Real Estate Investment Opportunities Series - The Mortar Group

Foreign.

Welcome to another White Coat Investor real estate webinar. I'm Jim Dali, the founder of the White Coat Investor and a practicing emergency position. I'm here with Anthony Morena. He's a principal in the Mortar Group, a syndication company that specializes in multifamily real estate investments in niche New York neighborhoods. Welcome. Welcome to the webinar.

Anthony Good morning. Thank you for having me.

Now our format today is we're going to go through a presentation that Anthony's prepared to tell you a little bit about New York real estate, about syndications in general and also about Mortar specifically. And then we'll do some Q and A afterward. I'll be asking him some questions. So let's turn the time over to you, Anthony, and let you share your slides and get started.

All right, thank you very much. I'm going to share my screen here. Okay. So thank you again for taking the time to do this. So I think we want to start off just talking about Mortar, like what Jim was saying. We're a New York based investment firm. We specialize in multifamily residential in New York City. We are a small shop. We are a group that does specifically multifamily in Manhattan, Brooklyn, Queensland, the outer boroughs of New York City. We're a vertically integrated shop, which means we act as the investment manager, developer, architect and construction manager on the deals that we do. We've been doing this in various forms for almost 25 years now. I started in the field in 2020 and we've been expanding and kind of doing great lot of the similar stuff that we've been up to recently over the course of those years and we've put together a pretty healthy portfolio of work that we'll look at today. So in general we focus on, you know, New York City, like I was saying, and in, in specific neighborhoods that we feel most comfortable operating in. We deal in the, the class of substance substitutional mid cap family real estate with a blend of ground up development and your traditional value add assets and renovations. Each deal that we do is either an individual one off asset that we acquire or it's portfolios of assets that would typically range from 10 to 40 units and the deal sizes value from I would say 8 million to 40 million. And we have, one of the things that we do is we focus on our local knowledge. We are from New York, my team is from New York or has been here for quite a while and we have, we focus on the areas that we know and that we can really use our expertise to create an Advantage for the group and for the investor base that we work with over the years we've worked with and now we have about a group Investment Group, about 120 plus investment partners that are active in our syndications that we have across our portfolio 30 like 30 investment offerings over the last 20, 25 years. And this slide will update to show 24 years gross sales, 306 million in residential assets. I've committed and invested 9.1 million in sponsor equity as a co invest to investors along the way. And in total we've raised roughly 61, 60 million in investor equity across our syndications over the years. Just to give you some background on myself, I started off as a licensed architect. I'm licensed in New York City. Started off in the field after architecture school and realized that I wanted to do more than just be an architect. I wanted to control the narrative of the deals that I was doing. I wanted control of the assets. And that led to the creation of Mortar, which was this concept to blend initially architecture and real estate development. That was the initial fabrication of it. And then it became this idea to be fully vertically integrated where architecture and design became a subset of asset management and real estate development and construction administration, where we felt we could use our technical backgrounds to really enhance a project. And the deals that we were working for, we felt there was more opportunities that we can extract from a deal differently than another operator, another developer we're looking at. So that's how the mortar came to be. And it's expanded since there. And we've had a good track record moving forward. Over the course of my career, I've been involved in a variety of different deals, again mostly in New York, ranging from your first, my first deal, you know, a three family building that didn't go well to 500 units tower on 42nd street in Midtown in Manhattan. So I've been involved in pretty wide range of projects and we try to bring that experience to all the deals that we do. After some talking a bit about us and what we do, I wanted to just kind of briefly chat about New York in general. Because New York is one of those markets. And especially recently, it's gotten a bit of a bad rap. And sometimes it deserves it and sometimes I think it doesn't. You know, it's. There's always kind of that, especially during COVID It's like, you know, the general sentiment was why bother investing in New York? You know, it's on its way out, it's got all this political turmoil and you're better off Investing anywhere else. And this is not anything new. It's something that we deal with living here and operating here in different variations over the course of the last, you know, for me, 25 years and. But it's been ongoing for quite a while. You know, New York is a tough market to work in. And I think the key and the general guideline to working in New York is just understanding it. You've got to understand the ins and outs and how to operate here. Otherwise it is not kind to newcomers who try to test the market for the first time. So we try to use our, our expertise and our local knowledge to, to, to play in this landscape, you know. So why does New York get a bad rap? I think there's a few reasons. It. Some are myth, some are well deserved. But there are significant barriers to entry for the newcomer in New York that you should know about or you should at least have some general understanding of. First is kind of the tax structure, both property and income tax. This is a question that comes up a lot with investors that we kind of walk through with them in detail. Property taxes, depending on the assets that you're acquiring, each one is taxed differently, some skew higher than others. So it's always good to