22: The Epiphany - With Masood Bhatti

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.

This is James Nelson, your host of Real Estate Investing Live from New York. For show number 20, first and foremost, I hope you all are staying safe.

Out there and doing well.

I'm actually recording this show from home as many of you are also working from home and getting used to this new reality. But we still have a great show for you and we are now up to close to 30,000 listeners. So I know many of you during this very challenging time has used this time to catch up on reading and listening to shows and so really appreciate your spreading the word with your friends on this and posting comments and sharing questions whether it's itunes, Spotify or wherever else you are getting your podcast. So tonight we've got a great show. We've got my friend Massoud Body who's got an incredible story coming from Pakistan with basically nothing coming here to the US Finding his way to New York, his years at Lehman Brothers and ultimately now being a managing partner at Silver Peak. So he's got an incredible story to share with us and then we have the second half of the panel on project and asset management. So definitely stay tuned for that. Before we get to it, it is time for our week in Review powered by the Daily Beat. And wow, what a week for news here with the government making many unprecedented steps to hopefully save our economy here. The Federal Reserve slashed its benchmark interest rates last week to nearly zero and said it would buy 700 billion in treasury and mortgage backed securities. And an urgent response to the new coronavirus pandemic. Senate Majority Leader Mitch McConnell also introduced a trillion dollar stimulus package proposing cash payments to many Americans and billions for small and large businesses including 50 billion loan guarantees for passenger air carriers, 8 billion for cargo air carriers, 150 billion for their large businesses and 300 billion for small businesses. Also individual payment plans including up to $1,200 to individual Americans making less than 75,000 and 2400 for eligible married couples making less than 150,000 combined with an additional 500 for every child. And these subsidies are definitely needed as the list of companies who have had massive challenges are long. Marriott International, the world's largest hotel company with nearly 1.4 million rooms worldwide, said it is starting to furlough tens of thousands of employees as it ramps up hotel closings around the globe. In the US there are around 130,000 employees on the Marriott payroll. They met with President Trump at the White House on Tuesday seeking 150 billion in financial assistance. Meanwhile, in New York State, Governor Andrew Cuomo on Thursday further restricted the number of employees of most businesses who can report to work outside their homes, saying that only 25% of a non essential company's workforce can report to work. New York City is doing its best to work with the hospitality industry to even convert some of these hotels into hospitals for patients with the coronavirus. Meanwhile keeping restaurants closed closed except for takeouts and as a result, one prominent restaurant group, Union Square Hospitality Group, is laying off 2,000 employees. With this in mind, no surprise that a lot of these investment sales are being pulled back. CBS removed the blackrock tower from the market. It had been aiming for a price of north of $1 billion, according to the Real Deal. Somehow transactions are still happening though. AB Rosen's RFR Realty has entered into contract to acquire the office portion of 522 Fifth Avenue for Morgan Stanley for around 350 million. The Midtown office condo spans roughly 575,000 square feet. The bank will continue to occupy the entire office space for at least three years. Beyond the closing date, it is unclear if Morgan Stanley's 1585 Broadway might also be available for sale. Lastly, I should note that we are seeing some of the lowest mortgage records on record and the number of refinance applications spiked 79% in the first week of March to the highest level since April of 2009. The jump was also the largest week over week increase since November 2008. The average rate, according to the Wall street journal on a 30 year fixed rate mortgage fell to 3.29%, the lowest level on record. This is a great first time home buyer opportunity, but it can also discourage existing homeowners from selling. So with that we're going to take a brief break and we'll get on to the interview with Massoud.

And now it's time for our Investors Spotlight. Thrilled today to have with us my good friend Massoud Bhatti, who is Managing Director at Silver Peak. His group focuses on investment activities all across various property types throughout the country. Previously, Massoud was a Managing Partner at Scout Real Estate Capital where he invested in distressed hospitality assets. Before then he was an MD at Lehman Brothers where he focused on equity and mezzanine debt investments. He has also received the Chairman's Award for Extraordinary Service. And he holds a Master's of Science in Real Estate Development from Columbia University, where he now teaches an entrepreneurship program. We're going to get to that. So Masoud and I have known each other for at least 10, 15 years. And we were having lunch the other day and I wish I had a tape recorder right then and there because this story just blew my mind. So, Massoud, thank you so much for coming on the show. Really great having you here.

My pleasure. Thank you for inviting me.

So I know, I heard your story, so I know where it all began. So Pakistan is where you grew up. Tell us a little bit about family life for early years. What was it like growing up there?

For the interest of listeners, I'll keep everything very short.

Okay.

Anything you want me to expand on, just ask, please. So I grew up one of seven kids in Pakistan and government subsidized housing. You know those tin roofs that leak when it rains? Fortunately only rained in Karachi a couple of times a year, so no big deal. And my dad was a contractor, so I grew up going on weekends with him and banging nails in, you know, whatever he was building desks in government offices and stuff. So every boy likes banging nails into wood and so that was fun. And none of my parents were very educated, neither are my other six siblings. But I always wanted to fly airplanes. And so I studied hard to go to Pakistan Air Force and I was lucky enough to get in. And then I realized that it was a 25 year commitment and that kind of scared me because I did not say so. Yeah, no, I just didn't want to drop bombs. It was not never in my.

What kind of planes were you flying at the time?

They were F14s at the time.

