10. From Interning to Mastering Development with Susan Hewitt

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis & Young's Tri State investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson. Happy New Year's Eve. This is James Nelson, your host of Real Estate Investing Live from New York. I hope you are gearing up for a great New Year's celebration to close out the decade and welcome in the new one. And for us, this is our 10th show. So I want to just take a minute to thank you all for your support and spreading the word. Please continue to post your comments and rate the show. You can also request it now on Siri or with Alexa by asking for it on itunes. So for today we've got a great show where we've got Susan Hewitt coming on. She is the founder of the Cheshire Group and she's going to talk about some of our early condo and co op conversions up to today where she has been advising on a new Islanders hockey arena. Then we will have our panel back with Peter Steyer who who does debt and equity with Avis and young Steve DiNardo, founder of the River Oak Fund and then Marius Sejuilsson who is from Equity Multiple A crowdsourcing platform. Before we get to that, we will quickly do our week in review. Powered by the Daily Beat in this past week's sales, McDonald's has sold 429 7th Avenue to an unknown buyer for $35 million. The three story retail building spans 5,800 square feet and is located between West 33rd and 34th Street. And based on those metrics, I would assume we're going to be seeing a new development there shortly. In financing, the group behind Industry City has secured a $720 million loan from Blackstone bank of China, Deutsche bank and SL Green Jamestown. Angela Gordon Belvedere and Ruby schroan plan a $1 billion expansion to their 6 million million square foot office conversion project out in Sunset Park, Brooklyn. In Real estate meets tech SoftBank's talks to secure 3 billion from Japan's three biggest banks for WeWork have stalled as the lenders have hit internal lending limits. The banks are seeking ways to provide the financing while offsetting exposure. One option is to use some of SoftBank's 26% stake in Chinese e commerce giant Alibaba as collateral. In Real Estate meets politics, the Trump Organization's office portfolio is thriving while their hotel expansion plans have been thwarted. Their marquee hotels in New York, Panama and Toronto have all stripped the Trump name. But in the meantime, the office properties have been providing a boost. Their Fi Di office tower at 40 Wall street has been controlled by the Trump since 1995 and has seen its NOI nearly double since 2015. The Trump family also owns a 30% stake of Vornado's, 1290 Avenue of the Americas and 555 California street in San Francisco. And lastly, the IRS has published their final regulations for the Opportunity Zones, which control almost 9,000 designated areas throughout the country. The the new regulations now allow investors and developers up to 62 months to complete projects and also incentivize brownfield sites and vacant lots. That being said, out of the 103 tracked funds looking to raise approximately $22.7 billion, only $3 billion has been raised to date. So those are your updates for this week. Please stick around. We'll be right back after a word from our sponsors. A Different Approach to Putting our Clients First Avis and Young's Tri State Investment Sales Group sells multifamily office, retail, development and specialty sales throughout the New York metro area. As experienced thought leaders in our industry, our 35 member group is available to help you make informed investment decisions by advising you on your current holdings or identifying new opportunities in the marketplace. Our one unified team is built on an industry unique platform which promotes unparalleled collaboration and teamwork. We share core values of hard work, integrity and expertise. We put our clients first providing tailor made strategies to achieve superior results. Please Visit us at aytristateinvestmentsales.com and and follow us on Twitter, LinkedIn and Instagram amesnelsonnyc to learn more. And now it's time for our Investor Spotlight today. Thrilled to have with us Susan Hewitt. Susan has over 30 years experience as a developer, manager and investor in New York City's residential market. In 1993 she founded the Cheshire Group, a real estate development, investment and advisory company specializing in New York metro area multifamily properties. Susan has been involved in rent regulated apartments, market rate cooperatives, condos for sale and has been involved in some recent conversions here as well as her latest endeavor is entitling the new Islanders arena in Belmont. So thank you for doing that and bringing the Islanders back to the Island. I'm sure got a lot of happy sports fans listening in as well.

It's been incredibly fun.

Good, good. So I guess we'll finish off with that piece because what we've been doing here is having conversations with real estate developers, experienced veterans in the industry like yourself. So maybe if you can bring us back to the beginning, maybe not all the way back. I know on the way down, you were telling me how you grew up in Rhode island and New Hampshire. I grew up in Wisconsin, so I think we have cold weather in common. Yes, yes. So any real estate early on or what?

I actually came into it sideways. I mean, most people who didn't grow up in a real estate family find it through different avenues. And I had been an economics major and I was studying, took city planning courses because they counted for the economics department and just thought it was incredibly fun and interesting. And I couldn't get a summer job working for a city planner, but ended up talking my way into a summer job working for a developer. And that was it. I was like, oh, this is way more fun.