understand where that valuation is and how does it get determined after you close as well. The political landscape is always kind of shifting in New York and it shifts to the extremes at times. So I think also having a good understanding of that and a good historical context, understanding the historical context of these shifts is also is also important demographic shifts. A lot of people outside of New York focus about, on the shift of people outside of New York especially that think that's more of a Covid thing that happened over the last four or five years with some of this cities like, or states like California, New York. But there's also shifts, you know, locally where people moving to, where are they moving out, out of, where are values going up, where are they going down? And I think it's, you know, one of those things you really understand. New York can be pretty unfriendly or difficult to new landlords and developers if you don't understand the rules of the game or how to operate within them. Lack of land for new development. New York is a tight city. There are a lot of people here. We're over 8 million people in the city. Access to land is limited. How to maximize land development is a bit of a specialty all in itself that you have to have and bring in the right people to really help you understand that and make sure you're doing the right thing and then how to extract most out of it and ideally a little bit more than your competition. The price to enter the market on all, on all levels is higher. Whether you're renting an apartment, buying a home, and then buying a development asset or a value add deal, they're all going to be higher. And you have to be comfortable with the metrics that are involved with those assets and understand how to hit those marks for a successful exit. It's a litigious town. It's one of the things you learned very early on, as I did with one of my first couple of deals. You will get sued, so you should understand how to protect yourself, have the proper insurances in place. They are significantly more expensive in New York than anywhere else in the country. So you must make sure you budget appropriately. There's predatory lenders in New York City that are always looking to take advantage of a deal that goes south. You're seeing that, you're seeing that now, but you see that on any down cycle in real estate where the knives come out a bit. And you really can get a sense of how these individuals and these companies work. You know, some projects, depending on the size they have to deal with unions, union pricing, general market corruption that you always, you're working around or avoiding as long as you know where it is and what's coming from. And then in general with New York, there's new construction versus renovations or alterations depending on the size of the deal, the structure of it. Each one of these varies significantly and they take different amounts of time to, to work on and, and to, to finish. You know, in general, I think the negativity towards New York is, like I was saying earlier, is justified in some ways, but it's also, it can be excessive at times. In general, New York does not always track the national sentiment as far as the markets. When you hear something on CNBC or something in a newspaper or a national article, New York could be trending a little bit different just because it, it operates tend to be of its own drum to it to a certain extent. You know, even if you look now at certain markets that are in decline, which were the popular locations, you know, three, four years ago, those metrics are going down. But on the New York side, things are going up. So that's, for us in New York, that's a nice thing to see, that things kind of come back to the median and come back to the average of how we typically expect them. So it's just understanding how that works. And how to navigate in it. So in dealing in New York and how to navigate and counter some of the extensive negatives that I mentioned earlier, the bottom line, in my opinion is really just stick to the fundamentals, stick to the basics. When you tend to get too cute and you try to outthink yourself or everyone else, you tend to get yourself in trouble. New York, for all the pros and cons, is a city of 8 million people and rising. The population is going up. You've had some people move out, but you've got a lot of people moving in. It's a political hotbed at times, but overall it's a pretty strong city. The GDP is the highest in the nation. That is not going down anytime soon. There are other cities. In a way, the nice thing about COVID was that you had other cities start to kind of emerge, which is good, but it doesn't mean New York is the number one and everyone else is secondary. There can be a lot of different cities that you can invest in and thrive in. My argument here is more just that New York is still a place that has value if you understand how to navigate. In general, vacancy rates over the last year or so are lower than national averages. We had a tough time early in Covid when other cities were thriving. That caught up a bit, I would say by mid-2022 into 23. And we tend to be doing fairly well on rental pricing. Now wage growth is going up in New York and across the country. You know, the population of high income earners in New York in general is on the rise and has been on the rise since pre Covid. And like I was saying earlier, New York tends to outpace the national market on, on metrics especially. Pricing is always kind of a bit higher just because of the. The cost to do things in New York City. And one other interesting thing with New York and being a local and kind of understanding the market is that as we have emerged from a post Covid, world growth has surpassed Manhattan. Manhattan used to be the best place that everyone, especially foreign or investors or investors outside of New York City wanted to be a part of. That is no longer the case. A lot of those investors are shifting to outer boroughs because the value is there and in certain places it's surpassing it. Brooklyn is the best example of this. So bringing all these things together for us, we like to look at it as how do we do it? What makes us successful in what we do and how do we be efficient and how do we try to share this information? For us, it's really like the previous