So you've flown an F14? No, no, no.

I got into Air Force and It was a 25 year contract and I said I'm not doing it.

Okay.

So I declined going to the academy and that's really what precipitated me coming to the U.S. i was disheartened. I didn't know what I was going to do now. And one of my friend's father who had been in the Air Force and had spent a fair bit of time in the US suggested that I come to the US and go to school here. And I, I said to him, I called him Uncle Hussain and I said, listen, I don't have any money. And he said, let me help you with the one way airline ticket and let's see if we can get you out There. So, long story short, I ended up at Oklahoma State University with just literally less than 500 bucks in my pocket. And I bought a busted Chevy 1967 station wagon, and I lived in it for a year right outside the dorm. And I used the dorm bathrooms and study halls, and I fixed that car and I sold it for 1800. And I thought I had hit gold because I'd made, like, you know, thousand dollars of profit and now I could go to school the next semester. And along the way, I did some odd jobs working at Wendy's and delivering pizzas. And then I bought the next car and I fixed it and I made a little bit of money. And. And by senior year, I had bought and sold over 100 cars. And most of them I made money. Some of them I made a lot of money, some of them I lost money. But, you know, I put myself to school, and then I came to New York.

How terrifying was it? Or was it exhilarating for you to show up? You'd never been to the US Before. You're ending up in Oklahoma, right?

Yeah.

And you didn't know anyone. So, I mean, how did that. Were you terrified or was it an adventure?

I would say less terrified and more of an adventure. I was, you know, I was. I had just turned 18, and I don't. I kind of took it as an adventure. And what's the downside? I mean, people often ask me that question, and I always respond by saying I had nothing to lose. Whereas a lot of the folks who ask me that question, they say, God, I would never do it. And I say, yeah, of course you wouldn't, because you have a lot to lose. When you have nothing to lose, it's less terrifying because that becomes your only option. So the first semester was a little bit tough because I didn't speak good English. And in Oklahoma, people particularly have a little bit of a Southern accent, which was really tough in the beginning for me to understand.

And I'm assuming they didn't have a Pakistani community. Maybe if you showed up to New York, maybe you'd have your people, maybe, you know, some familiar food.

Exactly.

But, you know, again, I'm thinking about you showing up to Oklahoma, so.

Yeah.

Yeah, so. And was it even possible to work in all these odd jobs? School was challenging. Were you able to hang in there? Were you able to excel?

Barely. I graduated because I was working so much, I skipped probably more than half the classes. I graduated Oklahoma State University with a 2.3 grade point average, so barely squeezed it by. And then at the moment I had this sort of old Cutlass Supreme. I don't know if you remember those cars.

I think my father actually had one. Yeah, you'd graduated from the Chevy station wagon.

That's right. Two door car, bunches of clothes and whatever in the backseat. And I drove straight to New York, not knowing what's next.

Did you have an apartment lined up?

Nothing. I had a friend who I knew from Paxton who had subsequently moved to New York. And Danny, he now lives in San Francisco. And he said, yeah, come on over. You can crash on my couch for a couple of weeks till you figure it out. So I just. In Queens, I drove to him. No GPS back then, looking at the paper maps, kind of figuring it out. So get there, spend a couple of weeks with him, try to find a job. I got very lucky. I got my first job with the largest real estate company in North America at the time, called Cadillac Fairview in their accounts payable department.

But you didn't have any experience in that. You had a 2.3 GPA. I mean, what were they thinking?

How did you. They were like, oh, yeah, you know, we need somebody to process accounts payables. And I said I'd do that. And it was like 17,000 bucks a year. And that was, you know, a professional job in New York. I mean, for an immigrant, that was like a huge home run. So I was thrilled and took that job.

And did you have citizenship at this point or no?

I did. Back then it was easier. I had a green card at the time, which requires five years of residence in the U.S. and then you can apply for citizenship. I think I got my citizenship in. I came here in 81. So seven years, eight years later. And so I had a green card. And at the time, actually, frankly, nobody was even checking. It was not like, oh, you have citizenship or not, and otherwise we can't offer you a job. There was no checking at the time. And so 17,000. I kind of figured out what I had to do. Their offices were in White Plains, Westchester. And so I found a widow who was looking to rent her basement. So I took that for 200 bucks a month. No kitchen. I had a little hot plate and I bought an old Volkswagen Rabbit and.

I started working there, lot of hours or.

No, it was just nine to five accounts payable.

So were you doing extra things on the side?

So the company. So much of luck happens to you in life. It's surprises me. So the family. It was the Bronfman family who owned that company. Their kids, I believe, had A dispute.

This is the Seagram's family, right?

Yeah, Bronfman's.

Right.

Okay. And I think they were Seagrams in there, too. So they decide to sell the company. So two years later, they sell the company to JMB Realty, if you remember those guys. And so I wanted the guy I was reporting up to move to Schroeder Real Estate. And he said, you can come with me. And so I go there and there's a bunch of people making tons of money. So I started asking around, like, how do you do that? How do you drive a Porsche and make like 3, 4, 500,000 bucks? What do you have to do? And then I, for the first time, heard the word Ivy League schools. I had no idea what that meant. And so, oh, no, no. You need an Ivy League League school degree. And I said, oh, how do I do that? And like, what's your GPA? It's like, oh, Oklahoma State, 2.3. In any event, as luck would have it, Columbia had just started this master's of real estate program, and nobody knew about it. It was the second or third year that I went into, and they were actively trying to recruit guys who had couple, two, three years of experience in a real estate company. And so they accepted me. They said, oh, three years at Cadillac Fairview. Cadillac Fairview was very well known firm at the time, highly regarded. They go, oh, Cadillac Fairview, Schroeder, come on in. I said, I have no money. $100,000 loan they gave me. And I drove yellow cab at night. Not seven days, but like four or five days a week. Friday night, Saturday night.

