SYTE - Enterprise Diversified

[NBL0303]

I appreciate how difficult it is to run a micro-cap and I believe some of the most critical comments on CoBF about SYTE over the last few days were unwarranted. For a major change of strategic direction relating to a very large financial transaction, I personally was shocked at the initial 8-K and how it raised more questions than it answered. For a situation of this level of importance to the company, I would have expected an explanation and disclosure more akin to what Steve just put out. This statement is, I believe, what this situation requires and I commend Steve and everyone at SYTE for putting it out in relatively short order after the initial 8-K. I think perfection in such matters is impossible and I give Steve credit for realizing that more disclosure was required and providing it in short order.

[LC]

Well Steve I don't know you but Jeff has a special place in my investing heart. He had a series back in the day of trying to buy a retirement home and convert it into rentals. Like a 4 part series and it was just brilliant.

 

In general I'm sad to see you having failed in this venture - but kudos on the announcement and putting it out there publicly.

 

I was never a SYTE shareholder - just a spectator. But from my seat, I wish you the best with the asset management business. Would love to see this thread filled with good news!

[Hielko]

I appreciate the letter, good to provide a bit more of an explanation.

 

What I'm wondering though, why is SYTE so hell bent on being a SEC reporting company? I rarely think it makes sense for nanocap companies given the costs involved, and especially in this case since apparently the accounting overhead with running the real-estate operations were one of the big factors that made the thing not work.

[bizaro86]

I read the update, and my only comment is this:

 

On behalf of property owners everywhere, I want to thank Jeff for installing 1/4 turn ball valves on his plumbing shut-offs. I've replaced so many seized gate valves over the years (roughly all of the ones I own!) that hearing someone else with a practical bent to real estate makes me very happy. Plumbers love gate valves for reasons that make no sense to me, and I've had them installed in properties I own after I explicitly specified 1/4 turn ball valve (by plumbers that no longer do work for me). That type of attention to detail is key for small scale real estate investment. It costs an extra couple bucks, but it is basically guaranteed to save a $100 service call within the next 10 years. And once in awhile it will save a $10,000 flood issue when something is leaking and the crappy gate valve can't be closed. I doubt that level of attention to detail is available from an outsourced property management firm, but I sincerely wish this company the best.

 

[ragnarisapirate]

I read the update, and my only comment is this:

 

On behalf of property owners everywhere, I want to thank Jeff for installing 1/4 turn ball valves on his plumbing shut-offs. I've replaced so many seized gate valves over the years (roughly all of the ones I own!) that hearing someone else with a practical bent to real estate makes me very happy. Plumbers love gate valves for reasons that make no sense to me, and I've had them installed in properties I own after I explicitly specified 1/4 turn ball valve (by plumbers that no longer do work for me). That type of attention to detail is key for small scale real estate investment. It costs an extra couple bucks, but it is basically guaranteed to save a $100 service call within the next 10 years. And once in awhile it will save a $10,000 flood issue when something is leaking and the crappy gate valve can't be closed. I doubt that level of attention to detail is available from an outsourced property management firm, but I sincerely wish this company the best.

 

Thank you. That comment made my evening! It also guarantees that a floor joist won’t rot out when the gate valves in a washer box go bad and the tenants don’t tell you about it. Prolly because they can’t see the problem that’s occupant behind their washer, wall, and floor.

 

I’m even crazy about the specific type of wire nuts our electricians use, and how they install them. Seen too many melt off electrical connections before!

[bizaro86]

I read the update, and my only comment is this:

 

On behalf of property owners everywhere, I want to thank Jeff for installing 1/4 turn ball valves on his plumbing shut-offs. I've replaced so many seized gate valves over the years (roughly all of the ones I own!) that hearing someone else with a practical bent to real estate makes me very happy. Plumbers love gate valves for reasons that make no sense to me, and I've had them installed in properties I own after I explicitly specified 1/4 turn ball valve (by plumbers that no longer do work for me). That type of attention to detail is key for small scale real estate investment. It costs an extra couple bucks, but it is basically guaranteed to save a $100 service call within the next 10 years. And once in awhile it will save a $10,000 flood issue when something is leaking and the crappy gate valve can't be closed. I doubt that level of attention to detail is available from an outsourced property management firm, but I sincerely wish this company the best.

 

Thank you. That comment made my evening! It also guarantees that a floor joist won’t rot out when the gate valves in a washer box go bad and the tenants don’t tell you about it. Prolly because they can’t see the problem that’s occupant behind their washer, wall, and floor.

