Investments are not limited to real estate. You can also venture out to other opportunities. Right now, with everyone cooped up in front of their televisions, one of the sectors that is interesting is film. In this episode, Chris Larsen brings over someone who can give you a great understanding of this area. He sits down with Cristhian Andrews, the founder, CEO and Chief Investment Officer at Initiative Equity Partners. Here, Cristhian talks about the free cash flow available in streaming platforms and how you can take advantage of it. He also lets us in on their New Luxury Fund, where you can invest in luxury development, and then shares some tax strategies and ways to grow your money. Join Cristhian as he imparts his vast experience in business leadership and expertise in investing and more.

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Exploring Investment Opportunities In Film And Luxury Development With Cristhian Andrews

I’m excited to have on our show, Cristhian Andrews. He is the Founder, CEO & Chief Investment Officer at Initiative Equity Partners. He brings his vast experience in business leadership and his expertise in the real estate industry. It stems from countless transactions investing in distressed promissory notes, wraparound mortgages, traditional fix and flips, and commercial partnership acquisitions. In addition, Cristhian sits on the Board of Prolific Artists, a privately held institution with professors from Harvard, Juilliard, Yale and NYU. Cristhian, welcome to the show.

Thank you for having me, Chris. It’s a pleasure.

I enjoyed our first conversation here and your diverse background. A lot of people and even a lot of my good friends probably don’t know that my mother was a music teacher. She went to Shenandoah Conservatory. It’s cool to have somebody with an artistic background that has crossed over and blended their experience in the business world. For our audience, maybe you could share where you started and how you ended up where you are now.

The beautiful thing is music, specifically music theory, is connected to a very analytical side of the brain of thinking. When you bridge that together to modeling performers, this cashflows and then you add anything that can go wrong just like music and exploring possibilities at the theoretical point. It’s a close bridge, but most people are not aware of that. It’s the same part of the brain I feel. It’s the same strength. Way back then, that has inspired me to take the next step of not being a broke musician in New York City. It’s been a pleasure to have music as the background, and film which we’re pursuing right now. It’s a close world in terms of the analytical perspective. The relationships are almost similar in terms of the fundamentals of relationships. Nothing is different, it’s just the end result that you hear. That’s the only difference to me. That’s how it seems.

I was a musician. I grew up playing string instruments. I played the bass until I was in high school and I’ve transitioned over into cycling. I always thought it was interesting because of the structure of music. I’d go to music camp over the summers and we composed things. I see a lot of similarities when I was structuring my training schedules for cycling. They have this macro perspective and it depends upon the cadence of the music. It’s the same thing if you’re training for a specific event, you have a different way of training. You have a different pattern that you follow.

When you’re tasked with creating a three-part symphony and you have to structure it into three parts like Beethoven and Mozart or the famous film composer, John Williams, it’s like structuring a business plan in three parts. What are the possibilities? How can they differ? Building a business plan is what you do every time you purchase real estate. You’ve got to know where you’re going, execute it, and who are the people that you work with as a team. It’s the same concept. It’s just not by yourself.

Before we touch on what you’re doing and what you’ve been doing in the real estate world, talk about the transition. Did you study music specifically and then move into business? When did that transition occur? What sparked that?

I was studying music in New York City and I got sucked into film from a gig. A friend had this documentary that was going to Cannes Film Festival. I jumped ship. I’m like, “Put those grades on hold,” and went all-in on film. One thing led to another and then I started getting into the film industry. What they don’t tell you in the film industry is it’s like a partnership commercial real estate. You can’t fund a $20-million picture by yourself. It’s a partnership thing. Sometimes on the fund level, just like private equity real estate, its 5, 8, 3-year holds with multiple films. It’s the same exact measures, IRR or XIRR distribution. It’s the same thing but in order to get into that world, it’s a closed club. No one’s going to let you in unless you have a solid foundation of relationships. I got a little bit on the producing side, directing side, the business side and understand it. That’s when I came into contact with all that good stuff, syndicated deals. It diversifies your income. As a very good investor, you need to know that 20% of the portfolio has to be sector-specific. You can’t have one sector with more than 20%. It’s important that you don’t take those hits during volatile times.