What year was this?

This is. I went to Columbia in 88. The program started in 86.

So was it still dangerous kind of being out in the city and driving a cab around? Or by then you were kind of.

Adjusted and I don't know, I guess it was dangerous. I kind of view it as. I learned a lot about how people move and where do people live and where do they go. And frankly, my last class at Combia, I was saying to people, if you want some good stories to tell your friends that are better than everybody else story, just drive a yellow cab couple of times.

That's right. HBO used to have the Taxicab Confessions.

The whole show, the stuff that goes on in that backseat is amazing. Especially the graveyard shift. Oh, my God.

So you're doing that at night, you're studying during the day. And at this point, have you improved your GPA or you.

Well, luckily, Columbia had a fast, pale, fast Fail grid. So yeah, it was all good. And by this time I was focused on I gotta do something with my life. So I studied hard and then I got a job at Chase. Just in time when the savings and loans recession hit, right? So I was at Chase. Chase stock drops to two bucks. Everybody starts saying Chase is going to file. I got put on the team of three people who are, we have 5 billion of real estate loans that need to be sold and Blackstone, Starwood, Angelo, Gordon, I mean, all these folks were just starting out their fund business of let's buy distressed loans.

So I ended up, you'd never done anything like this. Did you even understand these loans or the implications?

We had hired Chase, had hired Kenneth Leventhal accounting firm to do what was referred to as diy no, sorry, Distressed Investment Value Div, if you remember that abbreviation. And they would do this div, taking the loan, balance net present, valuing at 35% to say, that's the value of this loan, go sell it. And the biggest sales that I made were to Starwood and Blackstone. And I didn't know it's just like, okay, this is $100 million loan and it has five years remaining and Chase telling me to sell for 30 million. So I'll go just sell it for 30 million. I don't know how to value.

And on the other side of the phone, I mean, I'm sure they probably have some, some experience doing this. They probably loved it. They probably thought they were running circles around you.

Totally.

Yeah.

So I got to know very senior people at these organizations. I did that from 1989 through 94, worked really hard there again making 50,000 bucks a year and getting 20, $30,000 bonus a year. And at the end of those four or five years, I said, okay, now I have an Ivy League degree and I work really hard and I still am hand to mouth what the heck's going on with my life, right? So I said, that's it, I'm done. None of these people telling me, Ivy League school and name brand banks, you make a lot of money. None of that has come my way. I'm out. So I sell everything. I had a little bit of money. I take a airline ticket to Eastern Europe. And then I just said, you know what, I'm just going to travel for a while. Backpack cargo ships, one country to the other. I go visit my parents. I go, okay, Paxton is not working for me anymore. Everybody's smoking and I can't deal with that. So I leave again, travel around Eastern Europe and it just. In those travels, I had an epiphany that real estate is being managed in very private ways. And when recession hits, people lose a lot of money. And just around mid-90s, the CMBS market and the REIT market was starting to evolve. So I came up with this notion that real estate should be liquid. You can have some private, but for family offices at least, it should be at least 50% liquid and it should be hedged. The CMBS, Sure. By the BPCs at the time were trading at 50, 15, 18% yield. Yeah, buy those, but short the Treasuries so that you are hedged against interest rates. Yeah, buy REITs long but also buy REITs short that you don't like, so you're hedged. So I had gotten to know this guy, Peter Lawson Johnson, who was a very close friend of mine. And in fact, he and I have been playing partners since Columbia time. I'd met him at Columbia. We've had like three or four planes together, and we still are plane partners. And so I pitched it to him.

Right, but you gotta explain this. At this point, you weren't buying Learjets. I mean, I think you told me the first plane was a Cessna and you had like a $25,000 plane. Right. So this is. This is really for your passion of learning to fly. Right. And you didn't even know who he was at the time, right?

I did not. And so I have a few stories that hopefully we can touch upon as to how to make money with no money down. This is really like a TV commercial.

Now you've got our listeners attention.

So I meet this guy, Peter Lawson Johnson. His last name is not Guggenheim. So I get to know him. He's like chewing tobacco, little kind of a little bit of a Gruffy guy. He and I hit it off with each other. And towards the end of Columbia program one day, we were sitting around and he says, you know, I have this airplane, I love to fly. And my partner, he's making a lot of money. He's in the leasing business and he wants to go buy a twin. And I can't afford this plane by myself. And I said, well, Peter, how much is the plane? And he goes, it's 25,000 bucks. I mean, 50,000 bucks. And I say, oh, okay, and what does it cost? You know, it was at Westchester Airport. And he goes, well, it's 200 bucks for parking and gas is at the time was like two bucks a gallon. And to go to, as an example, Martha's Vineyard, which is where he. He went a lot, had a house, or he bought a house later. But going to Martha's Vineyard, it's like our 10 minute flight, which is 18 gallons, so it costs 40 bucks in gas to go to Martha's Vineyard. And I go, oh, that all sounds pretty good. Can I be your partner? And he goes, sure, 25,000 bucks. And I said, well, I don't have 25,000 bucks. And I said, but let's do this. Let me find a lender to give us $25 loan on this plane, and I'll make the payments on that 25,000 bucks, and we'll be 50, 50 partners. So now I am a 50% partner in a plane.