 

I’m even crazy about the specific type of wire nuts our electricians use, and how they install them. Seen too many melt off electrical connections before!

 

Glad that made you grin, as I was definitely grinning when I read that in your letter. Those valves are one of my number one pet peeves in life.

 

I agree you can't reasonably expect tenants to keep an eye on things, so installing the low-failure version definitely makes sense.

[matts]

I appreciate the full update from Steve. I bet going forward they will take this approach. Lesson learned.

 

I'm a bit confused about why the accounting burden is so much heavier as an SEC reporting entity. Mt Melrose has to do all the same tedious accounting work (many small purchases, depreciation schedules) to file its taxes no? They might only have to do it once a year, all at once, but is that really an improvement over doing it on an ongoing basis? It's still the same number of invoices for screws and bolts.

 

Any accountants around that could enlighten me?

 

[Tim Eriksen]

I appreciate the full update from Steve. I bet going forward they will take this approach. Lesson learned.

 

I'm a bit confused about why the accounting burden is so much heavier as an SEC reporting entity. Mt Melrose has to do all the same tedious accounting work (many small purchases, depreciation schedules) to file its taxes no? They might only have to do it once a year, all at once, but is that really an improvement over doing it on an ongoing basis? It's still the same number of invoices for screws and bolts.

 

Any accountants around that could enlighten me?

 

The comparison is to if everything was sub-contracted where Mt Melrose gets a single invoice per job and the sub buys all these things.

 

To do all or most of it in house results in a multitude of invoices, vehicles that have depreciation, inventory that must be audited for shrinkage, excess & obsolescence, utility bills, etc.  Segregation of duties means one person can't handle it all or you have a material weakness.  So you need one person to write up a purchase order, a different person to approve it.  One person to make the journal entry and someone else to approve and sign the check. 

 

Tax accounting has depreciation, but not the same as GAAP which has to be audited.  No segregation of duties is necessary if not audited.

[matts]

I appreciate the full update from Steve. I bet going forward they will take this approach. Lesson learned.

 

I'm a bit confused about why the accounting burden is so much heavier as an SEC reporting entity. Mt Melrose has to do all the same tedious accounting work (many small purchases, depreciation schedules) to file its taxes no? They might only have to do it once a year, all at once, but is that really an improvement over doing it on an ongoing basis? It's still the same number of invoices for screws and bolts.

 

Any accountants around that could enlighten me?

 

The comparison is to if everything was sub-contracted where Mt Melrose gets a single invoice per job and the sub buys all these things.

 

To do all or most of it in house results in a multitude of invoices, vehicles that have depreciation, inventory that must be audited for shrinkage, excess & obsolescence, utility bills, etc.  Segregation of duties means one person can't handle it all or you have a material weakness.  So you need one person to write up a purchase order, a different person to approve it.  One person to make the journal entry and someone else to approve and sign the check. 

 

Tax accounting has depreciation, but not the same as GAAP which has to be audited.  No segregation of duties is necessary if not audited.

 

So there are 2 different comparisons here that I don't want to mix up.

 

1) Jeff seems to imply that the accounting burden got much worse when mt melrose became part of ENDI. That was the focus of my question, independent of an external manager. And yes ok, so a second person has to sign off, what else? because that doesn't sound like a dealbreaker.

 

2) There is less accounting if you just outsource management. Makes perfect sense. But the manager now has to do all the shitty work and that would factor into what he charges ENDI. So are you really saving that much? Yes, the manager might have some scale efficiency but since it's just the nature of the industry to have a million different accounting entries I don't see how those costs won't get expensed to ENDI, one way or another.

 

If someone can convince me in 1) that accounting for a private property manager is FAR easier than a public one, then I'll be more inclined to concede on 2).

 

 

[ragnarisapirate]

I appreciate the full update from Steve. I bet going forward they will take this approach. Lesson learned.

 

I'm a bit confused about why the accounting burden is so much heavier as an SEC reporting entity. Mt Melrose has to do all the same tedious accounting work (many small purchases, depreciation schedules) to file its taxes no? They might only have to do it once a year, all at once, but is that really an improvement over doing it on an ongoing basis? It's still the same number of invoices for screws and bolts.

 

Any accountants around that could enlighten me?

 

The comparison is to if everything was sub-contracted where Mt Melrose gets a single invoice per job and the sub buys all these things.