Great. Was that in Boston?

That was actually in Providence.

Okay.

So I spent a couple of years doing project management, converting office buildings, loft buildings to office, and doing historic renovations and just thought it was the most. I found it incredibly fun.

And what did the day to day look like back then? Were you actually on the job? Were you working with local government? What was your.

Yes, in a way. What you're doing is making lists and following up with people. I sort of tend to explain. It's like being a movie producer. You don't have any actual skills. You're just organizing a whole lot of other people. But I wasn't understanding the finance side of it, so I got to see how construction worked. I learned enough about construction management to understand that I will always pay somebody else to do construction management and worked with leasing, which is sort of the sales and marketing side of it. So I understood the physical part of it, or I started to understand the physical part of it. And I started to understand the leasing and marketing and a little bit about just what was involved in operating a property. But I didn't understand how the money part worked. And that was really what sent me off to business school.

I really like how you describe the job as the developer to be maybe not specifically doing any of the actual tasks, but coordinating, because it is. And part of the show week after week to build on is bringing on specialists who handle every aspect of a real estate transaction. So, yes, coordinating is a big part of the job.

Well, and especially doing project management when you have responsibility without authority. I mean, it's really about how do you cajole and beg and keep people together on a schedule when Each team has been assembled usually for the project.

So early on, thinking about that first law of conversion in Providence, any horror stories or any triumphant successes and anything that stands out from your memory.

Well, the thing about Providence is it's very small. I mean, I hadn't moved to New York yet, so I didn't know it was very small. But everybody knows everybody else. And when you went down to the building department, Merle Dicconti, who was the.

Building inspector, would say, he's probably still there.

Yes. You'd roll out the plants and go, oh, you're working on the Hoppin building. Well, you gotta watch out for the winders on that staircase. Right. I mean it was very small community. So when I got to New York and found out that there were things like expediters. Whoa.

Yes. We have a whole cottage industry to help you navigate the buildings department. No, it's interesting because there are certainly some town cities that are, you know, if you're dealing with the local branch of city government, could be just one person that you're interfacing with as opposed to a whole department.

But the process is, is in fact the same.

Right.

I mean, you still need to get it built and you still need to get it approved and you still have to find somebody who will pay you rent.

So you wanted to learn more about the financing aspect. So you go back for an mba? An mba?

Well, some of it was, I just wasn't. The guy who owned the developer I was working for was not going to share the details of how the numbers were working. And some of it was I was a 23 year old girl. And so having a little bit of credibility was also helpful. Yes, I had to go someplace and get older and get more respectable.

So was it more theory in the classroom or did you feel like you were actually getting. I mean, the reason why we're doing this show is there's a lot of listeners out there who don't even know where to start. I mean, going. And maybe some do have the ability to take a year or two years off to do a master's program. What was that experience like?

I would have said that the thing about business school is that it's two years of practice and making decisions without a lot of information. There's very little that's specifically applicable. But you learn a lot about. Let me back up for a moment. The thing about real estate is it is the perfect generalists job. It's the physical expression of what's happening with an economy. It's valuable if people are Going to move someplace and want to live there or if people are going to want to work there or people are going to want to make something there. And so the building itself only has value to the extent that somebody wants to live there or work there.

Right. So the theory could apply anywhere, but if you don't pick the right market, then you're kind of dead in the water.

Yeah. So it's less about the. I sometimes explain to people it's way more important to read your local newspaper than it is to read the Wall Street Journal because you do have, you do have to understand what's going on with interest rates or whatever. But really you sort of have to know why is this part of town gonna grow or be attractive to people. And sometimes that doesn't have to do with what your building looks like. It has to do with demographics or what's happening in the, you know, what industries are growing and changing. And so sort of trying to get in the way of change is probably the, I would have said the important real estate skill.

It's really great advice because it is such a super localized business. And I even rem early on when I started in the business and attending my first community board meeting, which for all our listeners you got at least try it once. In fact, my company I think put me up to being a proponent of one of our developer clients project. They wanted to build some tower on a mid block which probably should have never happened, but it was booed off stage by a couple hundred the old ladies in the audience.

It's really important.

It's important. And I will tell you one of the first things that happened because one of the neighborhoods that I focused on early on was Chelsea. And at that time it was mostly manufacturing zones. So up and down 6th Avenue was all flea markets. And then all of a sudden overnight there was 30 story towers popping up because they gave residential density. And for our listeners they might say, well, I'm not going to build a 30 story tower right off the bat. But I tell you, if you had bought the small one and two story that were maybe part of an assemblage or off on one of the side streets, you would have done really, really well. So I think being tuned in today to what's going on in the neighborhood is very important.