Leveraged buyout.

Leveraged buyout. And by the way, it was $25,000. So my memory's shot, but it was like around 4% loan, and monthly payment was like a couple hundred bucks. And in my mind, I was kind of saying, okay, I'm on the hook for 100 bucks for parking and 200 bucks for the debt payment. So we're 300amonth, which, worst case scenario, I can do my cab gig. I can drive a yellow cabin two times a month to own an airplane, I mean, that's like one weekend.

That's better than the American dream. It's not an F14. So you're flying. And so you find out that he is the. Now, how is he related to the Guggenheim family?

So four years later, he says, hey, you know, we've been flying together. We've become closer and closer friends. He goes, he's a big hunter. He says, let's go down to South Carolina because there's turkey season. Let's go turkey hunting. And I said, sure. So we get in the plane, we fly to South Carolina, we pick up a rental car, driving through, all of a sudden, he makes a turn onto a dirt road. One of those movie scenes, right? Big trees on either side. Half a mile of drive, pulls into this huge house. Four or five people come running out going, oh, Mr. Lawson Johnson. Carrying my bags. And I'm just kind of going, what the heck is going on here? Anyway, we walk in the house, and there's like all these photos of museums and gold mines and copper mines. And I kind of start looking around, and I go, what's all this about?

You know, for four years, he never told you anything about this?

Never, never. And he goes, oh, that's my great grandfather, Salman Guggenheim. That's Harry Frank Guggenheim. That's this, that's this. We funded this. And that's how I learned that he is the heir to the grand Guggenheim family. Okay. So that's how it all unfolded. So then when I, you know, circling back to, I go to Eastern Europe, I have an epiphany of how the real estate business should work for family office. I come back, I say to him, hey, Peter, you guys have a lot of real estate. It really should be run this way. And he said, yeah, that sounds pretty good, but we gotta go talk to my dad. So we go talk to his dad, and his dad listened an hour, asked questions, and he said to Peter, do you trust Masoud? And Peter said, oh, yeah, Masoud and I've been plane partners and I trust him wholeheartedly and vouch for him. And Peter's dad said, it's not the smarts that I look for in people, it's the trustworthiness I look for in people. And said, I'll fund you. And that's how we started the Guggenheim real estate fund.

So you had an epiphany, but there's no business plan. There's no. I mean, did you know when you went.

I put the business plan.

Okay, so you went in there and was there an ask. Did you tell him what you needed to go do this?

Yeah, I Forget it was 5 or 10, I can't remember. I think it was 10 million bucks he funded us with.

So you go in there, you've never run a fund before, and you give him this concept. You say, you need $10 million. He looks you in the eye and says, go for it.

Yeah. He says, okay, let's get the documents ready.

Did you just fall out of your chair at that point?

Well, it wasn't. I mean, it was. I'm shortening the story. It played out over a month and like, how much money do we need? Do we need any staff? Where are we going? To office. What's our pitch? Let's refine the pitch so we can raise more money. High net worth institutions, family office.

So you started basically a business within the family office.

That's right.

And you grow this to what?

Grew it to about a little over 100 million. Okay. And now we were in conversations with a firm out of Chicago called Liberty Hampshire to infuse somewhere between 2 to 500 million. And they wanted piece of our business. And we were negotiating that when they said to us, look, we really want to grow ourselves to 3 to 4 billion, 3 to 400 billion. And we would, instead of funding you and taking a piece of your business, what we would like to do is maybe do a reverse merger. So we take your fund under our umbrella and change the name to what is today called Guggenheim Partners. They have done an amazing job. So Peter's on the board, doing really, really well.

So you basically started Guggenheim Partners. It was the idea that.

I wouldn't say I started Guggenheim Partners by any stretch of the means. It was. They said, just sell us the fund and come on over, by the way, in the meantime, I had been doing some business with Lehman Brothers. This was all over my head, by the way. Reverse merger, blah, blah, blah. How do you value my business? We were making a little bit of money just getting by because everything you make.

But you had to be onto something. They had to see what you were doing. It must have been very profitable, that 100 million. You said you were buying these positions at 18% returns. Did that all play out as expected? You had a track record at this point?

Yeah, we had three years of track record. And we were doing what we said we were doing. Mid teens returns, no volatility. There was a little bit of a struggle raising capital given the technology boom that was going on. Pets.com type people doubling, tripling every couple of months, which busted in 2001. So there was a little bit of struggle raising capital. But. But they had always represented that we are going to infuse 2 to 500 million into your business and then we will raise you a few billion dollars. Then they came back and said, let us just buy your entire business, change the name. And that fund today is, I believe, around $8 billion. Wow. So one of my mistakes of life.

I was going to say, you didn't want to stay with them at that point, or you, you kind of said.

Lehman gave me such a. At that time, I was living in a studio apartment. I had gotten married.

You didn't get the Porsche yet. They were still waiting for the Porsche.

