I began my real estate career while in college, working for a development company as a commercial leasing agent for their office buildings and various specialized buildings, such as medical, retail, industrial, and laboratory buildings. It was a family company, which enabled me to perform many duties beyond leasing and grow in knowledge.
After nine years, and with a record of leasing over nine million square feet in as many years, I moved into public development companies and served as a senior officer in several of them. What I learned from those experiences was a unique perspective on understanding value, or “qualification” versus “quantification.” In other words, I developed a 360-degree perspective of real estate.
Having that background has aided me greatly in problem-solving and structuring transactions. Mine is not a typical pathway to being in finance. I was a leasing salesman and an operations officer in development; however, I learned early on that I was not personally suited to work for other people and that having my own business plan, even within a national brokerage house, was more satisfying to me than pulling the rope and company line in a public company.
I also made my personal business plan, one that centered around equity, a product all investors and developers require, and the corresponding debt, so that I was able to have my assignments exclusively in both. That approach is both lucrative and practical, as I believe non-exclusive relationships can dilute credibility in the capital markets for anything other than permanent and CMBS debt assignments. Having this unusual background gave me a real leg up in building a successful business plan that has been successful to this day as a structured finance advisor.
We have a real problem in the business world right now that has grown out of the COVID debacle, and that is that people were indoctrinated against social contact. It has permeated all phases of society, and we have both a business community and a nation of communities that have to fix this; otherwise, we will retreat into a selfish parochialism.
Reflecting on $35 Billion in Transactions
Now, fast forward $35B in transactions later, I look at where things stand and reflect on where I’ve positioned myself versus where I think the market is heading and where I need to be to take full advantage of what it has to offer. This is a combination of both personal and business insights and observations. The first business observation is that the financial community has been shifting toward structured finance as a more reliable execution model, given the complete lack of LP capital willing to take market and cost risks in vertical development. In its place are credit funds that are moving higher in the capital stack for risk-adjusted returns.
The dominance of credit funds has strengthened since emerging from the downturn in 2007, when most banks exited the competitive playing field for vertical development. Over the years, these funds have expanded exponentially and have moved out of the 65% LTC range to the 75% LTC range and now, in some cases, into the 90% LTC range.
I believe this will remain the case until the cost of debt decreases enough that the underwritten debt yields on vertical loans increase leverage sufficiently to make sense for LPs to come in on the equity side. Until such time, the structure of loans allows credit facilities to have the “A” note up to 65% laid off to a low-cost capital provider such as a bank or warehouse line at the low-to-upper 2s or low 3s over SOFR, and the rest as a “B” note held on the balance sheet or with an LP that prices to a multiple.
This allows credit funds to move up as high as they want to go and achieve excellent returns. I believe that when the current administration is able to replace the Fed Chair next mid-year, we will see a precipitous drop in interest rates and a curve that will make the cost of funds more favorable again for affordable debt, and for equity to have a more secure feeling about the risks associated with development.
In the meantime, equity is still focused on a firehose supply of distress opportunities that, once again, has not materialized, as the practice of internally restructuring debt and kicking the can down the road has been more favorable than giant write-downs and realignment of real estate values.
This business is a Bloodsport, and unless you are in it to make at least a half a million a year it’s not worth the stress and aggravation.
Staying Ahead of the Curve
On a personal note, how I try to stay ahead of the curve at my firm is by hiring producers who come out of a private equity background, or those I can organically grow to understand how structure works at the asset level. This is how I adapt to the changing marketplace.
I have not tried to build a team of investment salespeople, as they are almost always the first to go when a brokerage house re-sizes to market conditions. That said, in most mature and maturing markets, finance professionals often end up as part of sales teams, particularly in larger firms that want institutional business, so I’m open to acquiring a team to start building that side of our practice.
Another way I personally adapt to change is by voraciously reading as much as I can about industry trends and markets through what’s available every day online and by email. This has been a discipline for many years. I read three newspapers a day and five websites to gain perspective.
I also talk to people constantly in the capital markets so that I understand where the compass points are headed over the next six months. I also believe that personal interaction with peers is essential, and I’m a big believer in in-office synergy, meaning personal contact rather than a work-from-home model. I want people together to interact and talk, as that’s where ideas and solutions are born.