Well, in talking about Chelsea, there are a couple of other changes, which is Uber. I mean the thing about west Chelsea, it wasn't near any transportation and it was a long cold walk right to 11th Avenue. And Uber has really changed the economics of a Lot of stuff. And I think so it doesn't have to be a political change or a zoning change, but those kinds of larger changes in an economy or in a sort of social changes starts to ripple out and gets felt in the real estate market.

So, okay, so you graduate, you have your master's now what? I moved to New York because.

Well, that too. I moved to New York because my boyfriend was here.

Okay, so there we go for career advice.

And 40 years and. Or how many years, 35 years and a couple of children later, I can't imagine living or working anywhere else. But I think it actually sort of brings up a thing that when I talk to people about their. About real estate careers, your early decisions about where you locate or what kind of work you do or who you work with will have very long reaching effects. Because all of your contacts, all of your knowledge, all of your information becomes more valuable the longer you stay in a place. I mean, real estate is very local, except maybe the retail business will put a little asterisk by that.

On that note, how should our listeners think about if they have the flexibility to pick up and move anywhere? I would fully agree with you. There is so much knowledge and so much capital here in New York. It's the number one investment sale market in the world. Even though this year sales are going to be off by a fair degree, based on some political headwinds we've been finding. This is the first time in my career that I'm hearing about. It seems like every city's up for grabs. And I hear Nashville and I hear Austin a couple times a week. How would someone pick a city today?

That's hard for me to think about because as I said, I pick New York for completely random reasons. But the thing about New York is it's a really big market. So there's lots of different ways to be involved. Even when you're at a moment when there's a recession or there's always something going on in New York, I've done some work in New Hampshire. And if you're in a very small market, well, let's put it this way, in New York, if nobody's renting your apartment, you can drop the rent and someone will move in. If you're working in a project in a small place in New Hampshire and you drop your rent, it doesn't matter. There might not be anybody moving that month. So it's important, I think, to work someplace where you understand or think about how deep a market is. So in New York City, there's Always a kind of market city market clearing price. There's always a transaction that can happen when you're in quite small markets. The fact that real estate is really illiquid can really be a problem.

Yes, yes. So you start off and do you go work for another developer? You do something on your own?

I worked for a small development company for 10 years and we did loft conversions. So we converted loft buildings and institutional buildings, hospitals and stuff to apartments. So I spent 10 years kind of doing. We would do big complicated projects and we would do it all ourselves. We did our own syndications, we did our own construction management, we did our own property management.

So your job was to go find the opportunity and then execute on the plan, or were you more.

Well, I was sort of hired to be the project manager for 305 Second Avenue.

Got it.

Which was a conversion of a former hospital to apartments and it was a national landmark. So we had a tax credit piece of. Was incredibly fun and we all barreled along until. This is ancient history. But in 1986, the tax laws changed and money sort of dried up, followed by the SNL crisis. So then I got to understand what it was like to do a workout from the ownership side, which was agonizing.

Any takeaways from that. So you had loans that wasn't.

It's an interesting experience, all those documents that you negotiated with such optimism and you kind of didn't really think about.

You actually have to read those, is what you're telling me.

And when you read them, it's like, ooh, yeah. And it was an interesting experience understanding that notwithstanding what the documents say, whoever has the most money in the deal will control the decision making.

So you had to work out some of the situations. And I'm sure the lender was looking for a way out as well. So, I mean, here you had the expertise and it wasn't the skill set to finish the job. It was just you had to reset the basis. Is that fair?

Yeah, it was pretty amicable. And we'd done a couple of. We had a whole bunch of market rate rentals with J51s that were burning off. This is again more technical than needs to be explained. But we did condominium conversions for several buildings. So I actually been through the conversion process and so what happened in sort of 92, lots of CO ops were defaulting because they. And so I had been buying individual apartments at foreclosure auctions and eventually figured out that the efficient way to proceed was to. Because you have to underwrite the whole building that if you bought the debt on the building, you could kind of scale this up. So that was really what started Cheshire. And this is again, I think way more technical than for general listenership.

You know, the idea, especially for a first investment and here's just one example, but my family goes down to Fort Lauderdale and I see on the beach you've got 50 story towers and then, or maybe 30 story towers and then you've got these little bungalows out there with, you know, who knows, maybe 5, 10, 20 units. And I thought if there was a way to kind of buy up all the units and maybe you could, you know, then take control of the co op and you know, then dissolve it and build highest and best use is probably not as two, three story bungalows. So you have that kind of one idea. You also have, you know, situations whether there's condos that have gone bust and they haven't been able to pay their, their maintenance costs. I'm sure there's a lot of listeners out there saying, well, there's a couple condo projects in my town and maybe they'll work out and maybe they won't. How do you approach those?