Still waiting for the Porsche. Everything we're making, pumping it back into the business, travel, you know, pitches, all of that. And. And so Lehman's like, oh, we're raising private equity fund and why don't you become the second in command and either go to London and be the. The second in command guy there, or go to Tokyo and be the head guy for all of Asia. And I chose. And I said, oh, I talked to my wife, Amy, and I said, what do you think? And Amy's like, let's go to London. Who wants to go to Tokyo? Nobody speaks English. And so we ended up in London. And it was a package that I could never Imagine anybody offering me, like, big base, guaranteed bonus, carried interest in the fund stock, all of that stuff that everybody wants. I was just blown away. I didn't have an advisor to say, yeah, that looks great, but this Guggenheim thing could be really big. Don't go to Lehman. Right.

But at the time, Lehman was the all star team, and many of our friends who came from that era have gone on to do incredible things. So, I mean, that must have been so exciting to be a part of it. I mean, unfortunately, we know how the movie ends, but, I mean, you were there for how long?

10 years? Yeah, I mean, I started in 99.

I mean, the experience you probably received because by then you were doing all different types of investing. Was it mostly in Europe or what was the focus then?

So I only stayed there for a couple of years in London, and then I moved back to New York. My wife got pregnant. We wanted to just be back in New York. So, yeah, did all kinds of different types of debt. Mez Equity, MA took a couple of companies public. So to your point, I got an amazing, amazing experience. And the Lehman team, which I'm now back with them, just incredibly smart folks. No yelling, no screaming, none of the stuff that you hear on Wall Street. Just very supportive. So I had a great experience. Just, I'm saying, from an economic point of view, I probably would be much better off at. I said Google. But I have no regrets. It was the right decision at the time. I made the right call at the time at Lehman. I did really well.

Right.

I know. I earned a Chairman's Award. I made a lot of money the last four years. I really made a lot of money. And then Lehman ended. Yeah.

So then it was scout. So then you decide you're gonna go invest in hotels.

Then when recession hits, as you know, hotels, resorts really take a nosedive. And because of my experience from chase of operating businesses, really tanking. I actively looked for resorts that were hurting. No cash flow, and bought several of.

Them from any ones we would know of.

Well, there were three in the Northeast, two in Martha's Vineyard, one on Cape Cod.

This is going to be fun. At least you get to go.

Yeah, yeah, yeah, yeah, it was fun.

Take a look at them. You do some asset management.

Yeah. And fly your plane there, which is the fun part.

Good.

And the kids loved it. So two kids by then. I mean, another daughter by then. So that was all fun. And then I saw that window starting to close around 2012, so I got focused on New York, did a couple of deals here in New York, including 111 West 57th, which is that tall, skinny Steinway building. So I was part of the purchase of that land with the developer, as well as figuring out the capital structure around it. So that was a lot of fun for me and I thought I'd hit a home run on that one.

But this was now at Silver Peak. By then, this is Silver Peak had been established.

No, no. So this was my deal in New York that I was working on on my own. And I went to Silver Peak, to Mark Walsh, who was my boss at Lehman, and I said to him, I said, hey, you know, this is a really compelling being low basis. You should put a little bit of money into this. And in that conversation that he said, you know, why don't you come to Silver? Where are you working from? And you're working on these interesting transactions. Just do it out of the office, come back and join the team. And I did. In 2013, I joined Silver Peak. Back again.

I love. And that's very much in the spirit of what you all do today is really an incubator. I know there's a couple different buckets of capital and strategies, but I think for our listeners, what I think they'll really appreciate is that you find these best in class sponsors where you come in and almost be a Big Brother to them, a co gp where you come in and offer them strength and access, really. Because clearly if you all are signing off on an opportunity, you have a lot of supporters and believers out there. So I would imagine, imagine from there it's very helpful for them to raise additional capital and debt. The model you have, again, is unique. I don't know of a lot of other platforms that do that. Maybe talk a little bit about that, especially for our listeners who are aspirational, maybe they've done some smaller transactions. They're looking to step up into the institutional world. What kind of sponsors do you look for? Tell us a little bit more about how that works.

Our business, which started. Let me frame this thing. Silver Peak came to being because in 2008, when Lehman filed on the private equity side, our largest investor was CalPERS California Pension Fund. And it was them who said to the court that they had given their money to Mark Walsh and the team and not to a bankrupt state. So they forced the court to sell the private equity business to Mark Walsh, which is what became Silver Peak. And they also came to Mark and said, by the way, the 2.5 billion that you have remaining to invest in fund number three, forego that which Silver Peak agreed to. Consequently, immediately after Silver Peak opened its offices, the developer sponsors that we all had known for whatever 30 plus years started to come through the door saying, I need money. We would say, well, we don't have any investable capital. And the business kind of started by these developer sponsors saying, yeah, but if you put a few hundred thousand dollars into my gp then I can go to capital markets and say, Mark Walsh, Silver Peak is my partner, this is a good deal. They're investing personally and they would listen to me. We were frankly somewhat skeptical of that strategy, but it really worked well. There was a lot of credibility on the street for Mark Walsh. And so capital providers, the household names, Goldman, Blackstone of the world, they all like, oh, interesting, sure. And so it started out that way and now 10 years later we are very blessed to be in a position where a lot of times those guys call us and say we have a really good transaction but the sponsor is weak, doesn't have enough track record. If you guys can come in on the GP side, you do great asset management, oversee it, then we will do the deal. And I'd answer that. Connected to the question you're asking, James is what type of people are ideal for us are the folks who need a little bit of help either financially or track record. Because once developers and sponsors have done several deals or few deals for a few years and they've made good money for themselves, they generally don't need us anymore. They have the GP money, they have the track record. Now the reality is that 50% of our business continues with those folks because they say we enjoy doing business with you and because of you we can get better terms from the lenders and better terms from the LP capital providers. But generally it's an up and coming developer sponsor who needs a little bit of help with the GP money, need a little bit of help with the track record and they can put our name alongside theirs and that brings credibility to their deals.