slide. Just stick to the basics and understand work where you understand what you can navigate. You know, New York has a lot of projects that are developed that are used some sort of political or government approvals or need are not as of right. They need. There's a board of standards appeal, tax incentives, rent stabilization. There's a lot of these areas you can, you have to navigate. So we try to invest in as a right assets to avoid most of these pitfalls. It allows us to finish projects faster and with less fluctuations in our estimates and just less bumps along the way because you're not trying to get these approvals or special incentives. And if you're buying an asset with this in mind, you're not leaving any money on the table. You're trying to account for all these items. We invest in tax class protected multifamily buildings. This is something that we've started to do more of over the last, I would say three, four years. Just as the shifts in the tax burdens for property tax has shifted. We stick to, to. We've been trying to stick to doing more developments and more value add deals with assets that are tax protected, where if revenue does, does increase and we renovate a building or we make it better, the taxes are not going to double or triple like you'll see in some other different classes. In the classes that we work in, you're capped at a 6 to 8% annual increase at the max. So you're able to budget that on your performance significantly better than some other project that goes from $6,000 a year in taxes to 80,000 after the completion of the project, which has happened more times than not. There's a low allocation of stabilized housing and no government financing. Like I was saying, we try to avoid those. We navigate the landlord and the political market. You try to stay away from the negative assets that are a political hotbed, that are fluctuating where sentiment fluctuates depending on who's in office. So we try to stick to things that are not involved with those as much. And like the foundation of what we do, we try to be an expert in our market. And one of the other things is, you know, what to do and then what not to do. You know, that's also a big thing. There's a lot of tempting deals that look like they can make sense, but there can be an underlining issue that a lot of people will miss, sometimes until it's too late. Knowing some of those pitfalls is extremely valuable on its own. You know, Knowing what things cost and what to do if things go wrong. You know, every project is going to have its upsides. And over the course of a deal or an offering that takes two to three years, there's going to be some parts that do not go well. So it's going to be a question of how do you, how do you navigate that and how do you, how do you navigate the project to a successful exit, regardless of what's going on? So just having local knowledge, whether it's a consultant, contractor, just general laws and how to navigate is important. One thing that helps us out a bit is the access to deals in a competitive market. Off market deals have become more and more prevalent, especially in a down market where people are looking for their distressed assets. You tend to start working with different brokers over the years that they know you've sold deals, they've seen you buy deals, so they'll reach out to you when something's in the market because they know you're an actual buyer or you're someone that's willing to transact. They get a sense of your reputation, of how you transact that you'll close quickly, efficiently, so you get access to more deals than the normal person would. And again, understanding comps and market shifts. Where are people going? Where are they not going? Why do people want to live in certain areas? Why are they avoiding certain areas? What's coming up in certain neighborhoods that makes them more attractive? What rezonings are going on? You know, there's a lot of different metrics at play throughout Manhattan, Brooklyn and Queens, which is kind of our specialty. And they are constantly moving around. The, the metrics for those neighborhoods shifted greatly over the last five years and the dust hasn't fully settled on them. And I think there's still opportunities to be had in some of those neighborhoods where the current market has slowed down the growth of some of those neighborhoods. But the, the population metrics and the rent metrics are going in the positive direction with some areas. So we try to try to find the value in that. And then the other part of it is, and lastly is kind of, you know, we diversify, we try to, when we assemble different portfolio offerings, we try to have different offerings in assets in different locations, different neighborhoods, at least where we can try to spread risk and also benefit from the growth of different neighborhoods as they're coming into their positions, as we, as the offering goes. And then in general, as a general rule, you just avoid high leverage situations. You're seeing this come to fruition now in a Lot of deals in New York and across the country, but it's very similar to what happened in 08 during Lehman, where the high leverage deals just got crushed. Debt is getting more expensive and it's going to continue to do so seemingly for the time being. One little clip that we added here was just, you know, one of the biggest players in New York City is Carlyle Group, which is a big private equity firm. And it's pretty well known in New York that they are a very or they have been a very active buyer of these smaller assets they have been buying for at least three years. These similar types of deals that we work in, you know, they have been the buyers on some of the types of deals that we, that we work in, where we're developing and then selling assets to a market that Carlyle and similar private equity firms are looking for. They're looking for the same things we are. We're trying to be efficient and avoid the pitfalls and headaches of some New York developments. So with that, we can talk a little bit about mortar, some of the stuff that we're up to now, and just kind of just a brief update on some recent offerings. This is just a quick slide. Some of the recent ground of developments and value add work that we've done, I would say over the last six years. So we've been pretty busy on both fronts. We do a