I'm not sure I would recommend for a first time investor going in and trying to restructure a condo. You'll run into some pretty significant professional fees on lawyers and there's some complicated tax aspect to it. But buying up a couple of condominium apartments and operating them as rentals is not a bad way to sort of figure out what's what and you don't.

Have to deal with the overall upkeep of the building and you're kind of focused just on your unit might be a good way to.

And depending on where you live, airbnb is. Makes operating and managing an income property way simpler for people.

Right. And you definitely do. And I know you said depending on where you, you are because that doesn't work in.

Right.

There are legal said, you know, basically no Airbnb or what the way they say it. No, it's got to be a. Yeah. Unless if you're at home or it's over a 30 day stay. So you do have to check can you take an overnight guest?

Right.

So you did become known as one, you know, a pretty big buyer of these condo call them unsold packages. So you would go in and in fact I think we, I'm trying to remember we did a deal. It's probably been we're due for another one. But we were younger then. Yes, but you bought the units that the Developer never sold off, so I guess they had rented them off. And you bought the units?

Yeah, that was sort of chapter two. We'd bought all of these apartments and restructured the debt and then realized that we were in the unsold share business, so.

And you'd rent them and then when the tenant, I guess, well, they were.

They were subject to rent regulations. So what we were.

So they had rights to the apartment, they would stay. But if they vacated then, then I.

Think the phrase that we use is move to Florida. But if, if the tenant moved to Florida, we would then renovate and sell.

The apartment and we would you ever help facilitate that move to Florida? Maybe pay for their moving expenses or anything like that?

If, if, if they approached us.

That.

Was a sort of whole probably 10 year chapter. And then in 2006, we pretty much sold everything. And I'd love to say it was because we could see what was coming, but it was as simple as we would bid on packages or portfolios and we were coming in at less than 50% of what it ultimately traded for. And my business partner and I would just sort of go, maybe we should be sellers.

Right. Or lenders. I find a lot of my clients today say, hey, if I don't like where I can buy the real estate, if I can lend even at 75, 80%, I like this. Have you ever thought about that?

Well, on the unsold apartments, typically they're not financed because they don't really generate enough current cash flow to make financing worthwhile. So that's not an asset that we would be a lender on. But there have been other situations where it's made sense for us to be involved. I mean, currently we're looking at a couple of situations where residential projects are underperforming. So new money needs to come in. And so we will. There will. We're working with a partner on putting in new money and offering some, some expertise.

Got it along. So I know you did a very substantial condo conversion in Greenwich Village. And there the developer. Was it a joint venture that you did?

Yeah, I mean, that was a joint venture with Sterling and that was. That project sold out. And then we did a. We've just completed the sellout of a very similar project with a different partner on the Upper east side.

So high level on that conversion project that you did. And there you had some units that would stay as rentals. You had units that you figured you could turn around and sell. But how did you get comfortable with that investment? How did you know, assuming that it did it seemed to be incredibly successful. I guess it started with picking the right location.

I would say, in Greenwich Village, the Devonshire House project. We felt that we were able to offer something that didn't otherwise exist, which was a pre war condominium that was completely renovated. There was a fair amount of competing stuff coming on the market that was new construction. But if you wanted a pre war apartment with a doorman in the Village, there was so little to choose from that that's really what gave us the comfort to go ahead. And conversions are. They're complicated. There's a whole sort of dynamic with the existing tenants. At Devonshire House. We had lots and lots and lots of tenants bought their apartments. Really the most complicated thing about it is doing extensive renovations in an occupied building.

Right.

And it's again, when I.

Maybe not for the first investment, but we have some aspirational listeners on the show, so maybe for their second or third. But the idea of buying a rental building and selling it off as condos, you kind of look at what's the price per pound as a rental and then what you can sell the units for. Because you bought that building for what? Do you remember how much it was a foot? Sure. It was under 1,000 a foot.

Oh, it certainly was under 1,000 a foot.

But you were selling the vacant, I mean, the renovated units at 2,500.

Right. Well, lots of pain and money between A and B. But when I described the role of a developer as essentially making lists and haranguing people, I would say at Devonshire House, much of what we did was constantly communicating with the contractors that, remember, there are people here, this is an occupied building, this is people's homes. And what it is that what piece of information you have to supply at any given project, what's the sort of missing thing that you bring to it? I would not have expected how much of my time was spent simply communicating that over and over to contractors and also with folks living in the building, giving them a context for what's going on and how long it's going to take and why we're doing it.

