter Realtors
Join QuantumDigital’s EVP and CMO Eric Cosway as he gets the latest dish on real estate trends and technology with David Caveness, president and CEO of Carpenter Realtors®. For over 50 years, Carpenter has helped Indiana families buy and sell homes. As the state’s largest real estate firm, Carpenter has 33 locations throughout central and southern Indiana.
Eric: Dave, welcome to the podcast.
David: Eric, it’s my pleasure. It's always a treat to talk to you.
Eric: Well, thank you very much. I wonder if you can give our listeners a little bit of background about your current role as president and CEO of Carpenter, Realtors?
David: Well, I think you just did. I am the president, and I am the chief executive officer of Carpenter, Realtors. I got named that when I realized I had more shares in the company than anyone else. And so I called a shareholders meeting, and we had an election. And I won.
Eric: And you exercised your right as a majority shareholder.
David: I won the election, so that was very exciting.
Eric: You have a unique model. I’ve always been intrigued by the model you have—an equity ownership model, which is great for your employees, and creates a really strong retention. Can you give me a little more insights about your equity?
David: Our company is really two companies. The operating company, we call that “Carpenter Company, Inc.” doing business as Carpenter, Realtors. That’s the operating company. The other is what we call the property company or “Carpenter Properties, Inc.” And, 20-plus years ago, probably 23 years ago now, we knew we needed a succession plan. We had a sole owner at the time, Tom Prall, a genius in real estate, and he wanted to share the benefits of ownership; pride and benefits of ownership with as many of us as he could, and at the same time, create a succession plan. And at that point, all of our properties—at that time, we probably had eight or ten branches, and we owned those in the operating company itself. And so the first step was to spin the real estate out of the operating company, frankly [for two reasons]: First, to reduce the cost of buying shares in the operating company, and secondly, so that we could create another entity, the property company, that we could touch more of our employees—more of our managers and department support people. And so it was brilliant, absolutely brilliant on his part. And we engaged a law firm, and struggled with them because, frankly, at the time, Eric, most of their succession planning involved maximizing the takeout for the current owner. Tom wasn’t looking for that. He’s a man of modest… like, he used to say, “I’ve got the same wife and the same house for the last 50 years. And I’ve got a car that runs. I don’t need anything else.” And so, he did fine. Don’t worry about him. But, he had to convince the attorneys that the mission wasn’t to maximize, but it was to create a legacy that would allow the enterprise to survive for decades and decades, and hundreds—you know, in theory—hundreds of years.
Eric: So, the ownership revolves around the property that the non-operating company has, and the stock that employees have is against those assets, correct?
David: Yes. So, it’s only on the property. And the rationale is interesting, because real estate—by the way, we’re the only tenant, and currently we have 20; I think it’s now 25 or 26 buildings, we have somebody else that keeps track of that for me, obviously—and that rent is paid by the operating company on long-term leases. They’re all the same. They have escalation clauses, modest escalation clauses. So, the rent structure is favorable to the tenant, and at the same time, with a true “net-net-net” lease on each of these buildings, the landlord has absolutely no expenses, except making the relatively modest mortgage payments to the bank each month. There’s no maintenance, there’s no insurance, there’s no property taxes. There’s nothing other than interest and principal paydown. And so, that allows us to create a very consistent income stream for the shareholders. Because some of these people, they’re not necessarily sophisticated investors at all. And they hold the shares, Eric, until their death.
Eric: Help me understand, the buildings are evaluated every year, so the share prices get adjusted?
David: No, the values of the shares. This is interesting, it’s brilliant, he’s just a brilliant guy… the shares have nothing to do with the value of the real estate at all. At all. The values of the shares are tied in a formula. So, the rent income, and the mortgage balance, and the free cash flow. So, what you’re doing is really valuing the free cash flow. And so, you don’t have to worry about appraisals. You don’t have to worry about anything. The bank that we work with doesn’t worry about the value of the buildings that they loan against, because we’ve got 25 or 26 buildings in the portfolio and we only have mortgages against 11 of them.
Eric: It sounds like the beauty of that model is for the employees, who are part of that program, they’re getting another monthly annuity. Correct?
David:They get it semi-annual. Twice a year, they get a semi-annual payment, which is, for somebody owning, in this particular case, we started out with 100,000 shares. We’ve added buildings, by the way. This funds the growth of our company. Now, we have 34 locations. And, as I said, we started out with 6 or 8 buildings in the original. Now, we have 25 buildings, soon to have 26, we have one under construction. And those buildings, the entity, funds the purchase of the new buildings.
Eric: For you, buildings in real estate is extremely important. There’s a wave of consolidation and getting out of buildings. But your model is based on that, having brick and mortar.