I remember you were telling me about a Texas operator who had a great little multifamily business with a couple hundred or maybe a thousand or so units. And I mean it sounds like you really able to help them grow.

I mean we have a long list of those stories. They've done a little bit of work, we meet them, we look at what they've done. Are they smart, honest people? Have they been able to do? Do they have the capability and skill sets of executing what they set out to do? They've done two, three, four deals, smaller deals, ready to do bigger stuff, have Gotten few knocks have learned from them what to do, what not to do. We get behind them. And frankly, that's a little bit of what we also did at Lehman. At Lehman, we had a similar viewpoint of folks finding folks who we believed had the capability and skill set to becoming big, getting behind them, and ultimately they're taking them public or staying private, raising capital for them, that type of thing. So it's not so far away from what we were doing at Lehman as well.

Well, it sounds like such an incredible role to play and see help these sponsors grow and to grow along with them and be involved in a lot of different really interesting transactions. So we only have a couple more minutes left, so I want to talk about it. I think it's so fantastic that you're giving back now teaching the entrepreneurship program at Columbia. Tell us advice that you would give, because some of those students, some of them may be coming from real estate backgrounds, maybe others are looking to get into it. What type of advice do you give them?

You know, generally, I've been teaching at Columbia four years, and I found that students who come to that class all have great aspirations, and almost 100% of them say, I really want to do something on my own, but I want to go get a job for four or five years so that I can get more experience and then I'll go on my own. And I always say that, look, you know, in four or five years, you. You will probably be a VP someplace, and it's very likely that you're married and have a kid, and that becomes a very difficult exit to start with, something that has a lot of risk, and now you have family. So my advice generally to people is don't wait. Just, you know, what you learn on the street. Nobody will ever be able to teach you. And you gotta make bunch of mistakes. You have to. That's part of the plan. I need to go make a bunch of mistakes so that I can get better and wiser and make those mistakes now. So that by the time, in five years, you'll be a better investor, better developer, better sponsor, and you don't have to go build a big tower. I tell people, go buy a CVS with 15 years of lease remaining for 4 million bucks. Get 3 million from the bank, pass the hat for a million of equity, buy one and then buy one more. And if you buy two a year, you would between acquisition fee, asset management fee, you'll have 100, 150 grand in your pocket and you'll be fine.

But for our listeners who might not have that friend who's got a million dollars or $10 million. Where do they start with finding the right transaction and then where do they go from there?

Well, let me just super simplify it. And nothing in the world is simple, but just buy a CVS 4 million, you need a million of equity. Pass the hat. Let's say it's 90% LP, 10% GP, 100 grand of GP money, 900 of LP money. There's plenty of family offices who love these type of long term, net lease, dividend type play. That money is not difficult to find. You say, you know what? I want to build seven apartments on a tiny little lot. And it's construction and two years nothing's going to happen and construction might go upside down. That's tough money to find. That's a tough 200,000 to find. But if you go to a lot of folks and say, look, it's Walgreens or Chase Manhattan bank branch or whatever it is, and it pays X rent and you're gonna get 6, 5, 6, 7, 8, 9% dividend comes with depreciation. That money is not difficult to raise. Call all your friends and ask them to get one more name from them and call those people and get another name from them. Call those people. 900,000 is not a lot of money to raise in New York City. Okay, wow.

So what would you say? I mean, you've got such an incredible story. What is your key to success? I mean, what attributes have brought you to where you are today?

You know what, I just think of me that I am who I am. And I think everybody is the same way because I think we all kind of view others to be the same as you. We would be. But my wife tells me that I won't stop no matter even if I am failing and failing and failing. I just keep going. There's a word for it.

Tenacity.

Tenacity. It's just you have to accept that when you get, whether in the boxing ring or a soccer field or hockey field, you're going to get knocked over and over again. And the question is, are you just going to stand right back up and just keep going at it? That's all it is. Frankly, at this age in my life, I have less of a value to education from Ivy League schools because I see a lot of people very well educated that have just done nothing. And I see, I know tons of people who have little to no education or unknown schools who just keep going. They just like, they wake up and they go, I'm going to work hard and I'm going to keep trying to, I'm going to keep talking to people, I'm going to keep learning of things I don't know to figure out where the value is and I'm going to try and find it. That's all it is.

Amazing. Wow. That's an incredible way to end what a story. Thank you so much for coming in today.

Thank you for inviting me.

This is your host, James Nelson of Real Estate Investing live from New York. We're going to take a quick break and we will be right back. When it comes to business, you'll find the experts here.