So a rental to condo conversion, is there a rule of thumb where people should say, okay, this is good, I mean, is it as simple as price per foot?

I think New York is super difficult. Different because of the rent regulations.

Right. But if it's a vacant building and you're looking to convert it, you'd better.

Be coming in at less than 50%.

Of your sellout in what you're acquiring the building for. Yeah.

And then There are real questions about sort of where your market is, because you can kind of go one of two ways. You can either change the ownership format and sell it cheaply. I mean, we're sort of. It's not quite just painting it and making it cheap and cheerful, but that's one route. The other is really repositioning the whole building and trying to sort of change how people think about it. And that involves. You need to control the entire building.

Right, right.

And that's sort of, by the way, when people think about buying an apartment in a larger building. If you just own an individual apartment, you're really never going to sell it for more than the comps within the building. And sort of part of what, as a developer we're doing is trying to figure out how you can change the entire narrative and have people see the entire. And sometimes it's a question of the amenities, sometimes it's a question of how do you change the unit mix and who are people, who are you trying to sell the apartment to? One of the things we did at devonshrau's, by the way, is when we bought the building, it was studios, ones and twos. And much of our effort was spent combining apartments so that we had really significantly large, over sort of 2,000 foot apartments, family size, because that was not a thing that you could get in Greenwich Village.

And how did you determine. How did you know there was going to be demand for that?

My favorite real estate quote from somebody else is that David Kramer says, if there are comps, you are too late. But really working closely with brokers and knowing and trusting and brokers have deep knowledge. They don't necessarily.

I like plugs for brokers, but they.

Don'T necessarily understand the significance of what they know.

Right, right, Fair.

But that was part of what made that project appealing to us was the way physically it laid out. We knew we were going to be able to combine apartments.

So you do a couple successful conversions and now you're more in an advisory role. So just tell us what you're doing with a stadium.

Yeah. So you know what I said about how your career will influence the choices available to you. You can disregard that with. With this. The partners in the Islanders project are people I have worked with before. Mostly what I've been doing is working on the entitlement and negotiating the grand lease with the stadium.

So you're not designing yet what the stadium is going to look like?

Oh, yes. That is all designed. And I have learned all sorts of fun things that I never thought I would need to know like why it matters where the Zamboni enters the ice.

No, I think it's important because some of the criticism that you. When they used to be at the Brooklyn Barkley. Oh yeah, the Brooklyn arena. Was that it's great to go watch a basketball game, but somehow the way the seats were positioned and where the goals were, maybe where the Zamboni was coming out, that it is, it is.

Not designed for hockey.

Right. Okay. So are you a hockey fan?

I grew up in New England. So you know, I know from, I'm an Islanders fan.

Okay.

But what I realized in doing this is it's a real estate deal. So there are sort of specifics which are unique to this and that I had never previously thought about. But then again, managing risk, sort of understanding where you have financial exposures, dealing with the reality of just how long it takes to build something.

Is this a master plan? It's not just an arena. I mean I'm sure it's the retail. It's the part, everything.

There's an arena, there's a 250 key hotel, there's 350,000ft of retail.

That sounds like a lot of retail today. Is that concerning or is that.

Well, it's a very specific kind of retail. Scott Malkin, who's a principal owner of the Islanders and the developer of this has spent the last 30 plus years in Europe and Asia developing Value Retail, which are luxury outlet centers if you think Woodbury Commons, but nicer.

And so people will go to the game, they'll shop before or after, you'll have.

Right. And it's located. I mean Value Retail has an enormous international tourist base. I believe their project in London is the second most visited. Let's see. Chinese visitors visit Value Retail at Bicester Village more than any other tourist site except for the Tower of London or maybe Buckingham's House.

I'd never heard that before.

Right? No, no, no.

So you get the right anchor so people are going to show up.

So you're adjacent to Kennedy Airport and that's got it. I think it's going to be at an enormous base. But anyway, it's been very fun.

Got it. So over your career, what would you say has been your key to success? Your chance to double handed pat on the back? Just, you know.

I return my phone calls.

You know what, that's actually, you know, it starts with that. Right. You'd be surprised how many people do not.

Jennifer, my business partner. I joke that the two things that all it takes for us to Think you're wonderful is do what you say you're going to do and return your phone calls that turns out to, you know, put you miles ahead of everybody else.