If there is some catastrophe which we experienced with the pandemic, a lot of things change except streaming platforms which went up 200%. That’s star investor. That is a form of diversification that you’re relying on human behavior. You want to be at a spot where you know human behavior will do the obvious. Sometimes humans are obvious. People are going to be at home, sitting and watching. It’s good to have not more than 20% and not rely on one thing. I think film investors are just investing in film, and real estate commercial fund managers or syndicators are just investing in that one thing.

Personally, Joe Biden passing rent control could destroy a lot of personal portfolios. That’s where the diversification of solid things of human behavior won’t get touched. As Warren Buffett says, “Is there a moat around it?” Can this show it by anything else? You want to look at that sector that has some free cashflow available and money available at any time. Film has a lot of that, especially a streaming platform like Netflix and HBO. You won’t find a lot of that cashflow with someone like Tesla, for example, which is the talk here. That free cashflow does not exist. I got sucked into it and I was lucky enough to have a mentor that gave me that advice very early on and it makes sense. Here we are now.

You started a fund that invested in films, is that accurate?

I personally invested. I did not create a film fund. To run a fund like that, you have to have solid relationships with all of the A-lister stars. Those are mostly agents and managers. You’ve got the outside investors and you’ve got the agents to have the relationships with.

How does that work if you say, “I want to invest in a movie?” A lot of people come to me and they’ve never invested in a multifamily or any type of real estate syndication. We walk them through it and we say that it’s not that complicated. It’s not that different from going out and buying something yourself. We’re just pulling it all together. Is it similar in the movie world?

It’s very similar. I would highly advise especially in times like this to not invest in single movies. That’s like a single-family, residential property. You don’t do that unless it’s your own. Unless you’re making your movie, The Chris Next-Level Income movie, maybe it’s your life story. Unless it’s your movie also known as your house, you do that. When you’re investing, you’re not going to invest in a single-family home. That’s the same thing. The IRR is not there. There are a lot of things against it. You do sensitivity analysis against it. There are 101 things that can go wrong and most likely it goes wrong. I just have the market respond, the projected sale prices. Are you familiar with Christopher Nolan’s Tenet, the film? We’re talking about Christopher Nolan, their director here. The market responds in different volatile times like this. It’s a $1 billion-picture and it’s not looking that way at the moment.

That’s why I am against investing in one. You want a group of assets, much like you don’t invest in one unit, you buy 200 units at a time. Those 200 units have power because even though they maybe $110,000 a door, which $110,000 house is not the best house, but $110,000 unit combined with 200 other ones has power. It’s got leverage. Property values go up so it’s producing income. It’s the same thing with the film. If you’ve got 15 or 20 films., they have lots of potentials to instigate this FOMO, what you would call fear of missing out from the actual positioned companies like Netflix, HBO, Apple TV, Walmart Plus, Paramount Plus, all these streaming platforms. Hulu is fighting for one another because they want that group of units. It’s only relationship-driven. Not anyone can invest in that asset class, which is a very interesting world.

I liked that because when you talk to any investor that invest in the stock market and some real estate, you tell them you want to invest in film and they run away for that reason, but when you tell them, “Look at the returns of the last fund that’s sold to Netflix.” On top of that, you can sell the picture and you could do a lease option with a set of films. Universal Pictures owns the films and they don’t want to sell them to Netflix, so they leased them. That would be like a portfolio income rent is coming in, and then it gives them the opportunity to buy it at a certain point in time to the streaming platform. Depending on the rights and all that good stuff.

There are a lot of strategies and investors are missing out because humans are natural consumers of storytelling. We want to connect. We are driven by people that are connected to us, that have experienced the same suffering as us, that have experienced probably the lack of father, lack of finances, this and lack of that. Sometimes when we want to escape and we don’t want to go to the drama route, we’ll put on a Hangover part or comedy just to escape, “What if I did that? What if I went to Vegas?” It’s a great investment when invested in the right packages, the right films, the right people, and the right fund manager as well. In real estate, who’s sponsoring this thing? What are the returns, the way to be done? Aside from actual monetary compensation, there’s also a lot of other compensation with being involved in more benefits. Those benefits are always great for relationships and other good stuff. It doesn’t stop in the monetary sector.