 

To do all or most of it in house results in a multitude of invoices, vehicles that have depreciation, inventory that must be audited for shrinkage, excess & obsolescence, utility bills, etc.  Segregation of duties means one person can't handle it all or you have a material weakness.  So you need one person to write up a purchase order, a different person to approve it.  One person to make the journal entry and someone else to approve and sign the check. 

 

Tax accounting has depreciation, but not the same as GAAP which has to be audited.  No segregation of duties is necessary if not audited.

 

So there are 2 different comparisons here that I don't want to mix up.

 

1) Jeff seems to imply that the accounting burden got much worse when mt melrose became part of ENDI. That was the focus of my question, independent of an external manager. And yes ok, so a second person has to sign off, what else? because that doesn't sound like a dealbreaker.

 

2) There is less accounting if you just outsource management. Makes perfect sense. But the manager now has to do all the shitty work and that would factor into what he charges ENDI. So are you really saving that much? Yes, the manager might have some scale efficiency but since it's just the nature of the industry to have a million different accounting entries I don't see how those costs won't get expensed to ENDI, one way or another.

 

If someone can convince me in 1) that accounting for a private property manager is FAR easier than a public one, then I'll be more inclined to concede on 2).

 

Let me give an example from our onboarding audit earlier in the year:

 

We were needing to give documentation of our historic revenue. Fine. I get that. You want to verify stuff. I support that, and think it’s a good thing.

 

We gave our quickbooks/appfolio records for documentation... Not enough.

 

We then gave our bank deposit slips... Not enough- they needed to see a breakdown of every property’s rent, on the deposit slips.

 

We then referenced the quickbooks/appfolio files, that had both the rent amounts, and the serial numbers on the money orders... Not enough.

 

We reconciled these records to ensure that they MATCHED THE DEPOSIT SLIPS. Not enough.

 

I offered my tax returns, you know, because me lying about revenue on there, would do a good job of getting me in jail. SURELY, that, with the records we had (keep in mind SERIAL NUMBERS OF EVERY MONEY ORDER, and documentation where all those numbers reconciled with our bank deposit slips...

 

Nope.

 

We had to get our bank to go through THEIR deposit records, and print off a photo copy of EVERY rent money order (I stopped taking checks years ago because of them bouncing) that we had received during the period being audited... I had to call in a favor to get it done under the time that we had to get it done in. When I picked the copies of what I am guessing was in the thousands of money order photocopies, I hugged my banker because he’d done us such a solid.

 

This occurred... I want to say within the last 5 days of our deadline for the audit to be finalized, and 2 of those days were on the weekend. That monday may have been a holiday too. Can’t remember. What I do remember is this: It was stressful as hell, Jenn worked literally til 3 AM several times, Marie (her assistant) was booked like crazy, and there were others that were helping as well. I was pissed off because of the absurdity of it, and we almost didn’t get a clean audit opinion because of something that was pretty stupid in my mind. That said, I get it. People need to have faith in the capital markets.

 

_______

 

And no, the manager doesn’t have to do all the work that we did in terms of bookkeeping. They literally send a statement. It could consist of whatever they want it to, and be pretty simple. When audited, that’s pretty cut and dry for corporate. The auditors don’t go through and audit the records of your property manager... what could take them 15 minutes to do could have taken us an hour, just to cover all our bases.

 

Monthly reporting for corporate also becomes easier with a manager. Re-read what I said about the cutoff dates in our software. If a tenant made a payment on their late rent, that could really throw things off, and would require adjustments to be made, and took time to figure out exactly where problems were happening.

 

This was not insignificant...

 

Also, a lot of the various entries that were so time consuming were from the FIX UP operations. NOT the rental ones. At one point, we had more than 30 active house renovations going on. Once our stuff was rented, our maintenance expenses were generally pretty low because of how we went about fixing the houses.

 

As Steve and I said, this make so much more sense in the way that it will be, going forward. Both in terms of the public entity, and me doing stuff privately. A fund setup makes sense as well.

[Spekulatius]

QuickBooks is not going to cut it for accounting /tracking when you are a public enterprise. I am no expert on this, but there is a reason why companies employ accountants Larger ones run ERP systems that integrate several functions and you have independent  auditors and internal controllers poking around stuff. It’s a whole different league to run the same outfit in a public company vs private.

[Guest Schwab711]

I appreciate the full update from Steve. I bet going forward they will take this approach. Lesson learned.

 

I'm a bit confused about why the accounting burden is so much heavier as an SEC reporting entity. Mt Melrose has to do all the same tedious accounting work (many small purchases, depreciation schedules) to file its taxes no? They might only have to do it once a year, all at once, but is that really an improvement over doing it on an ongoing basis? It's still the same number of invoices for screws and bolts.