blended portfolio, ground up and value add, for sale and for lease assets. And I think that kind of blended strategy is helpful when markets turn because you could have more than one exit and if one market sours a bit, the other one is usually doing well. So you can kind of blend and still generate good returns and have a good margin of safety with investors. A couple of case studies also we can look at that interact with this kind of model. This is an asset that we did on 203 Richardson in Williamsburg, which was a pure value add where the investment ROI was 158%. The completed valuation was 6.8 million. We bought the land for 2 million, basically converted the building, added a significant number of units, extended the, the it had unused air rights. So we built out the back, added on top of the building over the course of 18 months, and then leased up the building for sale, followed by sale. So that one worked out really well. And it's kind of a lot of the type of work that we're doing now, especially in a high rate market where we want to be in and out of deals as quickly as possible. Past offerings had tended to be a little Bit longer in, let's say closer to five years. But it's been the popular opinion with a lot of the investors that we work with, they're looking for shorter duration deals. So a lot of the stuff we're doing now is 30 to 36 months from investment to return of capital and returns. And then that way it allows us to work within the market as well. It's becoming increasingly difficult to forecast what's going to happen in five years. So we're trying to keep deals as short as possible to, to protect against downside. Another project similar to 203 Richardson. This one is in Greenpoint, Brooklyn. This is another project that we completed over the last few years. It turned out really well. Similar concept where we took an existing asset that was delivered vacant, added a number of units to it and added on on top of the building and delivered an IRR of over 28%. Completed valuation of 7.225 after an initial purchase of 2.1 million. I would probably say that the valuation has increased significantly since we put this slide together at the end of last year just because the rents continue to do well there. This market in Greenpoint in general has been doing really well, has taken off a bit since I would say late 2022. And in general, one of the nice things with a lot of these assets is the, the markets that we tend to invest in, they're low, the inventory is pretty low and it's very quick to rent a unit. You know, most of the units that we have, they are, they are usually rented within two to three weeks. If we have someone moving out on the 30th, we have some unusually moving in on the 1st. We don't leave any downtime to lose any revenue. It's part of the building to the model. We have teams in place as one person is moving out. We have a team coming in, cleaning, painting and the next person moving in the next day. We keep our waste as far as the project is concerned to a minimum. Newtown plus is an offering that we did or launched a couple years ago. This has three assets that were kind of spread in different locations. In general, this is a project where it had three multifamily buildings that were delivered either partially vacant or fully vacant. And then we went about this renovation project process across all of them. Right now, as of today, the last asset has been fully renovated and we just rented the last apartment in that building this week. So we're fully stabilized. We've met our objectives. Asset valuations have increased over 92%. From where we started and we're going to plan to exit the first assets with the sale in this year just turned out overall really well. And even though the market is challenging from overall perspective with interest rates being what they are, the value of market rate assets in New York City is they're extremely valuable at this time and they're sort of, they're looked at more now than I think than ever just because as the political climate is a little bit trickier to navigate, investors are looking for more stable assets that don't have to deal with some of these issues. So this is one of the deals that we, we have modeled, are using in some of our future deals as far as stuff that we're doing now. We've got several deals that are finishing up and as they finish up and head towards their exit we have two more that are coming up. We have Urban Landing which is actually finishing up now. We're in the final stages of funding and that'll be closing out this month and we're starting renovations probably in two weeks and then that will be. That asset will be ready for market at the end of the year. So we're really excited to get this one going. This has been building up for a few months, but everything is lined up and we're moving ahead. And the next is MG east river which is really similar to that Newtown Flats project where it's a portfolio of value add offerings, where we assemble assets that are either partially vacant or fully vacant, that can be delivered free market or under built. Where we can add value through our technical knowledge and construction knowledge. You know, in good neighborhoods that have low import inventory and kind of just continue to do what we do. These offerings are similar to some of the others I mentioned where it's 30 to 36 month offerings we used to do preferred return for investors followed by a 7030 split is kind of the how we typically set them up. We keep them very simple. There's not some big waterfall structure. It's like investors get a prep and then they get the majority of the exit. And the sponsor being me, I provide the personal guarantee on the debt and we co invest in the deals. And I think that kind of keeps everyone on the same playing field to be looking to exit a project quickly and also do and do well by the investor group. Again, a lot of these deals are cash flowing in part in the beginning or we try to get them cash flowing within the first 12 months after closings as we get the project rolling. And it's an invested blended portfolio and usually the investor IRRs we target are north of 20% and that is it. If anyone has any questions, they can always reach out to myself, Francesco or Harmeet in the office and we can introduce you to what we do and answer any questions.