Try to keep your life in balance. We all want to be appreciated for who we are and what we do. Who we are comes from friends and family, and what we do comes from work. If you don’t get enough from one side, you will overcompensate on the other. This then leads to sickness.
The Erosion of Urgency in Modern Business
One of the biggest challenges I see, not necessarily a product of volatile times but indicative of today’s business culture, is a general loss of urgency in the business community. I’m specifically talking about lenders, sponsors, and subcontractors related to real estate.
Add to this the internet age and the repercussions of COVID, and we have a lot of people in the business community who think deals get done through emails alone. We are struggling to keep personal contact essential in expediting and efficiently managing closing costs.
In the “old days,” we picked a closing date up-front and did everything by conference calls until everyone gathered in a law office conference room for the drama and theater of the closing. Even if it took two or three days, we didn’t leave until it was done. In today’s world, even though we set a date on the first kickoff loan call, the lack of urgency has us moving documents and comments by email, and rarely verbally, which delays the process. You would think in a world where anything can go wrong on any given day that all parties would do everything possible to speed up closing, but that’s often not the case.
For example, last year we had an $80MM assumption of existing loan documents with a construction lender that backed out of the market, and a new one assumed the position. We all agreed to a thirty-day close. Five months and $800,000 in legal fees later, we finally closed!
During this adventure, we literally had lawyers yelling at each other on calls, not as a negotiating gambit, but because neither side knew the solution to the problem. In the meantime, as brokers, we can do nothing. We can no longer effectively manage closings from our side, and the lack of professionalism and basic erosion of interpersonal communication is causing serious delays and costs.
Becoming a Direct Lender
All the above just makes the case for being more of a direct lender than a broker. I believe we can be both and are taking the steps necessary to become a senior super stretch lender as well as a pref and rescue equity capital provider.
If I can pull this off, then I have a product for my team and I can better control transaction management.
In order to be a really good equity advisor you have to understand Qualification versus Quantification. Its understanding value versus checking off boxes. You can be good at one and be successful but Im really looking for producers that are good at both.
High Stakes and Hard Lessons
Real estate finance is like diffusing a bomb in a movie. You have the safest solution when you’re farthest away from the bomb, until it gets down to that classic scene where there are thirty seconds left, or Armageddon, and it’s a decision to cut the red or green wire. That’s our world, and it’s not for everyone.
What I tell younger people coming into the industry is that it’s a “blood sport,” and unless you want to make at least $500,000 a year, it’s not worth the emotional and mental wear and tear. The trick to sanity is knowing where you can diffuse the bomb, and doing it!
This is why we’re not mass marketers. We’re target marketers, and we take on assignments where we know where the capital is; otherwise, you’re trailblazing in a service business where clients expect to close once you commit. So, I tell my team: this is “shop until you drop.” Once you take it on, you must get it done. If we just tied people up in exclusives and waited around, nothing would ever get done. To mentally deal with this type of stress, I’ve learned how to compartmentalize my life. I’m fully focused on work, but when I’m home, I stop taking calls at 8 p.m. My first mentor taught me this, and he was very successful. Maintaining balance in life is extremely important.
If I can’t get things done in a 9–10-hour day, I’d never relax, so I take downtime seriously. That includes being in the gym and decompressing. If I can lead by example, that’s half the battle in mentorship. Although these guys technically work for me, they are all their own business, and if they aren’t successful, neither am I. So, what I say and do makes a difference, and I’m aware of that.
Money is a personal business. As long as people are working and creating to earn it, then it’s always going to be personal, and you need to be mindful of customer service and respect. If you take on an assignment, then the attitude is you have to shop until you drop, as usually the client has a lot riding on your performance.
The Power of Personal Connection
What I’m most proud of is our people. I like them all and am very interested in their well-being and career building. I don’t want 700 brokers. I want 35-40 people who are willing to learn, do it with thought and integrity, and will work hard for the rewards, and I believe I’m building that.
The underlying message here is personal contact and involvement. Money is a personal thing, and handling the money needs of people demands personal contact. Maybe someday one of our people will introduce me to an AI broker that will be better at this than I, but for now, I’ll stick to my beliefs and push forward into newer and more exciting things.