26: Marty Burger: All About Relationships

Welcome.

This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and 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 to show number 26 of real estate Investing Live from New York. This is your host, James Nelson. And we are now a month into the national shutdown as a result of this pandemic. And so I still hope that you and your families are staying safe. We are continuing on here, providing you with the information that you need to know. And we have Marty Berger, who is CEO of Silverstein, coming on talking about his story and how he has persevered in times of challenge and has a wonderful story about the importance of relationships and especially in this day and age, the importance to reach out to people and stay connected. So very timely. And then we have Pierre de Bass joining us talking about 1031 exchanges and some of the new rule changes that came as a result. Before we go to that, let's have our week in review, powered by the Daily Beat and a tough week with news, so please stick with us. President Trump outlined broad new guidelines for opening up the country. They'll put the onus on governors to decide how to restart the economies and states amid mounting fallout from the coronavirus outbreak. Governor Andrew Cuomo has extended the state shutdown for another month until at least May 15, whereas Mayor Bill de Blasio said New York City was canceling all permitted events for May. In the first week of April, just 69% of rent payments were made, but those numbers have improved significantly. By the second week of April, rent payments rose to 84% compared to the 90% at the same time last year. The data tracks the percentage of tenants who paid some portion of the rent, according to the Real Deal. Elsewhere in politics, lawmakers again fell short of an agreement on the next round of coronavirus emergency aid Thursday as 350 billion loan program for small businesses ran out of money. Republicans want to approve 250 billion more for the small business loans meant to support workers paychecks before moving on to other aid and stimulus proposals. Democrats want to make changes to the small business program and include money for hospitals, states and local governments and food assistance to recipients. Alongside it, the lab department reported that another 5.2 million Americans have filed for unemployment benefits last week, bringing the total in a month of Coronavirus shutdowns to 22 million. This was all according to the Wall street journal article. Elsewhere, WeWork stopped paying rent in April on some of its locations to try to cut costs. And notel has also failed to pay April's rent at several locations. Major retailers including Subway, Urban Outfitters and Mattress Firm have told landlords they e not pay or need reductions, whereas the federal government is doing their part in that. Jerome Power announced last Thursday that they will have a $2.3 trillion effort to bolster local governments and small and mid sized businesses, the latest in an expanding suite of programs meant to keep the US Economy intact. And while landlords might not directly benefit from these actions, more small and mid sized tenants will receive lending support which will flow to property owners. Lastly, and a bit of good, seems that XTEL has filed plans for a 354,000 square foot commercial building in East Harlem at 149 East 124th street, the former Pathmark site, according to the Real Deal. So looks like they will be pushing forward on a project there. So we're going to have a quick break and we'll get right back to that interview with Marty Berger.

Now it's time for our Investor Spotlight. And with us today I have Marty Berger, who is Chief Executive Officer of Silverstein Properties. He leads the company's day to day activities and focuses on its acquisition, development and financing efforts in the US and abroad. Prior to joining Silverstein, Marty was President CEO of Artisan Real Estate Ventures. Am I saying that correct? Marty, are you on Artisan?

Artisan.

Artisan, I'm sorry, sorry, Artisan. Yes. And before that 15 years at related as well as spending time at the Blackstone Group and Goldman Sachs. So has incredible experience and not to mention looking at his charitable contributions with his work for Habitat for Humanity in Westchester as well as being on the Board of Trustees for the Battery Conservancy and Lincoln center, just to name a few, as well as his incredible contributions within the real estate community. So Marty, thanks again for dialing in today to share your story.

Thanks for having me James.

Perfect. So tell us where it all started. Tell us a little bit about your childhood and maybe how you ultimately got into the business.

I grew up on Long island in Huntington on the Nassau, Suffolk border, ended up going to school in Philadelphia, undergraduate at Wharton at the University of Pennsylvania and I actually bought my first real estate deal at the end of my freshman year. I bought a house just off campus which I renovated and ended up playing landlord to my friends sophomore, junior and senior year and then sold it my Senior year. So I didn't pay rent for three years, and I learned how to take care of a property, my first one.