All right, thank you, Anthony. Great presentation.

Thank you.

Let's move into the Q and A portion here. Here's some questions for you. The first one is what do you see as the advantage of investing in individual syndications over a fund?

So syndications, you know, we've done funds in the past for what we do. Being smaller investors, we're not, you know, we're small to mid cap size deals. And we found the syndication model allowed us more flexibility to target the kind of deals that we like and we can offer them at a lower base point. The fund structure, where it's charging an asset fee to investors, didn't really make sense for the stuff that we were doing. We charge a management fee and we take a development fee. As far as that cost, we felt in doing syndications there was better value to be added to the investors doing it that way instead of your traditional fund structure. And the other part of it is in being in New York and being in very specific neighborhoods. A lot of investors like to know where the deals are, especially when the markets are tricky and volatile. At times like during the last four or five years, they want to know where's an asset and so they can look it up and then they have specific questions about those neighborhoods. Funds tend to be more blind in that respect. And they could either be locally based in one city or they could be spread across the country. And for us, that was never. My background is from the architecture side, so I don't look at things as a traditional developer, which is. I don't know if it's good or bad, but I had just a different perspective on and I felt it was beneficial to everyone to operate it that way.

Now you mentioned you target returns in the upper 20s. I mean, those are spectacular. When you can get returns in the upper 20s, what percentage of the deals that you've had go round trip have actually been in that range.

So typically the exit on projects. So we'll usually target a high 20 IRR for project level and then an investor level will try to target in the high teens, low 20s. So like a 20, 21% IRR is kind of where we target and we get there most of the time, you know, we'll either be high teens or low 20s. We've had some volatility over the last Few years coming out of COVID But you know, overall I think we tend to hit our marks and I think the stuff that we're doing now is doing well and is fair. For good exits. Newtown Flats, like I mentioned and a couple other ones, the valuations are up significantly even though the overall pricing in the market is down just because of rates. I think we're poised for good exits.

Which of the syndications are you raising money for now?

So we have two. We have urban land, which is, is finishing up now, and then we have east river which is going to be starting up now. And that'll run over the next three to six months and then we'll, we'll launch those early later in the year. So we have, we have two going now and then we have a bunch other that are kind of wrapping up and then it's kind of this continuing process.

There's been a lot of talk out there in the last year about the difficulties with multifamily real estate, particularly with the rapid rise in interest rates. There's this market cycle. It goes between the point of maximum optimism and the point of maximum pessimism. Where would you say we're at right now?

There's a lot of hopium in the air. For the last 12 months, everyone's been hoping that rates were going to drop at some point and we're going to see this boom. I think, you know, it's impossible to guess, but so we just base it off of like this is where we are. We don't forecast. You know, you have this tricky thing where you can create a performer based off of Today's model rates. Seven, seven and a half percent, maybe 8%, who knows. But you can play this game with yourself. It's like, oh, what would they look like if it rates drop to five, five and a half, you can't do that. You look at a deal based off today and maybe a little higher and if it works, great, you dig into it further. But I think you can't hope that it's going to drop to make a deal work. I think it's trickier for deals that are longer running. Like 5 to 10 year deals that started before 2020 when rates were really low and now they're coming into a high rate market. Those deals are kind of are just naturally off kilter. But deals that you buy at 7% interest rate can still work pretty well because you're buying it in straight, that's higher, but you're buying it at a lower price. So it all kind of blends out as long as you keep the fundamentals the same. So I think in general with any deal that you're buying today, you base it off of what's today's numbers. If you have a three year exit for the deal, there is a chance that if you hit the market the right way and rates drop 18, you know, over the next 18 months, you're, it's, that's added, that's, that's cake. You're not planning for, you know, there's that, there's that, that party that always wants to believe it, but you never know. Life and the market over the years has taught me to. Whenever you think when things are going one way, they're going to go another. So you plan for the worst and the best can be a surprise. And I think in general that kind of keeps you out of trouble most of the time.

Now, Mortar is a vertically integrated company. Let's talk a little bit about that term. First, can you define what that means? And second, talk about the challenges and benefits of being a vertically integrated company.

Sure. So for us, vertical integration is just having different facets of the business inside your office, being able to make the decisions and execute the plan plan in house without outside consultants, outside cost and at a faster pace. So for us, part of our integration is we have the architecture team, the construction administrator and the owner or the developer, we're the same. So we can sit down at a table with the three parts of our office or the team sitting there and we can look at an issue that a project has instead of having the owner call the architect who will take two weeks to respond and then he's got to talk to the contractor about the cost, which takes another two weeks or it could be a four to six week process. Within five to ten minutes we can decide, okay, what's the cost of this, of this issue, what's the impact on the project? How do we make it work? What can we value engineer to, to balance out the offset that this thing has created. And then we can make a decision within 30 minutes and we're done. And then we ever, we give everyone else outside their marching orders on how to complete successfully. And that's really, that's the, for us, the main piece, you know, there's different aspects of vertical integration that you can add on and there are different parts that we incorporate, whether it's property management or the investment management. But for us, it's the combination of the owner design or the technical team and the construction. It's those three together save a Lot of time and a lot of headaches and a lot of, you know, there's a lot of cya. Sometimes when you're dealing with all these different parties. So you've got to cut right through all the bowl and you get right to the answer and you just, let's keep going. We make our best decision we can at the time. And if we have to adjust, we can adjust faster than most can. I think that's kind of one of our specialties.

