15. No Experience Required with Chad Cooley

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.

Welcome back to show number 15. This is your host James Nelson of Real Estate Investing Live from New York. We are having a lot of fun and I am broadcasting to you as always from world headquarters here at CUNY University. I want to thank Kevin, my producer who's been doing an incredible job for the show. Today we have Chad Cooley, who is a good friend of mine, also a fellow Colgate alum, and his story that we're calling no Experience Required and how he started in affordable housing and ended up building out an incredible hotel portfolio. So we're going to learn all about that. Before we get to that though, we are going to do our Real Estate weekend review powered by the Daily Beat. So this past week Amazon has leased a 450,000 square foot warehouse next to its 855,000 square foot distribution center in Staten Island. The properties are part of the industrial hub near the Bayonne Bridge that Matrix Development Group is building on the West Shore. Furniture giant Ikea also operates a massive E commerce fulfillment center in the complex. Amazon's distribution center that opened in 2017 focuses on storing and sorting goods, while the new warehouse will focus on last mile deliveries. Amazon's existing $100 million warehouse, according to the Cranes and Commercial observer article, has received $18 million in state tax credits and employs more than two elsewhere. YD Development Alberto Smecki CEBA has acquired 105 to 115 Greenpoint Avenue in Brooklyn from Redbrook Properties for $29 million. The three contiguous walk ups span a total of 38,000ft containing 52 units. In Real Estate Meets Tech, CREXI has raised $30 million of Series B funding led by Mitsubishi Estate Co. Industry Ventures and Prudence Holdings. Founder Mike DiGiorgio departed from 10X, formerly Auction.com where he launched the competing company in 2015. Elsewhere in financing, L3 Capital has secured $90.5 million loan from Ladder Capital to refinance 11 retail properties in Williamsburg spanning 85,000ft. The portfolio includes 81 to 115 N. 6th St. 104 and 108 N. 7th St. Property in Wythe Avenue and Kent Avenue. Finally, in retail leasing, Fendi Berluti have signed retail leases at 4 NADO's 595 Madison Avenue replacing the prime corner previously occupied by Coach. Asking rent for the space was reportedly $1,000 a square foot. So good news for the Madison 57th street area. However, the long 57th street block between 5th and 6th now have as much vacant stores as occupied space since Z Chemists went dark a few weeks ago. At the same time, Fifth Avenue south of 57th street has large empty spaces that were home to Henry Bendel, the Gap, Ralph Lampolo, Hilfinger, Stuart Weitzman, Lululemon. Most have been empty for a year and leases are known to be pending, according to the New York Post article. But again, welcome news that we're gonna have some renewed sign of life. So that is our week in review. We are going to go to a quick word from our sponsors and we will be right back.

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Find us at voiceamerica, trn or twitter.com voiceamericatrna and we're back. This is James Nelson, your host of Real Estate Investing live from New York and it's time for our investor profile. Thrilled to have with us today my friend Chad Cooley who is co founder and managing partner of AWH Partners. Chad started his career after attending my alma mater, Colgate University. In fact, we were at a great school event last night and he remains very active in our real estate council there. In fact, he's the chair of it now. Chad's portfolio today stretches across the U.S. chad, I think we're talking a billion of assets. How many hotels? 20.

Closer to 2 billion.

Okay, 2 billion.

28 hotels.

28 hotels. Fantastic. So we've had, we've had over a dozen Shows, and we've had several developers in here. We've talked about multifamily, we've talked about retail. We have not done anything with hotels. So welcome. This show is really designed to teach investors everything they need to know. Really looking forward to our discussion about how you got involved in the business and the hotel opportunities that are out there. So take us back. I know you live in the city now, but where did it all begin for you?

I grew up in Portland, Oregon. I was pretty normal kid growing up in Portland, but my brother came to school back east. He was a little bit smarter than I am, so he went to Yale. I looked around options in the Northeast and Colgate kind of landed in my lap. I realized towards the end of my senior year of high school, I wanted what Colgate was offering. And so I came August of 1996, sight unseen, and arrived in Hamilton, New York.

I think you made a great choice, I gotta say. But coming, you know, making that transition from Portland, which unfortunately I've never made it to, I have to get out there. I hear incredible things. But Colgate, let's face it, it's in upstate New York. You're in the middle of nowhere. When you showed up, were you kind of thinking, what have I just done?

Actually, I think the rural atmosphere setting was not at all foreign to me, but I felt like I was underprepared for class relative to most of my classmates. And so that all evens out over time. And I think after a year, year and a half, I had found my place. And it wasn't long thereafter I met my girlfriend, who became my wife shortly after we graduated.

Well, there you go.

Remained married to this.

That's awesome. So before we get there, what was it like growing up in Portland, Oregon? What did your parents do? Did you have any summer jobs along the way? What was life like?

I think the most formative thing when I think back is both my parents were entrepreneurs, really. Okay. My dad started a real estate brokerage and was a real estate residential real estate broker and became an entrepreneur or became an investor in residential real estate, which is hugely formative in my own career thinking. My mom founded a packaging company with a number of partners and ultimately sold that and became kind of a packaging marketing company with her closest friend and partner of hers. So that was always part of my background. And I knew someday I'd start a business, whether the right reason or not. It was in the blood.