I tell people what we do in the real estate business is like the Warren Buffett strategy. It’s not sexy just like Warren Buffett’s not sexy, but movies are sexy. Any movies that you’ve been an investor that we would know of, Cris?

I have a handful of them. We invested in this new fund. Lots of Leo DiCaprio and Brad Pitt picture. It’s been great. It’s a five-year hold, so we’re going to see what the returns are. It’s a new world right now. The AI world is growing and growing by day. As things get automated, that has a little bit of indie in the streaming world. We’ll see what happens with this one. I’m excited. We also invest in personal films and try to sell that into a fund as well. It depends where we are at that time. There’s a lot of market volatility right now. It’s good to have that 20% and look for the next sector.

I think the next sector is in AI. I’m petrified of a liberal policy that is rent growth that doesn’t benefit anyone. It’s not just benefiting landlords, this is raising the standard of living and the beauty in which people live. It scares me if any extremist policy gets passed because it affects everything. The reason that’s why we started the New Luxury Fund is that it’s in and out. We’re seeing a mass migration of about 3,000 people moving to Florida from New Jersey, Connecticut, New Hampshire and New York. All these wealth are leaving those states because of tax policies and weather. No one wants that 6 degrees Christmas. It’s too cold. All this mass migration is pumping up those Florida numbers.

With this New Luxury Fund, it’s such a short-term hold that it’s in and out. We’re not subject to any of the volatility of the government controlling the business plan. At this time, we’re focusing on that. We’ll see 24 months in where things stand. That’s the reason. We jumped out of the curve. A partner of mine, we saw back in February, we started seeing the numbers when COVID started, not so much in the US but it started already. We were looking at any backdoor trying to see if there are any layoffs that were happening. Layoffs all started. Right then and there we’re like, “Multifamily, I don’t know about this because the government gets involved.” That’s when we onboard with the Luxury Fund.

You’re in New York City. I talked to people about rent controls. I live in Asheville, North Carolina. It’s a liberal city as well and we have some low-income housing. The one thing that I’ve seen, and this is my personal opinion. I’d love to get your thoughts on it. We started out a few years ago buying workforce housing. People were concerned like, “Are you going to kick these residents out?” We said, “We don’t do that. We provide an improvement in the community. We provide a safer and better neighborhood, and nicer place to live.” People are willing to pay for that.

What happens is you attract the better level resident or tenant, and those that are dangerous or don’t pay end up leaving. It ends up having this positive effect on the community and for investors. My personal thought has always been, when you implement rent controls as they have in New York City, you artificially suppressed that rent. It increases the gap between market-rate units or properties and that rent. I think it has a detrimental effect because it’s increasing the gap so big that some people can’t cross it. What are your thoughts on that, Cris? Not to get too political but it is from an economic perspective.

When you start investing in property taxes and you stop rent, the most obvious thing is to withhold CapEx and not do a lot of reparations. We need that remaining CapEx for any cashflow and for any other emergencies. It’s not enough to keep the building surviving. Paint starts chipping, this starts chipping. You’re not going to take care of those new stoves and faulty stoves. Now you’re affecting people because you put rent control and you continue to raise the taxes at 1.6% per year or whatever it is. Sometimes petitions don’t see the economic factor in that. There’s not much financial literacy at the Congress level. They have money. They’re financial advisors.

Our goal and big mission at the Next-Level Income is financial education first. We have an initiative with a local group here in Asheville to help educate younger under-privileged people. They are the ones that are affected the most by this sort of thing. Let’s flip to the other end of the spectrum. This is a pattern that I’ve seen happening. People moving from high-tax, high-cost urban areas like New York City and San Francisco to lower-cost higher-quality of living areas like Southeast Florida is a great example. You’re looking to capture some of this value and this opportunity that you see, Cris, with your New Luxury Fund. I love the name. What’s the model? What are you targeting? I spent quite a bit of time in Florida, in South Florida specifically. I’d love to hear what you have going on down there.