David: We are brick and mortar. We’re committed to it. The world is saying “Oh, it’s virtual… blah, blah, blah.” And I disagree 180%. I’m the absolute opposite direction. We’re committed to our buildings. They all are built with the exact same brick, the same trim, the same floor coverings, the same interior paints. You know, we have a template. We do refresh our buildings from time to time. That’s all paid for by the tenant, by the way—the maintenance of those buildings. So, over time, we’ve got a building under construction; it’ll come in about $700,000 with the lot and all the improvements. Carpenter Properties will buy it with cash, or they will just simply go to the bank, and the bank will say, “Great. We’ll just take you up $700,000 in your balance, no problem.” No new appraisals, no nothing, because it’s still on the same 11 buildings. Plenty of equity. Our loan-to-value is about 20-some odd percent, and so that leverages us up. It allows a higher… more rent. And more distribution for our shareholders, semi-annually. And so, if somebody’s got about 2 or 3 or 4 thousand shares—and we’ve got clerical support people that have thousands of shares—this can generate 10, 12, 15 thousand dollars a year, and growing, for the rest of their lives.
Eric: What a smart retention strategy. I was going to say, “Why would someone leave the company?” That’s a beautiful retention strategy.
David: People are emotional creatures, and so they may get unhappy on a given day, or a week, or they feel mistreated. They go home and share it with their spouse, and their spouse says, “Yeah, but can we keep our CPI stock if you leave?” And the answer is no. Their stock is automatically sold—they don’t even have to sign a document—it’s automatically sold if they’re terminated, unless they are 65 years old, and are terminated because they are retiring, and they don’t take another job with a competitor, or they don’t take another job where they work more than 10 hours a week. So, they can work at the local hospital as a volunteer, they can do whatever they want. But, they can’t work for a competitor after they’re 65, and they can’t be gainfully employed. If they “retire” retire, they can sell real estate for us—they’re allowed under the shareholder agreement to do that—it’s just brilliant, frankly.
Eric: Well, it is. And are all the employees eligible to get in the program? Or, how is that set up?
David: Each of our managers at every level, department managers, and then department support people—accounting, relocation, advertising—many of them are invited into it. Our lowest level entry employees are not, i.e. maybe a receptionist or something like that. But, the rest of them are.
Eric: Wow. What a bright model. So, of all the folks I’ve spoken to in real estate, this sounds very unique. I don’t think I’ve ever talked to another brokerage that has this model. Would that be accurate?
David: It’s so simple, and it’s so real estate, it would be surprising. It’s brilliant, and we’re 21 years into this. We’ve had deaths of shareholders, we’ve had termination of shareholders, that happens in businesses over 20 years, and it’s flowed so far—knock on wood—it’s flowed beautifully. [In] our shareholder meetings, we do a lot of laughing, we cover the numbers, and we dismiss. And we hold a shareholder meeting once a year. And the board of directors, twice a year, is they approve the new, and the formula price, by the way, adjusts up or down. But for the last 21 years, it adjusts up every six months.
Eric: Well, that’s a really smart model. So, it sounds like Tom knew that he was doing back then, and I can bet that was he one of your mentors when you first started off in the company?
David: Oh, he was. He’s the one that brought me to Carpenter 31 years ago. He was a unique individual. Still is a unique individual. He does not follow the trends. He follows his own analysis, his own thinking. Very observant. Had a photographic memory of people, faces and numbers, which made my life rather—for the years that I worked under him, you know I was a virtual emotional and mental wreck, because he would ask me, “How about this? How about that?” and I’m general manager for all these offices, and all the stuff going on, and I don’t know.
Eric: You’d have to have those facts and figures top of mind. Exactly.
David: I tried to be on the other end of the phone talking to him, not sitting in his office. I was much smarter on the other end of the phone, where I could have all these figures and everything in front of me, rather than sitting across from him. He didn’t tolerate that very well.
Eric: Your styles are very different, obviously, and he ran the company for a long time. Was there a transition when you came into the business, as CEO and president, and the culture had to get used to that style? Or was it just a natural fit?
David: Well, I didn’t come in in that position. Our company is divided into five. When I first joined, we didn’t have that in place. I told him I did not want to come to his company and not have an ownership position, or the opportunity to have an ownership position. He said, “I’ll take care, I’ll do that.” Now, most people say something and you, you know, you’re not sure that’s going to happen. When Tom would say he’s going to do something, it always happened. That’s just the kind of person he was, well known for that.
Eric: Straight shooter.
David: Very. Like a sniper. We were here a few years. We had to figure out how we were going to do it—move the property out of the operating company. And so, began acquiring shares of our operating company once the property was out. And we had a formula for that. The formula was based on the lowest valuation, frankly, that the Internal Revenue Service—I didn’t understand what was happening, but I was sitting in the meetings—that they would allow us to value this asset called Carpenter Company. And, very interesting, why would he push it low? First of all, he had plenty of money. But it would allow myself and the others, who were allowed to purchase into that, to buy into this thing, and eventually glom onto, over time—I mean, this was 15 years, 16 years, 17 years of acquiring shares, good times and bad—and eventually getting to the point where I was heir apparent at a certain point there, and so I was allowed to acquire more shares, faster. And, along with this, there’s ten of us now that are shareholders. Each of our department heads. Each of the people—marketing, advertising, training, relocation, accounting—those people are all partners automatically, IT, they’re all partners. Had the opportunity to buy shares, some more than others. And we have five regional managers, and those people are allowed to acquire shares faster.
Eric: Got it. Accelerated buying, okay.