You're at Colgate. What are you studying there? What are you thinking about after graduation.

I was Mostly studying. I did study political science and philosophy. I was a major in political science, and I took a bunch of philosophy courses and loved it. I was also there really enjoying myself when you hesitated.

I was thinking maybe. I spend most of my time downtown at the Jug, the local watering hole.

I made the most. I was very actively engaged in a bunch of different organizations, fraternity life and other club sports and so on. But I made the most. I loved every single minute of it. And I met, I think, most of the people in my class at one point or another, many other people, and just loved every minute of it.

So was your girlfriend, fiance, eventual wife? Was she from the East Coast? Because after graduating, did you all move straight to New York?

So she graduated a year ahead of me. She was in class of 99 from Rhode island and decided to go get a graduate degree which was available to her in Chicago. So she moved to Chicago. We spent the year apart. And I was looking at jobs, and I was thinking finance. But to really get into finance as an undergrad in a first job situation, you had to move to New York. So instead of finance, I ended up taking a job in consulting in Chicago, which I realized pretty quickly wasn't for me, but I was there for my girlfriend, who became my fiance six months later after we graduated. Nice. And then we decided to move to New York as soon as we got married.

Got it. And what brought you to New York then? Was it she had the job or you had the job?

Neither of us had jobs the day we got here.

That's pretty gutsy, actually. I mean. Cause it's not a cheap place to live. And so you figured you'd just show up.

And we got married. We had paid for the honeymoon, so we had $5,000 in credit card bills and no jobs.

Okay, so what's next?

Somehow we had signed a lease. I can't remember where we got the money for the deposit, but we were here to stay. And I had been really pounding the pavement trying to get a job in real estate. I knew about a year before that this is the career path for me.

Well, just through your family's experience and kind of having that residential real estate exposure. So here in New York. And we know Colgate's liberal arts school, so they don't have a real estate specialty. So you show up and you start looking for a real estate job. So what was out there?

Yeah, well, I really leveraged the Colgate Alumni Network. I mean, I still have my notes from this job search. And I reached out to every Colgate alumni That would talk to me. I probably reached out to you and you may have been too busy. I can't remember.

I would have definitely taken the call.

I did meet with Paul. I did meet with Paul.

That's Paul Massey for you all. You can tell how I pick my guests now because we already had Dan Hurwitz on the show and Paul Massey and no, it's a great network and it's also fantastic advice to all of our listeners. Is a big part of real estate is using. I don't want to say leveraging your network and your college is a great place to start. So you start asking around. Okay, so where do you land? From there?

Yeah. So right place, right time. I found a new division being started at the related companies and really just very, very lucky.

What year was this?

This was 2002.

Okay. But related still in 2002 was probably one of the premier real estate developers. And I would think most people working there have a master's degree. They've got five, 10 years experience. How did you. And I assume you weren't starting sweeping floors there.

Fortunately not. But to this day I tell people if Steve, Jeff and Bruce knew, if they had seen my resume, they wouldn't have hired me. But I got hired through my first boss there, Mark Carbone. He was in the affordable housing division. And I landed there with this new job and a new division and we just had to make it up as we went. You're right. All of that legacy affordable housing was really done in the 70s and early 80s before the tax law changed. And then the founded related capital, which they sold. At the time I started, there was no affordable housing division. Actually going out and doing affordable housing acquisitions and development. Part of the job was overseeing the legacy stuff. But really what I focused on was going out and buying new deals, doing tax credit, renovations, rehabs.

This is just in New York or this is nationally?

This is nationally.

You're. You're completely brand new to real estate. You're hopping on a plane, you're checking out these massive deals. You may be faking it a little.

Bit when you're out there working just round the clock, making it up as I went 23 years old in those first three years, my job at the affordable housing group, I did 12 deals. And I learned more about real estate during those three years than I'll ever learn ever again in my career.

All over the country. What cities are we talking about?

Chicago, Dallas, Queens. All over the country.

I want to get to this also, because when I look at your hotel portfolio, Today it looks like it's completely spread out evenly across the country. When you go into these new markets, you're going out to Chicago, maybe you spent a little bit of time there. So I'm sure that helped. You knew that market. But you're going into a new city, I guess in affordable, the demand drivers, are they important or how are you getting comfortable with the location to start with?

Great question. Let's put it this way. When I left the affordable housing group three years later, I knew nothing about market. Market played no role in our decision making.

So it was all about what's the program? Is it a federal program? I mean, you've got these Section 8 vouchers and we're going to have our friend Thomas Campbell who's going to come in schedule, he's going to tell us more about the affordable. You really became an expert at all the subsidy and the programs.

236, section 8, Low Income Housing tax credits, bonds.

So why did you even have to look at the real estate if it's just about the program and the numbers and saying, okay, can we get this approved here? Were these already affordable or were you taking buildings and combined converting them into.

Mostly doing preservation, which has real public benefit. Right. You're taking a building that could convert into something market rate and creating a longer term affordable housing option.

Got it.

And I did go kick the tires of the property, but I spent a lot of that time in public housing agencies.

Because these are local subsidies or state. Federal.

Local agencies always ran the local affordable housing. Even if they were federal subsidies, a lot of controls flowed through local economic development groups and housing agencies.