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Welcome back to Real Estate Investing live from New York. This is your host, James Nelson. And now with us is our property and asset management panel. With us, my friend Michael Feldman, who is co founder and CEO of Choice New York Companies. We have Leslie Lisser. Thrilled to have her here. She is senior director of asset management at Invesco Real Estate. And last but not least, my fellow principal, Mike Sullivan, who is the executive director for Avis and Young's Asset Services. Great to see you all here. Thank you so much for coming in.

Thanks for having us, James.

Okay, so let's talk about where this all begins because we've got a lot of listeners who are whether they're looking at their first investment or maybe they've done some things on their own, you all have the expertise to really help our listeners take their game to the next level. So the question is, and I'm sure for maybe many of our listeners, they might think, well, property management, that probably doesn't even happen until after I've acquired the property. That's very late in the process. However, I Think what you'll probably tell me is that probably getting involved earlier is a good thing to be considered. Michael, why don't we start with you? When do you like to get that phone call? How are you working with that investor from the get go?

I mean, I would guess that almost every servicer sitting in this seat wants to get that call as early as possible, no matter what side of real estate you're on. I met with a group right before coming here. They told me they were building a 53 unit building. I said, are you doing 421A, which is for those outside of New York, really the primary way buildings are getting built on the multi family side right now with a tax abatement. And I said, no, you're doing a 49 unit building because if you're over 50 units, you have to pay a certain amount of union wage rates for your staff, which can make or break an investment. So, you know, they had to go and scrap their plans this afternoon and start working on making a couple of units bigger.

Well, a lot better than after they've, you know, put up the superstructure. So at least they can, they're still in design phase.

So multimillion dollar difference on not that huge a property. So I mean, I think any good investor, I mean, I've listened to the show religiously, obviously they're going to give five stars.

Did you tell your friends?

Come on, that's all I talk about.

Good.

I go to sleep. I can't sleep. I'm thinking about the show.

Great.

Yeah, I mean it's really. All these investors are really relying on the servicers who are in that area of expertise. And so the earlier we can get involved, it's always better.

Great. So Mike, at what point, I mean, would you second that? When do you like to get the call and if it is before they make that acquisition, how are you advising the investor at that early stage?

Absolutely. We'd love to be in right from the beginning because it's a people business, real estate really. You're not going to automate it. You need a relationship and a trust. And hopefully you've built up a relationship with a particular partner, let's say Invesco. And when they're looking at a property, they want to call us to come in and help look during the due diligence process at what has been provided to them by the buyer seller to look through, to be the forensic detective to go through and say that's baloney. The cost should be higher. I can do better here. This is where you can trim it and to help them identify what the value is that they'd be willing to pay. So getting in and helping a trusted friend during that process and hopefully they are successful and get the building, hopefully we would get that nod and say, you helped me out. Now I want you to run it because I know you're going to look at this asset the way I look at it.

I'm really glad that you brought that up of digging into the due diligence because I'm sure a lot of our listeners and look, us brokers, we try to be helpful. We try to put the information that's out there. Sometimes it's projected, sometimes it can be a little bit of a discussion with our ownership as far as what we're going to put out there, maybe what we're not going to put out there. So I would imagine for you to really do your job getting that T12, that trailing 12, really taking a look at collections, really taking a look at the expenses. I mean bills. How much diligence are you pouring over?

Well, typically in what they call the war room, what's opened up by the seller is about three years of actual financials. And you'll look through that and you'll also obviously look at the occupancy level to understand why they went up or down. And you'll be able to say that doesn't pass the smell test. Or maybe their leasing assumptions are really aggressive that the vacancy downtime is only six months when we all know it's longer. You have to bring a little reality into it and that basically will boil down to the value that a person's willing to pay for the property.

Thank you, Leslie. At what point do you get involved? Are you working with the acquisition team from the very start? Are you kind of sharing your things thoughts about how other buildings in your portfolio are being run? I mean, what type of value add do you offer early on in the process?

Well, at Invesco, we have the opportunity to work hand in hand with the acquisition team. So basically this is for debt and equity deals. And I could also say in terms of doing my due diligence and my role is to really verify rents, verify strategy and expenses. So my first or second phone call is going to be to my property management teams and basically understanding how the comp set works, you know, helping me develop schedules on expenses, on rents. You know, they're, they're, you know, I have a host of people that I rely on in various markets to help me. I just met two other people right now in the room, that could help me too, which is pretty good.

Here's my business card.

Wow. There we go.

So very excited about that.

We encourage that, you know. Yes.

But we are, you know, we are hand in hand. We're working with our property management teams at Invesco. Because we are an institution, we have to go through an RFP process. So we do give everyone that chance to go through that process. And usually stepping into the room, you know who's helped you the most. And you don't want to steer it in that direction, but that usually becomes the natural choice of who to pick. But you do want a fair playing ground and make sure you don't give business to just one group, which I think is fair with brokers and everybody else. Same with our clients and our investors. So, you know, we have the same role as well.

And just to piggyback on that and Mike's point, I mean, I always like to think of it as I always tell our. My top guys make the client feel obligated to hire us. You know, just the prospective client where we're giving them honest advice. Sometimes I feel like you're shooting yourself in the foot because you might be hurting a deal or killing a deal even. But, you know, the strong property management firms that are reputation focused, they'd rather, you know, maintain their reputation, give the client the information they need, whether it's good, bad or ugly. And then, you know, really it does get paid forward, where Leslie calls you back and says, hey, you know, that deal didn't work out. But what do you think on the next one?