One of the aspects that’s most important to investors is that the time value money. When you lock it up for 5 years or 3 years, it’s losing value. When you introduce Jerome Powell, that IRR is not going to be as pretty when you got inflation attached to the five-year hold. In the interest of investors and the mass migration that’s going on, we also have lots of hedge funds leaving Connecticut and New York. A lot of the buyers of these luxury mansions that we’re building are actual hedge fund managers and employees. That’s one aspect of it. You’ve got all this wealth going and pouring into Florida and Miami. Who doesn’t love Miami? We’re constructing some assets over there trying to get good prices on those lots or demolishing some homes, and building brand new ones out of waterfront or non-waterfront.

It usually lasts between 6 to 8 months, and then depending on the actual design, it may sell. We don’t want to sell before twelve months. We want long-term strategies. We’re just going to get hit with short-term. We want our investors to take advantage of any bonus appreciation we can get on new itemized items in the property. Any seller depreciation, we want long-term capital gains. We want to also offset some of those gains by using a beautiful strategy called the deferred sales trust. I don’t know if you’re familiar with it.

We had Brett Swarts talk about that on the show.

We’re preparing for that. We don’t want to get hit by this restriction of 1031, which forces you to take up a bad investment because there’s a time limit. The Law of Parkinson says, “Work expands to fill the time allowed.” It’s like I made a new investment, but when there’s government involved, when other people’s money are involved, you need to buy low. That’s when you make your money. Acquiring something that’s rushed, it’s always going to be a bad idea. A deferred sales trust is what we want for our investor and for anyone selling their business. I know that you’d have some readers that are perhaps not in real estate and they are business owners. If you’re going to sell your business, don’t get taxed.

There are always options out there. That’s what I tell investors.

I want to clear myself up here when I say don’t get taxed for the general population. It’s not that a lot of entrepreneurs or real estate investors want to avoid tax, it’s just that from countries like Sweden or Denmark, we see the actual effects of helping our community. You and I can both agree, we want to give money to our government where we see benefits. We want to reap those benefits, whether it’s education for our children, maternity leave, all this good stuff. When we see those things happening in our community, everyone will happily contribute. When you have a lot of that money, they don’t tell you where it’s going. They’ll take it away from you first because they don’t trust you if you’re a W-2 employee. A lot of it is going into the military. That’s a complete fact. Why not use the legal law that’s there. If you’re a business owner, don’t get taxed on your business at sales. Sell that business through the deferred sales trust, and then use that strategically to diversify into great investments that are going to create a passive income.

The three tenets, we help you make more money at Next-Level Income. We help you to keep more money. We talk about tax strategy and then we’re talking about ways to grow the money. That’s the big thing. Use the laws that the government and the IRS rules have been put in place. Keep as much money as possible. You can always write a check to the US Treasury if you feel so inclined. If you feel like you’re not paying your fair share, just pull out your checkbook and write a check to the US Treasury. That’s what I always say to people that say, “I wish we should pay more in taxes.” I said, “Where’s your checkbook? Write a check.”

There are about 6,029 pages of IRS code and there are anywhere between 10 to 15 dedicated to raising your taxes, while the other remaining 6,000 are dedicated to lowering your taxes. Those ten only talk about that all gross income means any income generated from every source. It means about 99% of the code is designed to save you money. People are not inspired enough to save money for their children. I don’t understand. The code is there for you to take those exemptions at the end of the year. It’s all there.

You can look at it in a couple of different ways. That’s a great point. One thing that I see is the IRS, the government wants to incentivize private individuals like yourself and like us to go out and invest our money in areas that are going to help and housing is a huge one. Some people may be saying, “You guys are building for these luxury products.” Tell me or give me an example of the type of the house, the size of the house, and some of the amenities. I built the house with my wife. My mouth is going to be watering listening to some of the stuff you put in here and the sale price. I’m curious how does that look.