So you're showing up to the local, you're 23 years old, they're thinking, who's this kid out of New York? But obviously you're able to convince them that you were competent and you could get it done. 12 transactions in how long of a span?

3 years. These are complicated transactions.

What kind of dollar volumes are we talking about here?

My biggest deal was about a $60 million deal. They weren't massive billion dollar transactions, but it was massive for me.

When you were doing these for related, was this for a separate account or was this, how were these deals capitalized?

Well, the beautiful thing about affordable housing is it's designed for entrepreneurs to get into the business. While related was well capitalized, we didn't need capital to go do these deals.

So it was really fee development, it was all about. Got it, okay. So once you put them away, the fee is really made up front.

Yeah. And then there's some residual, but it didn't require the money to get into the deal.

So at what point? Okay, so that's the first three years. But you were there for eight years. Right. So then what happens?

So then I was lucky enough to get the opportunity to move over to one of related's development groups.

Got it.

And we did commercial development where I focused on mixed use development essentially mostly office and retail and. Whereas I did three deals, I'm sorry, 12 deals in my first three years, I spent the next five years on one deal.

And which one was that?

That was land we acquired in Boston, Mass. Former Polaroid World headquarters site.

Okay. This wasn't part of the Big Dig, right? This was something.

No, this was not part of the.

Big Dig because that was Boston, I guess, has a history of very long projects. Right.

So it is a tough place to be a filmer.

Okay.

And it took a long time. We got it entitled and permitted.

So were you. Did you move to Boston at that point or.

No, no, but I was. I was on the shuttle, the Delta shuttle, you know, two or three times a week. I usually wouldn't stay overnight because it's just so easy to fly.

And what are you. What were you doing up there? Meeting, just yelling at people, saying, why is this not happening yet?

Mostly getting yelled at.

Okay, all right.

You know, I knew the. I knew all the city councillors, I knew met the governor. It was a big political gig getting 120 acre site developed, getting it really entitled.

And it happened.

So fast forward a couple years into that and we went to ICSC in 2008 and that's really where at Related we realized the music had stopped. Retailers who a year before were begging us for term sheets to get into the development didn't even show up. I mean, it was like the music was over.

I thought for a second you were talking about maybe 2019. I'm hearing this again.

Right, well, you know, history does repeat itself.

I mean, a massive site like that, I mean, that would be a really big bet on retail right now.

Right. Well, and this is before Amazon was any kind of meaningful contributor to.

And you were just going to do a shopping or what was.

Yeah, it was probably 600,000 square feet of large format, 600,000 square feet of smaller format retail, and then another 500,000 square feet of office. There was a hotel pad.

That doesn't sound like that much square footage for 120 acres, right?

Yeah, that's right. I mean, it was in that sense lower density, it was suburban, it was in Waltham. So not like downtown Boston. Wow.

So that's got to be incredibly complicated. So you're getting great experience at this point. Are you kind of filling the role as the asset manager, would you say?

It wasn't flat, but I was in the office of Steve and Jeff and Bruce all the time, which was amazing. I mean, the smartest guys I will ever work with. Then my boss, Glenn Goldstein, who loved working for him every day I was there was involved, but I was in Boston running this job a couple days a week, and he maybe came up once a month. And so it was a lot of responsibility.

Wow. Okay. So you get the project kind of as far as you can now. What are you thinking? Okay. I'm kind of feeling like I did do this on my own.

Yeah. So really what happened was we went to that ICSC and then we realized this project isn't happening and a lot of development projects are going to be on the rock. So we started the process of unwinding that joint venture in the land and exiting. I started a process of soul searching. Was I going to stick around through the recession? This unfolded over late 08 and early 09, and we chased some big early distress deals. And I was participating in that at Related. But I also realized the company's going to go through a major change. We are predominantly a development company, Related. And that's going to evolve over the next five years, 10 years. I knew I had a certain amount of risk in sticking around and navigating that for the first time in my career, saw equilibrium with the amount of risk I was going to take going out on my own. Probably naive, but there was a lot of risk. It was 09, and I worked at a major real estate development company. Who knows what was going to happen?

So you start looking around and was the predecessor company to Awh was that August Group. That was the next move you made. So did you have any exposure at all to hotels at this point or. Yeah. How did you get this?

I'm gonna let my secret out. I did not have any exposure to hotels.

This seems to be a recipe for success here. No experience required. I think I've got the name of the this podcast.

If you're not a little naive and a whole lot of desperate, you know nothing's gonna happen. So I started looking around, and a friend of mine at Related had dabbled in the hotel space kind of on the side, and I had made this investment in a hotel that unfortunately didn't go so well.

This was the New Orleans. New Orleans.

No this was a hotel development here in the city. I just threw a couple of bucks in. I wasn't involved. And then realized in seeing these hotel deals completely unwind and get slaughtered, there was distress, major distress in the hotel business. I thought that would be a terrific way to enter the market, buying a distressed asset class that was going to rebound. What I thought would be very quickly, because you can.

Okay, so you're looking for distress. So you're going to buy from banks. So how do you go about.