Are there any downsides to being vertically integrated? I mean, why doesn't everybody do this?

There's a cost. You know, for me, I'm an architect. I came from that background, so I came from the technical side and I wanted to be in development. So it just became part of what we do. And then the construction and administration, once you're doing those two elements was pretty easy add on. So earlier in my career, I had worked for other developers that didn't have this aspect to it. And then that's why when I kind of went to create Mortar or the first version of Mortar, I felt it was more important to do that because we can find value as an architect or as a construction administrator that sometimes the owner might miss. And traditionally, if an owner or a developer hires an architect, the architect's object or the contractor's objective for that matter, is I want to make the most money and I want this job off my desk as fast as possible. For us, there's a value where it's okay. How do we squeeze every last ounce of benefit, whether it's square footage, the price per square foot to build, how do we make our use and our time and our technical background as good as possible to benefit the project? So for me, it was just kind of natural, just kind of giving my background. But for larger firms, it gets a lot more complicated and it's trickier to do. There's a lot of firms that have different models in New York, especially whether it's build and developer or strictly developers or real estate professionals. And then there's some that have this blended group, but they usually tend to be firms like ours. There's a handful of them that have the similar idea.

You talked a little bit about the rules of the game in New York being kind of unique. What's an example of a New York unique rule of the game that you have to deal with?

Oh, man, there's a lot. It's just in dealing with certain. In going through a process from when you acquire a project or get an asset under contract, and that what you need to do to get it either out of the ground or from a new construction perspective or to get it permitted. There's a lot of agencies and a lot of of bureaucracy and just a lot of levels of you have to go through. There's a lot of paperwork that you need to have and each. There's a lot of municipal companies or agencies that you need to go through. And it is very easy and I've seen it done where you forget one. We, you know, there's there in New York, there's housing pre preservation, there's the building department, there's landmarks, there's the rent stabilization, there's bsa, there's all these different groups. And if you have a property that falls into one of these zones and you forgot to check one of those boxes, you're going to wait a year just to submit your application because they're all backlogged. So that's the biggest one that always comes into play. Even now a big one with New York is environmental. If an asset is it's or environmental or there's, there's pilot programs going out throughout the city where the mayor's office or different, different agencies might be testing out different programs. If you're not aware of that program, even though it's not official or and made permanent, you're in trouble. You need to understand where things are and some consultants will help you. But it's for us or from my perspective, I think it's good to know in house what you have to deal with because it just helps with modeling a project. And when you're putting together the budget, you know what to budget for.

Now you're raising money for two deals right now. How bad would things have to get for an investor, a limited partner, to lose principal in either of those deals?

So, you know, those around the projects that we're looking at are value add deals where we can take existing assets, renovate and bring them to market at a higher valuation. The impacts where the items that can, where it can go negative are. It's harder to do, to be honest, in value add deals, ground up construction has a lot more intricacies and a little more difficulty. But with value add, if you're buying properly and you're not stuck in some of these issues that we have mentioned before, it's hard to do so. But we try to build the contingencies and margins of error to protect against it. Even when a deal looks great, you have to build in those protections. And sometimes those protections will get stressed during Lehman very early in my career we were stressed on certain deals and they forced us to build in margins to protect against the downside. That same of downside protected us during COVID and it's protected us now during rates. And overall you're trying to do the right thing and you're trying to get done as quickly as possible because you never know what's coming, what's going to come at you from, from from where? You know, pre 2020, you know, it was construction variables. Now you have all these other outside factors that I think are coming at you. So you, you have to prepare for the, for the worst and, and then go from there. And you know, nothing is guaranteed. There's no assurances that anything will go 100% correctly. You know, real estate is volatile and it can go high or it could go low at any moment. But you try to build in the margins and put your best foot forward.

Can you talk about the leverage that's being used on these two, these two deals you're raising for now? How much leverage is it? What kind of leverage is it?