 

Any accountants around that could enlighten me?

 

The short answer is the management company isn't audited so they don't have these expenses

[maybe4less]

A fund setup makes sense as well.

 

Does this mean you are contemplating an RE fund?

[Sunrider]

Spot on. This was my earlier point, an external manager seeks to collect his/her fees with the least amount of effort and just passes along costs ... show me the incentives ...!

 

 

I read the update, and my only comment is this:

 

On behalf of property owners everywhere, I want to thank Jeff for installing 1/4 turn ball valves on his plumbing shut-offs. I've replaced so many seized gate valves over the years (roughly all of the ones I own!) that hearing someone else with a practical bent to real estate makes me very happy. Plumbers love gate valves for reasons that make no sense to me, and I've had them installed in properties I own after I explicitly specified 1/4 turn ball valve (by plumbers that no longer do work for me). That type of attention to detail is key for small scale real estate investment. It costs an extra couple bucks, but it is basically guaranteed to save a $100 service call within the next 10 years. And once in awhile it will save a $10,000 flood issue when something is leaking and the crappy gate valve can't be closed. I doubt that level of attention to detail is available from an outsourced property management firm, but I sincerely wish this company the best.

[LowIQinvestor]

I'm behind the curve on SYTE so I might have missed this but:

reading all the comments/concerns on costs of running a tiny publicly traded SEC reporting company, why is/should SYTE be a public co.

 

Why deal with these headaches? Not convinced that capital raising is easier with a thinly traded OTC co.

[fishwithwings]

Why didn't Jeff just create a new LLC with him as CEO to manage the properties?  Seems like that would have been a better alternative than outsourcing the management to a random third party who doesn't know the properties as intimately as Jeff.

[rkbabang]

Why didn't Jeff just create a new LLC with him as CEO to manage the properties?  Seems like that would have been a better alternative than outsourcing the management to a random third party who doesn't know the properties as intimately as Jeff.

 

+1, I'd feel a lot better about all of this with Ragnar Property Management, LLC taking care of the properties.

 

[matts]

Pirate Property Partners .

 

Jeff, give me a ring and we can talk about a licensing agreement :)

 

[sarganaga]

I'm behind the curve on SYTE so I might have missed this but:

reading all the comments/concerns on costs of running a tiny publicly traded SEC reporting company, why is/should SYTE be a public co.

 

Why deal with these headaches? Not convinced that capital raising is easier with a thinly traded OTC co.

 

It may be management's sugar plum dreams of creating the next Berkshire Hathaway.

[Guest roark33]

Just think of the value invested in Willow Oak.  What is the best vehicle to make this investment for now and in the future.  Is it through a public company?  I promise you, it is not.  The same mistake that was made by creating a real estate vehicle in a public company entity will eventually be realized when it comes to Willow Oak.  It should be done through a private LLC/S-Corp.  The only difference is that Jeff has realized this quicker than the others and got out. 

[valueyoda]

It is hard to grow a hedge fund beyond a certain size (e.g. $50mln) nowadays. Smaller hedge funds can be lucrative for their operators when they keep costs down and perform well. However, it is hard for these revenue sharing agreements to add substantial value to SYTE beyond the ongoing operating expenses, especially if both funds' sizes remain moderately small or if these funds have a period of below average performance.

[Guest roark33]

The real point isn't how big any of the funds in Willow Oak become, the real point is that the capital investment should not be made through Syte or ENDI.  It's a poor structure, and that will become clear over time. 

[Broeb22]

The real point isn't how big any of the funds in Willow Oak become, the real point is that the capital investment should not be made through Syte or ENDI.  It's a poor structure, and that will become clear over time.

 

Roark, can you elaborate?

[Spekulatius]

The real point isn't how big any of the funds in Willow Oak become, the real point is that the capital investment should not be made through Syte or ENDI.  It's a poor structure, and that will become clear over time.

 

Roark, can you elaborate?

Taxation and corporate overhead would be my guess. If you like Willow Oak, just invest in the funds as a limited partner.

[oddballstocks]

This is basically a FoF as a C-Corp instead of an LLC/S.

 

I guess the thesis is if you invest you only get your return after fees.  Whereas if you invest in the top level entity you get most of your return because some of the fee revenue is paid back as income.

 

 

I guess this could make sense if they had a lot of funds.  Asset managers are extremely valuable, look at the big ones, Fidelity, BlackRock etc. But you need a lot of scale.