Yeah, I went down to this hotel where I had made an investment, and I met the operator, who's this German, quite accomplished German fellow. Klaus Ortlieb. He had been Ian Schrager's coo. He had been Andre Bellaj's coo. He had real street cred in the hotel space. And I said, why don't you be the operator and I'll be the deal guy, and we'll go around and we'll, you know, we'll put some distressed hotel deals together.

Okay.

And he said, I'm in. So we started based on all your.

Experience in the hotel space.

And. Yeah, he. I guess, didn't know enough to ask.

Okay, all right.

He brought the hotel experience. Okay. And, yeah, so we ran around the country and, you know, we pretty quickly found this opportunity in New Orleans, which became the first deal I did. And that was in a company called August. Yeah.

Okay. And that was the. You called it the Modern.

The Modern.

Okay. So what was the business? This was a boutique hotel. So this was. Did it have a flag before?

No flag. It was independent. It was being foreclosed by the lender. And the guy who was getting foreclosed was, you know, had a big personal guarantee hanging over his head. So I came in and bought it.

What was the occupancy rate at the time? Was this kind of a. Kind of a fleabag motel?

50%, maybe.

50% occupied. And they were getting how much a night?

That would have been, you know, 85 bucks.

Okay, and you took it to what?

Oh, good question. Good question. We probably took it to 70% occupancy at, you know, 110 bucks.

Okay. So that's. That's a meaningful increase.

Massive move, right?

Got renovation or you just kind of spruce it up?

I mean, we bought it actually, what I call a gut. We totally transformed it, but it was more like lipstick on the pig than a gut renovation.

And how did that work out?

Well, what really transpired is we made every mistake in the book, naturally, because what do we know? In fact, the German operator left very early on in my. My capital partner looked at me and said, so are you going to run the hotel?

That's a great question.

I didn't answer, but I did shortly thereafter, actually. I had been working for about a year and a half before that on partnering with my now partners, Russ Flicker and John Rosenfeld, on buying a hotel management company from a family that was exiting the business. Shortly after Klaus exited stage left, enter stage right. The management company that Russ, John and I bought and the rest kind of.

How did you have the money at the time for this? So maybe you saved up a little bit from your related days, but where are you getting all this money from?

Yeah, it was definitely not our money.

Okay, so you found another investor to go buy a management company.

Yeah. Yes. And I say it's definitely not our money. The business requires the sponsors, our position always to invest and we, we always do. But we've predominantly raised outside capital to build our business. In that case, we partnered with essentially a hedge fund that saw value in partnering with us to buy this man.

Your partners presumably did have some hotel experience or.

No, a little bit. Russ in particular. Russ and John both. And at that point we had both. They had done a deal and I had done a deal and we were, you know, you're experts. We were equal partners. Yeah. And there's really an element to the AWH brand. It's a couple of guys from Blackstone and I came from related and it opens doors.

Okay. So the New Orleans hotel doesn't go so well, though. What happened just wasn't.

Well, we made every mistake in the book.

Yeah, like, well, your operator leaves. Operator leaves, you know, over budget.

Yeah. GMs and chefs and people stole and the whole thing. It's a very tough business.

Right, but you still came back for more. Was this management business, was that kind of the key to success then, to actively manage the hotels you were working in?

Yeah, well, it was just to close the story on the modern. But the market was behind us. The market grew massively between the day we closed and with the day we sold it. And so that became a teens type return irr.

Oh, so that sounds pretty good.

It put us in position.

So from there, okay, so that was Awh. From out of that comes this new platform. What year was that?

Well, so we started working together in 10. We closed on the management company in 12.

So here we are a decade later, 2 billion in assets. So how did that happen?

Right after we bought the management company, we really focused on making more distressed investments. And finding. We bought properties through the debt. We bought a large portfolio through a 363 bankruptcy sale. We found opportunities in all sorts of difficult places. It was 12, 13, 14 and the market was still recovering.

I'm looking at your portfolio again and it is really spread out. I mean, you have something in Annapolis. I feel like maybe I've even stayed there. You've got hotels in Chicago, Colorado Springs, El Paso, I mean Denver. I think a lot of our listeners, maybe they see a Hyatt or a Marriott and they think, oh well, they must be owned by those companies. But we know that they own very little of those hotels, if any. So they're just the flag. And there's whatever it is, a 20, 30 year franchise. So when you were buying these distressed hotels, were they already flagged or. And you kind of went from a boutique. But then I see some Holiday Inns in here and I know you've also bought some really high end luxury type stuff.

So what's the genesis of the, the genesis of the map you're looking at is really opportunity. We've never been an investor with a single focus or a single strategy. We look at the vast majority of hospitality offerings that are marketed on an annual basis. It's not a big market. There's only so many hotel deals. We look at all of them. We bid on many, many deals.

When they come with a flag in place, you have to honor that. So if you're buying a hotel inn that has five or six years left, you just, you have to underwrite what's there and you have to. I mean, are you kind of thinking about, well, maybe we want to improve on this? Or is Holiday Inn saying, hey, this hotel is not up to brand standard? What is it called? The pip? The pip, yes, the pip. What is that again?

Property improvement plan.

Yes, property improvement plan.

So you're doing a property improvement plan every time you buy a branded hotel?

Right?

But yeah, when you're buying a hotel with five or six years left on the franchise, you're probably going to spend millions of dollars and extend that five or six years to 10 or 15 or 20 so that you can finance it and have a long Runway.