We strive for between the $3.5 million to $4.5 million sale price, between $4,000 to $5,000 square-feet built-cost for each. If you’re trying to build a property in Connecticut or New Jersey, there’s no way that you can build for any cheaper than 40% of a sale price per square foot. It can’t happen in a lot of states. We offer that opportunity where you can build something for $200, $250, $300 per square foot, and sell for $900 per square foot. Forget sale price, forget square footage. What’s the build price per square foot? When you have that large of a gap, there’s profit right there. You then have a tax-friendly state in Florida. The long-term capital gains is zero.

It’s on the state level, so it’s been perfect. Try building in Connecticut or New Hampshire, you just can’t or Wyoming, there’s no market there. In LA, you’re going to get hit with a state capital gains tax, which the taxes are due at closing sometimes. You’re going to do that at the end of the year. It’s hard for other markets. We see this type of asset class if you travel around the world, it does not exist on the entire planet. It doesn’t even exist in the country with the benefits that Florida has. The next luxury market I see is Los Angeles with this type of asset class selling for $800, $1,000, $2,000 per square foot but that comes with these things. We are fortunate to have Miami and a city like this that has such a huge cap of build-costs, on sale costs, and benefits our investors at a partnership level. This is about a tribe together. The luxury builds short-term holds. We also offer 12% pref, which is not common. Most real estate, private equity firms are 6% to 8%. We offer a non-compounding, non-cumulative 12% pref because it’s such a short-term hold. We want 12% on your money right away before we as fund managers take anything.

Even if this deal goes south and doesn’t sell. We’re going to give you your 12% right away and an 85-15 split. You make all the money first. When we’re able to sell higher, that’s when the split will change, that’s the IRR. That’s the investors. We know that we’re very vulnerable to what’s going on in the country. Any policies can change. We saw the idea and it’s 20% of our sector. We’re going to take advantage of it. When the time is right, we’ll jump back into larger multifamily. We need to see what’s going on. That’s the problem from a financial perspective of running a country. The President needs to have some financial intelligent literacy and an understanding of business.

This isn’t about if Amazon or Apple wants to service the consumers. We are the consumers of the country. As an existing subscriber to the country, there has to be incredible handling and management at the top level. The President and all those people, they’re running a business. You have CapEx, operating expenses and all these things. There’s no way that you can have any president without financial literacy run a country properly. He also cares about people. He cares about minorities. He cares about policies and businesses. The private sector is better than the public sector. My tribe does not get affected by policies that are not business-friendly, economically speaking. We’re staying away from politics. That’s the idea we had in March. We saw those layoffs and it is not good.

If you could go back in time and give your 25-year-old self-one piece of advice, it could be personal, enrichment, or business advice, what would that be?

I’m going to give this advice from a very analytical standpoint, and that is having an understanding and benchmarking on your life. We’ve talked about financial modeling. Financial model your life the same way we spend. You spend a lot of time modeling this financial analysis. What’s going to take to hit these goals and these target IRRs? I would give that model of my life much earlier in that sense, and stop wasting time on the things that going to have an impact either on my happiness or my economic level. People have these bad relationships with failure and bad relationships with money in the instance that all money is bad, but money is freedom.

Most importantly, this is the example that I hadn’t truly seen when I was 21 or 22. I’ll tell you a little story. I was in college and I was in Union Square in New York. I was biking around the area. There was a girl right in front of me. She was also biking and out of nowhere, a cab hit her. The bike crumbled. Unfortunately, she died right at the scene. A paramedic came and covered her body. Everyone gathered in a circle and I’m there. I’m right behind her. This had an impact on me. Not only from the horrific news to her parents and her family but also from the cab drivers’ perspective. His life changes at that moment because he killed someone. Cab drivers are also struggling to make ends meet.

From an economic perspective, if you, me or anyone is driving in the unfortunate position to hit someone on a bike, most people don’t have the actual economic stability to survive legal expenses in this country. Someone is going to jail. You can’t defend yourself. The average millionaire does not have enough money to legally defend themselves. What are you going to do? You’ve got to raise your income. You’ve got to raise your revenue sources. Diversifying things that you understand and things that produce a return. That’s very important not just for the safety of you and your family, it’s the future, it’s your legacy. We’re here for a limited time. Legacy is important and the impact that we can have on people. You cannot have an impact without money.