So now what we do as we, when we renovate the projects, we'll usually bridge debt for one year term. That is probably around, I would say in today's market, probably around 68%. Maybe you get to 70, but you're not getting past that. And then with stabilized assets where we're buying them stabilize and then kind of incorporating this renovation plan over assets over the, over the units as they become vacated, Those are probably 60% loan to value. So the leverage is pretty low. Especially in comparison to years past. The use of mezzanine debt is significantly lower. There's some preferred equity positions, but not so much in value add deals like the stuff that we do. Preferred equity and mezzanine debt is really too expensive for these kind of models. So it's really built off of a loan. With a low loan to value and equity. Everything else really kind of would just compromise the deal too much. With ground up construction and projects like that, those factors and those vehicles can be used a lot easier. But with the deals that we're doing now, we try to keep it lower, especially just because the market is volatile, rate wise, regardless of what we do, construction wise, or even if we hit our metrics that we plan for on an asset, there are so many outside variables that are market driven that really have nothing to do with us, what we can't control. So you have to plan for protecting.

On all sides and what percentage of your debt is fixed and for how long.

So right now the debt that we're getting that's fixed is usually 5 years. If not, we're trying to get it for shorter. If we get it for five years, we're trying to get it with no prepayment penalty. And the same thing, if we can get a three year note now with maybe a prepayment penalty in years one and two, but the third is free. So that if rates do adjust, we can try to gather some of that data upside from refinancing. That's kind of the biggest thing. I think if rates drop in the future, which we don't know, then we would extend things out longer. But because our deals are 10 are generally lower or shorter in duration, a 3 to 5 year note is really kind of perfect for us. It's just trying to minimize the costs on the back end. You know, sub lenders have costs that they, they pull to the back. So we try to avoid those kind of situations so that the exit is kind of cleaner.

Which one do you see as being more attractive right now in general in New York? Ground up investment or value add? Investment.

Value add, without a doubt, ground up has become, it's just trickier. It's got more variables. The allure of the ground up is the IRR is higher, is projected to be higher, but there's a lot more risk that's involved. And as the market sentiment in the way of, you know, what investors seem interested in for short duration deals, value add fits into that a lot easier. You know, to do a ground of construction in 30 months is really difficult. We used to be able to do it years ago at that speed, but it's just, there's so many layers that have been added to that process. It's hard to do. And plus with the cost of debt on a construction loan, where in 2020, 2021, our construction loan would have been 4%, 4 and a half percent, now it's going to be 10, 10 and a half, maybe 11%. And if and construction projects are very easily delayed, it does not take much to delay a project. It's construction issues, neighbors lawsuits, building department. It could be a variety of different things. And those delays are expensive. With value add you for the most part you avoid a lot of those issues. So we're trying to do more of that where we can be efficient, get in, get out, hit our metrics, do well by the investor group. And for us continuing to build our business and do more of the kind of work that we do.

You used a term earlier in the presentation that I'm not familiar with an as of right asset. Can you explain what that means?

So in New York, especially Manhattan, and you know, California has very similar issues where before a project can be permitted to be built, you have to go before some sort of board or approval process. Now if you're buying a deal that's as of right, it has a certain zoning assigned to it. And as a, as a result of that, you can build X square feet and you go through your approval process, but there's no special approval that you need to get this project permitted. If you're allowed to build 30,000 square feet, you're allowed to do that. You just have to show the building department that the building is built to code and built the zoning requirements and then you're cleared to build. And that has its timeline. But if it's not as of right and you need a special variance or you need a special approval, or if you're going for some sort of government financing that is not as a right. It just, it adds different agencies to the, to the timeline. So BSA and Board of Standards of Appeal, if someone's trying to add one or two floors to their building that would normally not be as, that is not as of right. Normally they want to get special approval. They have to go to the board Standards of appeal. That has to go to the community for review. It has to go through a lot of back and forth that will easily add 18 to 24 months to a project's timeline. It provides uncertainty because you don't know what's going to get approved. The city council, the local community or the municipal agencies might oppose some parts of it and they might tell you to remove a couple floors from your building. That happens, especially lately, happens pretty often. Landmarks with certain parts of New York City that are historical you can propose in addition and you can go through the two year process and they say no, take off a floor. It happens pretty often. So we try to avoid those obstacles just because the key for us is to be efficient. And you go into a deal, it's like, okay, I know I can build X square feet if the deal pencils at that, let's go. And we go through our process. It still has to deal with certain agencies, but we know what those metrics are. We don't. I try to avoid these surprises. So that's kind of the quick version of it.

When are your K1s generally distributed?