It sounds like also doing your research and really getting into the project. And yes, you call it coordinating, but it sounds like you're not just kind of up above and let everyone else deal with the details. You're getting in the weeds.

Work with good people and give credit to good people because it is fundamentally a people business and we're in a small market. I mean, New York is a very big market, but basically the real estate universe. Not quite everybody knows everybody, but if you don't treat people fairly, everybody will hear about it.

Yeah, I mean, it's reputation is the only thing you have in the business. And I think it's great advice for those of our listeners looking to start out. What would be your advice to them today?

My advice would be find something that.

You.

Know about, have an angle about, are able to understand whether it's because of your age or where you live, or if you have an, an uncle who runs a business in a part of town and sort of sees what's going on, tap into that. So what's scarce are sort of deep understanding of what's happening in a certain area. So if you're able to see, like we were talking before, what Uber would do to West Chelsea or Red Hook, nobody would have lived in Red Hook because. Because you needed a car.

Right.

If you can find an area that you feel like you really for some reason is likely to benefit from demographic change or economic change, I mean, the sort of big boom and bust obvious one would be Amazon and Long Island City. Right.

Wow.

People were suddenly crazed. But things like that. And by the way, Long Island City is probably still poised.

Right. Something's going to happen, something's on the waterfront. It's right there. Yeah.

And then invest. So sort of pick a general area, whether it's a geographic area or a thing that you understand, like, you know, I know how restaurants work and therefore I'm going to specialize in looking at things that will work especially well for restaurants or what have you, then you can kind of concentrate. And if you're able to buy one or two projects on a basis that sort of don't blow it out of the water, but just sort of make fundamental sense. You can kind of develop a, a working network of relationships and knowledge so that over time you'll be able to buy your next project more economically or you'll have learned some inexpensive and hopefully not too painful lessons then over 10 years, whatever the demographic change is that you tapped into will sort of wash over it.

Well, that's great advice and really appreciate your coming on the show today. So thank you. Susan.

Thank you. This is really fun.

Good.

I'm so glad you asked me.

And please stick around. This is James Nelson. I'm your host of Real Estate Investing Live from New York on the Voice America Network. We're going to go to a quick break for a word from our sponsors and we'll be right back. Thank you.

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Welcome back to Real Estate Investing Live from New York. I'm your host James Nelson and fortunate to have back in our studios with us today, Marius Schulson, who is co founder and CIO at Equity Multiple Peter Stier, one of my colleagues from AV Young in our debt equity group and Steve DiNardo who is founder of the River Oak Investment Corp. Gentlemen, thank you so much for coming back and joining us. We had a really great conversation last time about the capital stack. Last time we talked about the actual capital stack and how it's structured. Today we're going to talk about how to raise equity. Why you would want to raise equity. Steve, I'm going to start off with a very slow pitch softball to you. Why would an investor want to come to you to raise capital for their deal?

Well, I think there's several reasons. We're sort of a middle market player. A lot of the sponsors we deal with are fairly small, getting bigger over time. They may not want to have all their capital in one deal. They want to save some capital for multiple deals. And if you think about it, but raising capital, if you only need a million or $2 million, a lot of people can do that through friends and family. And if you're looking for 50 to 100 million or multiple millions, you can get that from one of the big funds. But where River Oak plays is really in the middle market. If an investor is looking to raise 4 to 6 million dollars, it's too big for the friends and family group and it's too small for the big funds. We've made a name in the New York marketplace in the surrounding area, and they know we have this kind of capital. They have a deal, they come talk to us.

Marius, is it fair to say that some of the deals that you've raised money for on your crowdfunding platform are probably even below that? I think Steve's right. I mean, there is kind of that sweet spot where maybe you can code to some of your friends and family if you need to raise a million dollars, but you also offer them that platform. How much equity do you typically raise on your platform, and what are the type of sponsors who approach you?

I think a lot of us, we will target a lot of the same sponsors in the sense that it's sponsors that are either moving from a real estate job at a big fund and they're starting out on their own, or they've had a couple of projects or several projects that they've completed and now they're sort of graduating away from friends and family into not institutional space, but that several million dollar check from 750,000 all the way to 5 million. When we started the platform four years ago, we were raising $500,000 into a single transaction. And now we're sort of doing two and a half regularly, five times a month into transactions. So it really sort of what we've seen is if there's a sponsor, whereby there's going to be a programmatic relationship with the amount of capital that we're going to raise per transaction is going to be lower. We rarely look at things any more below $1 million, but we would look at 500, 750 if we knew that sponsor and that developer was going to do three to four of those transactions in this sector and space.