You said the opportunity. Is it the hotel in specific, is it the city? For our listeners who might be thinking about getting into this, what's the view there?

The first word I would use is caution for any investor thinking about the hotel business. It's a very tough business. That's why we're in it. Frankly. The analysis of what makes a good investment or bad investment is pretty complicated. Yes. Market, broader market, micro market, street corner. What's happening with the office tenants in the area? What's happening with the retail, what's happening with transient guests? Meaning could be leisure customers and or corporate customers that come in and going. You have to understand where is your demand going to come from? Is it the right brand to meet the market? Is the hotel going to become obsolete if more hotels get.

Yeah, I was just going to ask that. How do you gauge the competition that's there? I mean if you're buying a hotel that's 10, 15 years old and someone builds across the street, is it not that important because someone just goes in and you can still be the low cost provider or maybe it's the brand that'll carry you?

Yeah, I mean we tend to work in brands as you pointed out because that's a pretty strong insurance policy. If you are a Hilton flagged hotel, or let's say you are a Hilton hotel, Hilton's not going to allow Hilton to be built across the street. A Marriott could be built across the street, but at least it's not a Hilton. You have some protection there. But we're analyzing not only the existing competition. Who are we competing against today, but who is in the pipeline. What's going to be built and opened over the next 12, 18, 24 months, even 36 months. Then what are the opportunities for development in the future? Is it a pro development market or is it an anti development market?

Do you buy these things on a cap rate or a price per key?

Both of those metrics are important, but there's really no one metric in the hotel business because you can buy a hotel well below replacement costs and a low price per key. That's a bad investment. You can buy a hotel at a wide cap rate. That's a bad investment. It's really about understanding how much has the hotel made historically. How is that going to change in the future? Can I renovate and improve? Can I rebrand re flag? Can I operate the hotel better? To understand all those things, you really need to understand all the market dynamics and all the operating dynamics of that specific asset. We tend to buy hotels where F and B is an important component. But we don't tend to buy, we don't tend to invest in hotels that are reliant on a single name brand restaurant operator.

Do you do a lease with the operator or do you. It's like a revenue share.

With the exception of a couple of instances, I think we operate every restaurant in our hotel portfolio.

That's a really, really tough business to stay on top and pick the right people. Is it about getting the right team? Did you inherit the team?

Yeah. Leadership is everything. I think we have $100 million of restaurant revenues, of food and beverage revenues in our portfolio.

So how do you know that the restaurant is performing and.

Yeah, well, as I said, it's a complicated, challenging business, but we have a great team. So our business is three divisions. We have an investment business, a management business and a development. Right, and the management.

Right.

So you do some third party as well?

We do, yeah. That's largely on a relationship basis. We're not out there marketing ourselves as a third party manager, but it's a.

Good plug for our listeners. I mean, if someone wants to try this, I mean, instead of going into a blindly having a manager, like, he would probably make a lot of sense.

Yeah, you got it. I mean. Yeah.

Wow. All right, so what advice? Well, actually, before I get to that. So what is it about what you do that has generated this kind of success?

That's a great question. I think the most important element of success at AWH has been the partnership.

Right. Finding the right people and kind of knowing everyone's role.

Well, rest, Russ, John and I came together at a time when we all had a similar vision of the world. Right. We all were. We're all relatively similar in age. We all had done well in earlier roles in the real estate business, but had a lot to accomplish. And that alignment brings us every single day to the office to do the same thing, which is continue to build a business. And we all looked at the business not as a, you know, in five years, I want to make a lot of money and then like, go sit on the beach. But as over the next 50 years, can we build the best hotel business in the world?

Do you think you'd ever focus more towards the fact that you've got three stars but you also have luxury? Do you like that diversification or do you see yourself focusing more in one arena?

I do see as we grow programmatic strategies coming out and being interested in pursuing a single programmatic strategy. We've done quite well in the Embassy Suites brand, which is a terrific value proposition for the customer.

Do you have one investor for each of these deals or is this kind of. Because you mentioned programmatic. And it reminds me, I forgot to ask, who's investing in all these hotel deals?

We have something like 500 different investors.

Wow. High net worths.

We've done, I'm going to say, 12 different institutional, joint Ventures with large private equity or hedge fund or insurance company capital. Outside of those 12, we've raised money from Kuwait, Chile, Israel, Mexico, a bunch of family offices in the US and then all the way down to investors that have put 25,000 or $50,000 in our deals.

That is unbelievable. And are you involved in the fundraising too?

Well, yeah. I mean, we all wear all. Russ, John and I all wear all the hats.

Right.

We have been able to kind of divvy up responsibilities as we, as we've grown. Right. Russ tends to focus more on the fundraising and I tend to focus more on.

So it's still deal specific though. When you've new opportunity, you kind of think who would make a great partner for this? You bring along some friends and family.

Yeah. We either identify a strategic institutional partner and chase it with them or we think this is something we can raise money around and go out to our.

What's a good hotel deal? If you're going to hold it for five years, 10 years, what are you trying to accomplish?

At least you need to pencil out higher returns than you're going to see in other asset classes. We're typically looking in the mid teens for a reasonably down the fairway hotel acquisition with some repositioning, but not a lot.