And not to stop you there, but I've got to ask, I mean, what. What prompted you to do that? How did you get the idea that you wanted to buy the place? And how did you pull the money together to do that?

I mean, long story short, my freshman year roommate had an older sister who married, like, the slumlord of West Philadelphia, and he owned all city housing, and we were going to live in, like, the coolest place, which at the time was Hamilton Court. He sent us a lease, and the lease was so onerous, my father said, oh, wow. My father's a dentist, so he didn't know much about real estate either. But he read it too, and we both thought it was so onerous. He said, go find a house. So we actually did. I think I paid about $100,000. I bought it in my name, and my father so co signed the mortgage. I had a partner whose dad also co signed. We renovated it over the summer for like, 20 grand and lived there for the three years and sold it for about 165,000 when we were seniors. So it was an interesting experience. The guy I bought it with, we had a falling out, and so I ended up buying him out. And I ran it by myself for three years.

So it actually cash flowed. I mean, were you thinking about it along those lines? Did you actually kind of do the underwriting and say, okay, well, I'm into it for this amount of money and after expenses, I mean, were you actually kind of calculating what type of return you were you were getting at this point, or was it just kind of more for the experience?

As a freshman, I didn't know what returns were. I just knew that the rent that I hoped to get was going to be more than the mortgage payment and the operating expenses and without me having to pay rent. So there were six bedrooms, only five people paid rent. And it was more to cover. More than enough to cover the mortgage payment and the taxes and the operating expenses for the house until I went away my second semester junior year and then found out that my housemates, or my tenants, if you will, my good friends, were having the air conditioning system fight with the heating system, and I was paying the bill.

Well, I'm really glad that you shared this story because, I mean, a lot of our listeners are still in college and they're trying to figure out ways to, you know, to get into the business. And I'm sure, you know, that hands on experience of having to, you know, collect the rents and handle the renovations. I mean, I'm sure that was actually a great introduction to the business. So.

I had no idea how to fix a dishwasher or washer dryer or, you know, what happened when the. When the fireman came and said, you're not up to code. You have to put an alarm system in here. And so I learned a lot over that period of time and how to deal with friends and not to ever rent your friends again.

Right. So at Wharton, were you taking real estate courses at this point? I mean, was this something that you knew then you wanted to get into or what? What were you thinking you were going to do after school?

So there was no real. Real estate program back then, if you think about it. Peter Linneman started, I think, in 87, 88. I graduated in 87. So the real estate school, which is today the Zell Lurie Real Estate center at the Wharton School, really didn't form until, you know, after I graduated. And so they had a real estate finance course that was taught. The graduate course was taught by a guy named Scott Erdang, who at the time was a partner at Laventhal Horwath in the Philadelphia office of what was then the 9th largest accounting firm in the world. And the undergraduate course which I took was taught by Joe Jerico, who is the head of the real estate center today. When I was graduating, I was looking for a job and I met with Scott Erdang and he suggested I meet with his partners in New York City because they had a real estate consulting group. If you wanted to get a hotel built, you had to go to LH or I think their rival was PKF at the time to get a hotel study. That group was run by about eight Cornell hotel grads, run by Bjorn Hansen, Art Adler and a bunch of other guys. I got a job with them doing everything but hotels. I was a real estate consultant. That was my first job out of college.

Wow. I mean, especially not having the experience going into that. I mean, that must have been an incredible opportunity. So how long were you there for? And then what did you. Was it from there that you ended up making the move to related or what? What was the.

Yeah, so I started there as a real sequence there and I was working on a number of projects. The hotel group, there was probably 15 plus people with eight very senior people there. And I worked for one guy in doing everything that wasn't hotels and really taught myself. Lotus123 at the time because that's what the industry practice was and did highest and best use analyses and a bunch of other types of studies. And what I realized pretty quickly was that my clients didn't have to listen to me. And that really bugged me. Even though I was, I think, 23 at the time, I thought I knew a lot more than they did about real estate. And when they weren't listening to what I was advising them, I got frustrated. So I said I got to get out of this advisory business and I found a headhunter. And I was lucky enough to become the first associate in the development group at the Related companies back in March 1989. Back then we were on one small floor at 625 Madison, which was the building we owned. And that was the development company, the management company and the financial services company all sharing one floor under Steve Ross's leadership.