That's perfect. I think what we have covered on this panel here today is really all aspects of the check size. Peter, fair to say you've worked for some of the largest developers in New York?

Well, first I'll start out with saying we'll take a look at raising equity in the 5 to $10 million range. Again, there has to be a hook to it. It'd be from an entity or a person who has multiple transactions so that we know that there's an ongoing relationship Moving forward. But putting that aside, equity checks typically range from $20 million on up, all the way up to, I guess over the past few years, a quarter of a billion dollars for an equity check, which translates into an approximate billion dollar transaction. The types of people or entities that we go to on the institutional side could be various pension funds. On a direct basis, we have relationships versus going through advisors, insurance companies, private equity funds, college endowments. Again, we have relationships with certain colleges that we could actually go to their endowments on direct basis state funds as well as unions with their pension funds. And then high net worth individuals or family offices who are actually capable of writing checks in the 15 to 20 million dollars ranges. So that's the typical gamut of folks who we would go to. We would have to understand the transaction and then we would have a very targeted audience on who we would go to as far as raising that capital.

Perfect. Steven, I know last show you talked about what you look for in a sponsor. We have people listening to the show who, maybe they're in the real estate space right now. Maybe they're a broker, maybe they're an architect. Let's say they've stumbled across an incredible opportunity. They've tied up a property that say for sake of argument, you think it's worth $15 million. They have it in contract for $12 million. They get the benefit of a great buy in. They don't have the track record that Peter's talking about where they can't show you five or six sales that they have completed. Is that just an automatic no go for you? Or the better question to ask is what would they have to do to, to show you that they could execute on that transaction?

I think the important thing is looking at what their background is. They could have this background having worked at an institution, or they could have picked it up along the way through other experience. We're not scared off by somebody if this is their first deal. We just have to gain the confidence that they're capable of, of executing, whether that's by themselves or with others on their team. Sometimes we'll add some insurance by bringing on a construction consultant that the deal will pay for that reports to us just to back up the fact that this is the person's first deal and we're going to help them through it.

Marius, how does your platform qualify the sponsors? Because you have, I think you said in the last show you've raised Equity for over 90 transactions. I'm sure these are many different sponsors. Does equity multiple actually qualify those sponsors to Start with are you the Good Housekeeping seal?

Typically they have to have a track record to Steven's point, if it's their first transaction in, in the space, there are certain things that we're looking for. Again, institutional experience is number one. If it's their first transaction in space two, is it the market that they have ties to? If they're a New York based professional and then all of a sudden they're doing something in Albuquerque, New Mexico, just because they somehow found something cheap, that's not something that we are attracting. It's got to be ties to the market. Places where you'll go and you'll be aligned. You know that they'll have boots on the ground consistently.

The reputation, the sponsor, the deal. You really do look to vet what's there.

Absolutely. I think that for us, even more so than the location, more so than the property, it's all about the sponsor. For us, largely because we're doing such volume at this point, there's so much embedded trust in their ability to execute on the business plan, their ability to sort of just consistently and honestly communicate, tell you when there's issues that have arisen and so that you're not sort of taken aback or taken by surprise if anything along the way just goes wrong really.

So Peter, we're looking to help this first time advisor. This is a really great transaction. Let's up the stakes here. They've got it in contract for 12, we think it's worth 18. There's imputed equity in the deal, but this sponsor has not done a real estate transaction before. How are you going to help them?

I'm going to bifurcate the answer here. There's a few different ways to go. In fact there's probably more than a few. But two ways that we would recommend is possibly find a co partner for them who owns that space. Meaning or who understands that space, who's been there before, done it and has a track record. And of course the initial sponsor would have to be open to allowing to communicate and be there with a co general partner.

And you could help them find a co development partner and create the whole staff structure.

Yes, absolutely, the structure at that point. Another format is to find, and we have done this on many occasions, find a LP partner who has done this before and who understands the space as well, who could be infinitely instrumental in helping them and guiding them and giving them guidance along the way as well. They'd still be a limited partner, they would not be a general partner or a sponsor in the transaction, but they may afford themselves some atypical rights in the transaction as far as various decisions go along the way.

So, Steve, I'd like to talk a little bit more about the relationship between the general partner and the lp. And I know last show we talked about about major decision making rights, but can you talk about really the interplay? Let's say you've gotten to the point where you've closed on the transaction. Talk about what an investor, a sponsor, should expect.

Yeah, that's absolutely right. It really does depend on that sponsor's experience. To Peter's point, my company is filled with people who actually have operating experience. So to the extent that they need to call upon that experience, we're there to help them.