I should have asked that question. Now none of my investors are going to buy in New York when they hear about all these incredible returns that you're achieving elsewhere.

Yeah. Well, then the riskier stuff, you're going to need a price. For years, everything we were doing was penciling out into the 20s because you had to do that then.

20S meaning you get all your money back in five years or double your money.

Double your money in five years.

That's fantastic. What advice would you give to someone who's listening to this show who's not investing? Should they be thinking about doing hotel or start off as a generalist, go work for a hotel year first, buy apartments.

I think if you're interested in investing in hotels, you should partner with an experienced hotel owner operator, someone like Awh. And there's plenty of other companies out there. But it's a business that I think our operators have been doing this their entire careers and they happen to be decades beyond me and Russ and John in some cases. And they're still learning. It's a business that requires a lot of institutional knowledge.

A lot of people too. You said you have what, 60 people in your organization?

I think we're about 70 people today.

Wow.

Yeah. And so, you know, 45 of those are just focused on managing hotels. Wow.

Very management intensive.

Yeah.

Well, this is really, really impressive what you've done and can't thank you enough for joining us today.

Thank you, James.

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So, Larry and Christina, thank you so much for joining us for this segment of the show and for this portion we're going to be talking about some of the legal considerations when purchasing a property. So Larry, why don't we start very basic. Okay. When our listeners, when they're out purchasing property, they're going to be assuming the leases that are oftentimes in place on a property. So if that's a correct assumption and.

That it is, my friend.

Thank you. Yes. Then I would be curious, why don't we talk about some of the basic parameters of a commercial lease and then Christina is going to tell us a little bit about the residential considerations. So when I'm buying property, what should I be looking for in a lease?

The utmost in protection. You as an owner are putting your money on the line. You're signing a mortgage, you're putting your investor's money on the line. As a consequence, you have to do your due diligence. You know, Ben Franklin, who's a cool dude in any century, his line was diligence is the mother of good luck and you need to make sure that it is stable and secure. Cash flow is backed up. The rental that's inside that lease, you have to know that plain and simple, because to an owner, you know, the cash flow is the oxygen that they breathe. So you want to have a tight fist on that and whether that's just looking at the assignment and subletting clause, which in my lease as a landlord's attorney is six to eight pages of sheer hell. But it's putting on that tight grip because the landlord's mantra is that it's mine. And if anyone's going to make money off of this space, this building, it's going to be me who makes it. So I want to see that there's this iron fist as far as control is concerned. I want to look at the use clause, because if someone's going to assign the lease, I want to have that lease be extremely. The use, I should say very, very narrow. If I'm renting to a nail salon, I want it to say nail salon and no other purpose. If you are a tenant who has a broad use clause, you can rent out, you can assign that lease. I just say to anyone, and all of a sudden you're making the profit.

Let's talk about the basic provisions of the lease. So we're probably, as an investor, I want to know what's the rent? Okay, what are they paying? And that's not always as clear as you would think, because sometimes, if it's a new lease, there might be some concessions involved. I want to know what the increases are and what the term of the lease is. And then I probably also want to know if there's an option. So I'm inheriting this tenant. Do I have them for the next two or three years, or could they be with us for 20 years? The most basic pieces to the lease, what are the items to be concerned with?

One, is there a renewal option because you want. And if there is a renewal option and you're looking at it from a buyer's perspective of a property, you want it to be based upon fair market value, not on a fixed rate, because otherwise your upside is capped. The assignment and subletting clauses. I mentioned what the land would where section states, but more particularly, because theoretically that's already been done. What the tenant work section is, because you want to be able to control short of a tenant, you know, basically hanging a picture frame, exaggerating the point. If anyone's doing work in my space, I want to know what's being done. I want to control what contractor is doing, and I want to make sure that there's no liens that are going to be put on it, you know, and that, that is beyond important. There is also the default clause. Listen, there needs to be a subordination clause in it because as far as underwriting is concerned, you know, my, my lease that I'm buying is subject to the terms and conditions of my mortgage, okay? If I get foreclosed out on that mortgage, you know, the bottom line is unless the tenant has, you know, what's called a subordination, not non disturb agreement, you know, plain and simple, that, you know, that tenants, you know, tenancy is subject to cancellation. But also the guarantee is beyond important, which is something that's more, you know, metropolitan New York centric. But that is the key. You know, in addition to security deposit, when I'm sitting here and I'm underwriting a lease, I have something, you know, pushing 20 different things I throw into my analytical blender.

So it sounds like you probably need a good attorney if you're going to be purchasing property, maybe to look through some of these provisions. So I want to get back to some of the important points that you raised, Christina, on the residential side. And you do due diligence for buyers here in New York when they're purchasing properties, you're looking through the lease files. And I know we could spend hours, if not days, talking about all the considerations of purchasing here in New York with our rent regulation, which I hear is now spreading, and we apologize to other places in the country, but since we do have a national, in fact, really a global audience, talk a little bit about when investors are looking for a property with residential tenants, what should they be looking for in those leases?