David: Yeah, because they’re in sales management. And, as anybody listening to this knows, or should know, sales management is harder than accounting, or advertising, or training, or relocation. And it’s more important than any of those others. And so, I came out of the sales management, and my heir apparent—and we’re down to a handful of people, small handful—vying to be that person. And it’s nice to have choices. And we’ll have choices. I feel nicely. They always ask me how I’m feeling. It sounds so nice, but it’s very self-serving on their part. They’re anxious to move up the ladder, so to speak. So, we’ve got choices and we’re grooming. You’ve met several of our regional managers, and one of those people are going to be my heir apparent at some point in the future. Undisclosed.
Eric: Oh, no question. I think you’ll be doing this for a while. So, let’s look back at your career. You’ve got, obviously, a long career. You’re a senior exec. Has there been one experience that’s really helped you and tailored the way you lead, and your style? Is there one challenging formative experience that you kind of look back on and go “Holy wow! That really helped me.”
David: At the age of 16, I knew I wanted to be in real estate. And my family wasn’t in real estate. I didn’t know a single realtor. I knew I wanted to be in real estate. I went to the University of Denver at the Daniels School of Business and majored in real estate. And I’ve been in real estate since 1970, as a freshman at the University of Denver. Got my degree. I was a terribly shy person.
Eric: You’ve got to be kidding. Really? You were?
David: Well, I mean, yeah. And you said, “What was formative?” My first job out of the University of Denver was 1975. It was a recession. It was a pretty deep real estate recession, and the opportunities for somebody like myself were… frankly, they were non-existent. I went to work for a new organization called the Montana Realtors Education Foundation, part of the Montana Realtors. Montana Association of Realtors had formed a 401(c), actually, my first job was to form the 401(c)(3), and begin raising money so I could pay my salary.
Eric: Oh, that’s interesting. Okay.
David: Yeah. And then we began doing to GRI programs, and offering, continuing it across the state of Montana, which is the third largest—you’ve got Alaska, Texas, and then Montana—but one of the least populated states. It was quite the challenge. And I quickly realized I had to come out of my shell a little bit, and I had to get after it. Otherwise, I wasn’t going to eat. And I was newly married, and so I had the privilege of spending a lot of time with some of the greatest real estate instructors. We brought them to Montana. And they wanted to come see the Big Sky Country. I got to spend—because you spend a lot of time in cars in Montana, driving—I got to spend time with some of the great trainers of the day, back in the 70s, late 70s. And talking to them, and watching them in the classroom, talking to them about how they were so good sitting up there for six or eight hours, you know. And, I just learned from them.
Eric: Was there one takeaway? Was there one “a-ha” moment when you heard these trainers in action, and you thought “I need to apply this?”
David: No, they just said, “Just animate yourself. Animate yourself. And, unless you’re threatened somebody’s going to hit you, it doesn't really matter. Be yourself. They are not going to hit you.” And I remember it was one guy—it could have been Mike Ferry, said “But if they hit you and have assets, you get to jump ahead. Because then you can take their money, if they actually strike you.” So, I’ve always remembered that, and I don’t really care.
Eric: No, I understand that. Yeah.
David: Once you don’t. For a guy like you, it’s natural. The rest of us, we have to learn it.
Eric: Well, you don’t know me that well, I guess. I was going to ask you, as we come to a close here, you’ve been doing real estate a long time. What are some of your personal passions outside of business?
David: I’m heavily involved personally. And, in fact, this Sunday I’m kind of keynoting a function for the Gennesaret Free Clinic. It started in a closet, in a lighthouse mission, by Dr. James Trippy. And he was a cardiologist who was down, as I was, down there serving meals at the lighthouse mission. People say, “Isn’t that nice of you to do that.” No, it wasn’t. Purely selfish. Once a month, you get a reminder how lucky you are. You’re there serving meals to these homeless people, and you’re sitting there going, “Boy, but for the grace of God, there go I.” And so, he brought it to my attention that he was opening a little clinic down there, and wanted to know if we would be interested in maybe supporting—he was looking for a hundred bucks, you know, fifty bucks, a hundred buck, a thousand bucks—you know, maybe something more from the company. We got so excited about that, we’ve been with them for almost 30 years. Now, it’s huge. They have six clinics, they have recovery houses. It’s big. And we’ve been there every day. And, we’re on the board of directors. We have dozens of our people volunteer at the different clinics. And we are their single largest fundraiser. And we raise money for them—big money—every year. We’ve raised about a million and a quarter dollars, and that’s pretty good for real estate.
Eric: Yeah, and I think I actually read something, you were recognized by RISMedia in 2017 for that, were you not?
David: Oh, yeah. That was so huge. We were so proud.
Eric: Well, you know what, you’re a smart guy. You’ve come out of your shell. I see that now. You’re no longer the little timid individual that once began a career.
David: But, when I go home, Eric, I have to be back to that person. The real me.
Eric: Yeah. It’s the same as me. David, I’d like to thank you very much for your time today. It’s been fun, it’s been a pleasure, and a really interesting model, the whole equity ownership model. I hadn’t heard of that before, and thanks for taking us inside that.
David: Eric, thanks for the opportunity to share.
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