You're being very modest, but I know you managed the Chrysler Building for Jack Kent Cook back in the day. So if you know how to run the Chrysler Building, I think you're probably qualified to take over or help any potential situations that arise.

But what's very important to us is communication. We need to hear from our sponsor partner as often as needed. We visit the properties often. We talk about the business plan, we talk about the marketing. And again, depending on their experience level, the greater their experience, probably the less they hear from us. Because the people that are very experienced, not only do they know what to do, but they also know how to deal with the limited partner. They know reporting is important because for me, what's important important is also the communication back to my investors. So the more communication I get from the general partner, the happier I am. The last thing a limited partner wants is a surprise, especially a negative surprise. Our goal is to almost know what's going to happen before our general partner knows. And that means staying on top of them with regard to reporting the construction schedules, marketing, making sure they're hitting their milestones.

I want to ask Marius because I have to go back first. And I realized we did skip a step. Peter, before they go out and look to raise equity, you're going to put together a memo, a deck. Maybe we could talk a little bit about that. And then I want to hear how Marius deals with reporting. What goes into when you're looking to raise money. I know it's not just a one piece of the setup. And hey, you want to come in on this deal? I'm sure you're putting together a memo and terms of engagement, so to speak.

Terms of engagement is probably the most appropriate way to put it. But it's a book and the book has several components to it, not the least of which is the sponsor's background and their track record. But putting that aside is the transaction itself, how that sits in the market, the market itself. As far as comparable information, why the numbers make sense and what the. And we'll typically do a 10 year projection on the transaction as stated at that point and then go from there.

Marius, now getting back to this reporting because with Steve and his fund you can call him up, I'm sure with his sponsors they're dealing with. Sometimes there could be other investors alongside you, but most of the time, most.

Of the time it's just us. But yes, sometimes there's others mares you.

Go out and raise money on your crowdfunding platform. There could be 20, 30, 40 investors. What kind of reporting are they getting if there is an issue, how do you resolve that?

Typically we max out on pretty much all of our transactions this point in terms of 100 investors. So I mean you know, 90 plus.

Transactions and there are rules. Is that the blue sky provision? So I, yeah, we can't have, we.

Are can have more than 100 investors per transaction on common equity on our debt investments and we do participate in debt investments as well. We can actually go past that rule and so we can go up to 2,000 in some of those transactions we've done with some big name sponsors here in the city. We've had 600 or so investors.

Did I blow up by not putting a disclaimer on the show that this is for accredited investors? Again, when you go out and raise money, and I know Steve, when your fund raises money, you're dealing with accredited investors, people who are in the business net worth. Is that the same thing? If someone wants to put $25,000 invested, they have to be accredited and that's.

Mainly to protect them, to ensure that they have the liquidity, they have the financial know how to know that real estate's not a liquid investment and should they need to get out, it's not as will like they can just get out whenever they want. They should just know going in that they may be sitting on no returns given the prospectus for maybe a couple of years potentially. In terms of reporting, back to your original question. We try to ease that pain through our technology platform. People are constantly engaged with our platform. Every quarter we're pushing out asset management updates. We have templates that we tell our sponsors that they have to adhere to at this point. And so it's a fairly easy template that they have to fill out and then we push that out onto our platform. People get an email, they say okay, great. Either I've gotten a distribution and here's an update on the project and even if it's a not much has happened that's still important. You know, I think that the no news is worse than bad news actually in our space because I think that we charge an asset management fee largely to sort of mitigate against this, that we're taking care of your investment, we're being good fiduciaries and we are sort of managing the sponsors and managing the outcome.

Perfect. And I think that is a common theme of it's always better to over communicate. When you bring on an equity partner, they are a partner and you're hoping that you can do more transactions. Ofer Yardeni came in here, one of our earlier investor spotlights. He said the first transaction that he did was with the Caisse de Poe. Talk about a first time investor. Now he was a broker but his first deal and I think it was $40 million in the case was willing to go in with him. Fast forward two decades later and over 2 billion of real estate acquisitions that worked out pretty well with them. Peter Programmatic investments. Is this something that you see once you make a marriage, you hope that it continues?

Absolutely. That would be the way we describe it to sponsors is that the hardest transaction typically is the first transaction is getting to know the parties well and not the least of which is the documentation that goes into into the transaction as well. So once that documentation is in place then it's relatively easy, depending upon the next sets of transactions to modify them on a going forward basis.

Perfect. So thank you everyone again for joining in this week. This is Real Estate Investing Live from New York and I am your host James Nelson. Thank you again. Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7:00am Eastern Time, 4:00pm Pacific Time, as well as always on demand. We'll talk again next week.

Sam.