So the four corners of the lease. Obviously you need a document to govern what goes on between landlord and tenant. There are some places where a landlord might think, oh, you know, the tenant's a nice guy or gal, I'll just go ahead and let them move in without a document. I would strongly advise an oral agreement for the letting of real property. So in a lease agreement, your most basic lease agreement, the most important clause, as Larry alluded to, is the rent clause. When is it due, how much is it, and what is the rent going to be for the entire term of the lease? The second most important also Larry mentioned, is the default clause. What happens when the tenant decides that, you know, they'd rather spend their money on, you know, the new Kid Cudi album or, you know, whatever it is, they're gonna. They're gonna hold the rent back and instead they're going to spend their money elsewhere. What is the landlord's remedy in that regard? And the Landlord lease will dictate that. There's lots of other clauses that are important in the lease. You want to make sure that the tenant knows that, you know, every tenant is entitled to quiet enjoyment, I would say nationally, probably globally, entitled to a warranty of habitability, that that apartment is actually habitable for a human being. So there are some obligations on the landlord in that respect, but only if, in fact, you have the four corners of that lease agreement in writing. It's got to be signed by both parties, and one party should return a fully executed copy of it to the tenant and then the document's there and it will dictate exactly what goes on during the term of that tenancy.

I'm really glad that you stressed the importance of seeing something in writing, getting copies of the leases, because I think our listeners would be surprised that oftentimes, even in New York, you see a lot of these month to month where, oh, yeah, the tenant's been there for a long time and we've got an agreement. And, you know, you really don't know what you're getting yourself into.

You really don't. I think also, you know, the parties to the lease is hugely important. Right. If you think that you're renting to Jane Doe and suddenly you go there and you have three men living in the apartment or people who don't look like the person that you rented to, obviously there's some kind of subletting situation going on. And you know, as a landlord, you're entitled to know who's living in your building. That's factual. You do want to make sure, again, that it's all in writing, that the parties to a lease are stated clearly. And you know that there is in fact a no sublet clause so that your apartment doesn't become a revolving door.

Right.

So great points there. Now, Larry, a lot of the customs that we're talking about. Yes. Are specific to New York or maybe they do apply elsewhere in the country. I know you do some national work as well, but for our listeners, why don't we just first of all talk about maybe some of the differences also between, say, a retail lease and maybe an office lease, because there's also different customs there as well. So we talked a little bit about concessions. Who's doing the work? What are the basic provisions, if you will, when a tenant is taking space in a retail lease versus an office lease?

Just one thing that we didn't get to before is that if you have a fairly well crafted lease, arguably speaking, the commercial lease is the most one sided document in the free world, it's pro landlord, it's a matter of degree. So from the standpoint, when you're buying, that's a very good thing. And what part of what our job is, because you know, pardon this scarring visual, but we are operational, financial and legal proctologists. We're sitting there looking through those leases to make sure that they sing and dance for a prospective owner. And you know, one of the things that, you know, we do is we'll do an abstract. We're taking anywhere from a 42, I negotiated 165 page lease a few weeks ago. And you're trying to turn that into four to six pages that will capture 98% of what the actual lease states, which is great for the investors, great for the people who are underwriting, great for the pawns.

I think I'm gonna pause and say thank God for attorneys again, cause I'd probably fall asleep by page six or seven. So thank you.

But as far as when you're sitting here, it's listen, it comes down to you're writing this lease free rent, you know, and you sit there and it's like free rent is part of the equation in most places. The difference, I think at its basic level with an office lease, many times a landlord is doing the work for you and then you still get free rent on a retail lease. I think most retail leases, and this is nationally, have more skin in the game, so to speak, because they might be getting six months of free rent, but because they're not necessarily getting financially pregnant early enough in the game by hiring an architect and they wait until the lease is signed. They have wasted, you know, unfortunately, and it's a fine balance that you walk, but they've wasted somewhere between six to eight weeks because how long it takes for construction documents to be prepared for the landlord to approve them to get permits. And as a consequence, most retail tenants, at least in my experience, over about 35 years, are not operational during their free rent period. Whereas listen, we moved into our space here in the city, we moved in with a toothbrush, obviously our computers and our files, and we were still enjoying 3, 4 months of free rent, which we got to use to offset our moving costs, buying new furniture and the like. But there's so many like, listen, my lease, the hardcore leases have 95 provisions in it. And I would sit there and say the only one that's probably pro tenant is the renewal option. And we find ways as attorneys to try and take away their rights. You know, under that as well. So, you know, there's so many important ones. The one that I was talking about before was the guarantee, right? And that's what secure and stable cash flow. We make it a guarantee and it's called the good guy guarantee here. And my goal is to make it more of a national phenomenon. But it's not only a guarantee of payment of rent, but a guarantee of performance of all non monetary obligations. And it's by the principles of the tenant who own and control the tenant. But it's not only that we have a lockout in it that you can't, you know, exercise your rights to give back the keys to the space. Okay, for somewhere between a year and three years. We have a construction guarantee in it. If you start work, you have to finish it. You start work, you have to pay for it. You have to provide me lien waivers if you want to give back the space and get out of the guarantee. I could still go after the name tenant, okay? You have to give me anywhere between 180 and 60 days and 360 days notice.

And this is a personal, it's a.

Limited, it's a good guy guarantee. And it's because of owners. And I know it's somewhat repetitive to call an attorney a pain in the butt, but over the years we took this basic good guy guarantee, which was just a way of a landlord saying to a tenant, to a corporate tenant, the owner, listen, if you're not going to pay me rent, be a good guy, give me back my space so I can minimize my damage. That's the way it started out in the 80s and the early 90s.