100%. 100%. Especially when it has to do with, you know, management fee, which is a negotiated item right now. I mean, depending on how big the asset is and what the NOI is, I feel that number is a negotiated number. But payroll is the other thing. I mean, we're, we're short to have. It's hard getting the right personnel. So, you know, having an honest conversation with providers of what it's really going to cost you is very important. So you've got to really focus on those most costly items. Obviously we talked about energy taxes, payrolls right there too. So having that trusted advisor like you said that you can call and really count on that makes a difference of whether this asset's going to be successful or not.

I'm really glad that you mentioned those points and especially the payroll. And I know, Michael, you have as part of your business is you do search for position. So how do you look at staffing for Buildings. How do you know if they have too many people, the right kind of people? What is the ideal team?

Yeah, well, like everything else in New York, the answer is it really depends. I know nationally a lot of times the building entity does not employ the building level staff or sorry, they do employ. In New York it's the opposite. Very often some of that's because it historically is a union town, but that trend's changing a little bit. Employment laws are changing. You talk about how fluid the market is. There's so many different little components of real estate. You wouldn't think employment laws in San Francisco matter, but the New York lawmakers tend to follow what they what San Francisco is doing in that area. That to me is something I look at as an indicator of how we need to react.

For our listeners who are maybe looking to get into their first investment and whether that's a 10 or a 20 family, typically you're going to have a part time super. How do you find someone who's credible? Do you as managing agent, do you bring someone to staff a building?

We can, it depends again, but I think it really you start with actually the revenue of the building and not just the overall revenue but the per foot, the location, what the business plan is for that asset, which you get usually your indicators from the asset manager and or ownership and that really helps dictate how you need to staff it and you just kind of take it from there. There's obviously a minimum level of adequate cleanliness and security that every building needs and is required. But then there's a luxury level where some buildings need to sparkle. And so you really have to start with what the ownership strategy is, their tolerance for risk and take it from there.

Great, thank you. So Mike, talk to us a little bit about owners who decide to maybe self manage as opposed to third party. So what are the pros and cons there?

Well, on the self manage, obviously you have the headaches. All right. It's nice to third party and it's their problem, self managing. You know, it's nice to keep the fee and that's what a lot of them will do it for.

I like how you can be unbiased by the way, because that was a super slow pitch softball that you were to hit out of the park here. Why would you need a third party property manager? Carry on.

Pass those headaches along. As well as the property management fee that is charged to the building which here in New York with the operating escalations, each of the tenants pay a pro rata share that fee could be anywhere from 2 to 3% of the collections. And if the owner wants to self manage and keep that entire fee to themselves, that's great. They just have to do the work. Another might be where they'd say, I'll collect the 3% and I'm going to give this management company third party, 2%. So I'm going to still keep 1% for myself and let them deal with the headaches and let them deal with the personnel. So you know, if Joe Schmo left and he went to another opportunity or he's out sick, let him figure out who's replacing him.

Right. I would imagine though that you probably have more buying power. I mean, if you have a, a first time investor, this is the first building, I would imagine your access to vendors, not only the quality and the reputation, because if a vendor messes up for you, it's not just on that one property. You have a huge portfolio. You might think twice before using them again.

That's absolutely right. In fact, with that relationship, you've built a nice book of friends that you can count on. When things go wrong, you know they'll be there. It's not the person who barely knows you when they don't want to pick up the phone. It's the middle of the night and something happened. You need to call on folks that you trust that can come in and really help you in a situation.

So Leslie, only a couple of minutes left here and this has been a great conversation, but your thoughts on self managing versus, you know, third party?

Well, in Vesco we don't self manage anything and we really rely on our third party vendors or third party operators for the very reasons that you discussed. You know, they have a book of, you know, various vendors. There are emergencies that happen in the middle of the night and you need that plumber out there, you need that electrician out there and they have the bandwidth and the properties and the scale to get that person there. And you know, there's a lot of other, you know, I think it's nice keeping that wall because management can change, personnel can change. You have that wall there to kind of protect yourself as an owner, as an institution. You may have to change your manager if it doesn't work out, but at least you have that flexibility. If you had it all in house, you're kind of stuck. And it's hard to, and I've done that at other jobs. It's hard to motivate that crew to change and get things the way that you want to get them.

Sure.

And the personnel liability, too.

Correct.

We only have a minute left. So, Michael, I'm going to go to you to close this out. So don't blow it. You're a Rivera here.

You're really taking a risk.

Advice to our listeners, someone who's looking to get into the business advice, they should call your office. What would you be telling someone who's looking to purchase their first property?

Buyer beware. It's New York. It's a seller's market sort of in perpetuity. And you definitely, I think, want to leverage your experts. And, you know, the brokers are great on the revenue side. You need that, you know, obviously commercial, residential, but there's a lot of other aspects, whether it's a tax attorney or transaction attorney or property manager, where we can give you the real opex of the property, not sort of respectfully your setups. And that's great when you can take a shot at the host on the way.

I'm going to grab a hook in a second here. Thank you.

Hey, my microphone's cut off.

Good. So thank you again, everyone for joining. This has been a really great conversation. And thank you all out there for listening to Real Estate Investing Live from New York. And we'll catch up with you next week.

Thank you for tuning in this week to Real Estate Investor 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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