K1s we get started on. It's usually by the end of January is the great scramble to issue K1s. I think this year we got them out by March 5th. The first batch went out the last week of February and then by first week of March we were out, we were done. That's typically kind of traditionally where we fall in line. Usually I say March 15th is the latest, but yeah, it's a scramble. It's a tee once you turn into the new year, that's kind of our goal. Get those out as soon as possible.

Now, of course everybody's going to get a New York K1 or do you guys file a composite return or do all your investors have to file in New York?

So they'll get a K1 from New York and they'll get a federal K1. Any taxes that are associated with the asset from the sale or the exit is paid for by the entity as a New York City tax that's paid by the management prior to the K1s being distributed. I think it's a UBT tax that's paid.

Okay, so that takes care of the city tax as far as the state tax goes. Is that filed as a composite return in New York? I don't know if those are allowed in New York or not.

No, It's a separate K1 that would be issued to investors.

Everybody's filing in New York then. All right, can you talk about one of your deals that didn't go well, why that happened and what you learned from it?

Sure. So I think the value add deals that we've done in general have gone really well and we're really pleased with them and we've had a great response. We had a ground up construction deal that we did during COVID or we started Pre Covid in 2018. It was a Manhattan based project where it was a ground up construction, but it was a condominium project for sale and we bought the asset I think in 2018, early 18. And we were ready for market in February or January or February of 2020. And the market in Midtown west at the time was about sixteen to eighteen hundred dollars a foot for per square foot for a condominium in that area. We had a brokerage team on board that we had, we had hired at the beginning and we kind of designed the project with them. The construction project was built on time, on schedule, budget for the most part was on time or met its metrics. We always carry about at least a 10% contingency. So that was in place. But the valuation disappeared. The exit was delayed because we couldn't get sign offs at the end because 2020 for half of the year we were locked up where nothing could happen. The city went like everywhere else to shut down. And then as the smoke cleared, we had to extend our loan because the loan term expired. It was a construction loan, so it was a higher rate. And then as a result, we had to get an inventory loan. And valuations ultimately dropped from 16 to 1800 dollars a foot to about 1300 in Midtown West. So that negatively affected capital. And that was kind of the hardest one we had to deal with at that time. You know, and one of those things that you build out, you want you, you know, to what you learn out of it is you try to model going forward for a lot of the downside. You put in larger contingencies and you also build in a bigger threshold for price fluctuations. If prices go down, how much can we absorb before it affects capital and equity? So that's kind of the keys that we try to do. What do we have to do to protect as best we can? You can't account for everything. Any project, I think you start in 20, 20, 2021, there's no way you would have known that deals would be at 10% or 11% interest at that time. You can't really model that into a project. So those are the kind of things, you know, you try to account for everything, but there's always something that can happen and ground up construction. That's why it's the most risk prone deals. But when they go well and the timing is on your side, the IRRs surpass any other offering. But that's always kind of the allure. But I think at this point, with the market being where it is sticking to value, add smaller deals or smaller or portfolios of smaller deals that you can put together into a group where you can spread risk. I think it's kind of been the best thing for our investor group that they've found most attractive, especially right now and for us because it allows us to do good deals and just kind of continue to do what we do. Well.

Now for investors out there that are feeling hesitant because of market volatility or what they've read about multifamily, maybe they're sitting on a bunch of cash and you know, money market fund making 5%, thinking they're going to wait a year or two before they invest, what can you say to them to convince them to buy now instead of waiting?

It's, you know, it, it's interesting. You know, I would say keep most of it protected in, in your, your indexes and, or whether you keep it in Treasuries or the stock market. But I think allocating a certain percentage to real estate is always a good idea. It just diversifies your portfolio. Where the. Where stocks go down, real estate can go up or vice versa. And it helps just blend things. I think real estate also gives you a tax advantage that you don't get out of the stock market or your indexes. And we have some investors or as time goes on, more investors that use their IRAs to invest real estate just because it can offset some gains through depreciation or invest in IRAs. So there's different options, there's different strategies that people are using. But I think real estate being part of your portfolio is good, but I think it's a blended and diversification that's key with anything. The same way we'll buy a portfolio of assets and we'll diversify those assets across different neighborhoods. I think it's the same with any portfolio. It's got to be spread to try to be efficient. And, you know, some things will go well, some things won't. And you try to get the blend, and hopefully that's higher than the average, and you build from there. That's kind of the key and the goal that we try to do.

Okay. We've been talking now with Anthony Morena. He's a principal at the Mortar Group. If you're interested in learning more about Anthony or about the Mortar Group or investing with them, you can go to whitecoatinvestor.com mortar and that'll get you right to where you need to be to be able to get more information. Thank you so much for your time today, Anthony.

All right. Thank you very much. I appreciate it. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.