I know a lot of these terms are clearly market driven. When the market is really hot, clearly the landlords do not have to give as much concessions. Although you could make the case here in New York. When it comes to office leasing, we've seen the rents here increase at a remarkable rate. The face value of the rent, you look and it's raising in double digits. But then the concession packages that are being offered alongside it. In some cases, if you're buying a property, you might not be seeing rent from that tenant for a year or two, right?

Oh, absolutely. Which is difficult. And you have to balance that when you're sitting there and you're underwriting a lease. In New York, if you had a 10,000 square foot lease, and this is naturally renting at $60 a square foot with six months of free rent and the $60 work letter and brokers on both sides of the table, I just described the landlord laying out $1.2 million between free rent of six months of 300,000, the work letter of $600,000, and broker commission of $300,000. If you're sitting here and you're putting it into your analytical blender, how much security deposit do I need? If you only got three months, that's $150,000. When you look at the scales of justice or injustice, if I'm laying out 1.2 million in the first year and I'm only getting $150,000 to a tenant, 150,000 is an awful lot of money. You know, what's the right number?

So I definitely want to circle back to the guarantee and who it's from, what entity. But before we get to that, maybe Christina, talk a little bit about concessions that might exist in a residential rent. Because you might be buying a rent roll and you, you see some really nice rents. But then when you roll things back and really look into it, maybe there was a month or two free given up front when you renew, you might have to pay a broker. What are some things to look for in that lease?

Absolutely, some things to look for. If you're buying into a market that is somewhat saturated, there are a lot of apartments available and you know, you have, you know, four apartments to rent. You may want to give two months free to the tenant. Does the tenant get the last two months free or do they reduce the total yearly rent by the 2 month amount? So your rent roll might not necessarily show, you know, that November and December are free. But in fact, when you get into the pages of the lease, there might be a rent consideration concession rider that says the last two months the tenant will be given free rent. Obviously what that does is it creates a net effective rent. So that's good for a tenant. You'll get a lower rent per month amortized over the course of the lease. But not so good if you're buying into that rent roll again, because more often than not, if you're in due diligence, the seller will provide you with a rent roll. You obviously have a right to rely on that rent roll. But I would not, as a buyer, only look at the rent roll. I would request that you get to go to the management company of the seller or the seller's office, whoever holds all the lease files and cull through them all the pages of the lease. In some markets I'm sure there'll be two pages, and in New York it'll be 18 or 20 pages. You know, the whole lease agreement but if you do see a rent concession rider, you have to understand that your net effectiveness of rent might in fact be lower than the rent that's produced on the rent roll.

So we only have a minute or two left in the show today, but this has been hugely helpful to understand the basic considerations when analyzing a lease. So I'm going to ask Larry, I'm going to end on that guarantee question. But as far as for that residential guarantee, so when that tenant signs up, you're looking at who is signing that guarantee. If it's a college student, maybe you're looking for their parents guarantee. I've heard rules of thumb where, you know, should their income be 40 times what the monthly rent is, what do.

You look for standard in New York City that you know, which is untoward. To think that a 24 year old person just graduating first job, you know, can make 40 times one month rent, that's outrageous. So you will want to pull in a guarantor and in fact hold it to that mark. You know, hopefully the parents are succeeding and can handle a 40 times the monthly rent, which is a form of guarantee. You know, as used to be the security deposit was a form that the tenant would guarantee performance under the lease. We've now, you know, locally been restricted to one month security. If you're in a jurisdiction that allows more than one month security on somewhat of a risky tenant, go ahead and grab a couple of months or three months security just to make sure that that rent hits when the mortgage is due.

Perfect. Larry, take us out. I've got what should I be looking for when the tenant signs on the dotted line? I mean, everyone always says, I want credit, I want aaa, I want the parent company versus the franchise. What is the hierarchy of the guarantee?

I could tell you that if I'm doing, just to use that example of the $1.2 million, one of the things we have in there, and this is why I love the good guy guarantee from the ownership standpoint, is I have in my lease a provision that, by the way, 10 year lease, yeah, I've laid out that $1.2 million. But if you give back the space to me after year four, you are obligated to give me back my unamortized cost of the transaction. Those costs were $1.2 million. Oh, six years still remain. That means 60% of the term. I times that by the 1.2. Oh yeah. By the way, you also have to give me back, you know, $720,000. It's as if they're signing a promissory note. And unfortunately, and this is for, you know, this is not to pat Christina or myself on the back. Unlike anything else I do in my commercial practice, I'm fairly good at it. There's a lot of people who are fairly good, you know, trying to be modest about it. In commercial leasing, there's not enough people who understand what the lease states. And although I said before, the lease is one of the most one sided documents in the free world, 90% of it is business. And everyone I would like to think who's listening to us and the three of us who are sitting here, we're all business people and it's a matter of understanding the business. But the guarantee is just a very, very powerful tool for making sure that there's secure and stable cash flow.

Larry and Christina, thank you again for joining us on the show. I know in a real estate transaction, I definitely want you on my side of the table. And I know our listeners thank you as well.

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.

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