And that was mostly. They were mostly doing affordable back then. But I noticed, I saw in your bio that one of your mandates was to go out to Las Vegas and build out a retail development. So how did that come to pass?

Well, that was much, much later. That was my second stint at Related. So I spent five years at Related and we were doing 8020 developments. I was a project manager on the Monterey, which is on 96 and third under under David Wines tutelage. So I learned a lot from him. Before that I was an assistant project manager under Bobby Giannis for the Computer Associates world headquarters out on Long island, which was a giant project we did financed by Prudential in partnership with Computer Associates. And then we started buying RTC packages. The world turned upside down and we stopped all development at that time. I think the Monterey was the only building built in New York city more than 12 stories in 1992. And really nothing happened in 93. And I ended up leaving in 93 after five years with Stephen and went to Goldman Sachs to work for Whitehall for David Hamamoto and Dan Nideck. So I started there in September, I think it was of 1993, was there less than a year and a half. We were buying bank portfolios and it was an interesting time. We were doing lots of buying lots of properties, but it was more paper pushing than anything else. It wasn't really Real Estate 101. We were buying it by the pound and we made infinite returns. I actually got fired from Goldman Sachs in November of 94. I was the last one in the group and the first one out, so I was told. And I ended up with about 12 job offers. In two weeks. And I ended up starting with Blackstone at the end of November of 1994. And I worked under Tom Salak and John Kukral. I started three weeks after John Kukril started at the Blackstone Group. They were on their first real estate fund, which was $345 million at the time. And I stayed for the first three funds. The second fund was a billion dollars and the third fund was 1,050, and had a great experience. You know, the guys there were real, real estate professionals. And it was back to Real Estate 101. We were, you know, when we bought something, we knew the markets and we knew the comps and we knew all the brokers in that market. And it was just a different type of investing. Wasn't, you know, we weren't buying it by the pound. So great experience at Blackstone was there two and a half years until May of 97. My big issue with Blackstone was that they didn't want to be a developer. And I was a developer at heart through John Kruechel. I had brought three different development deals to the investment committee. They all got shot down because it's just not what they wanted to do. Obviously Blackstone has been incredibly successful and they still have not to this day, done much development, if any at all. So I went back to the related companies for another 10 years and helped Steve start a company which back then, initial company, we called it the Palladium Company but is now known as the Related Urban Development Company with a guy named Ken Himmel who I met through Steven. And Ken's probably the best mixed use developer ever who ever lived. I'd done Copley Place in Boston and Reston Towne center down in Virginia and was involved in Water Tower Place at the start of his career. He was just a great developer of mixed use projects. So I learned a ton from him and spent a lot of time working on projects like City Place in West Palm beach and most notably Time Warner center, which I was the deal guy on, and just have got great experience working on some really fantastic projects. I've been very privileged in my career to have worked with some great people and to have worked on some great projects.

Yeah, I mean, I was going to say, and for our listeners who do not recognize these names, Steve Ross, David Yamamoto, you know, working at Blackstone, I mean, I don't think you could have chosen better mentors in the business. So was it luck that you just ended up with some of these, you know, preeminent firms? I mean, was it Was it deliberate? I mean, again, I don't think you could have done a better job picking mentors and including, you know, today with, you know, with Larry Silverstein. I mean, it's hard to come up with names that have been more impactful in, you know, shaping the way the business is done today.

Well, I didn't know leaving Related the first time that it was going to go to Goldman and then get fired. That wasn't fun. But it was flattering after being let down to get so many job offers and to be able to pick and choose what I wanted to do next. And I really thought Blackstone was the best choice for me and had no idea that Blackstone would be what it is today. It was just, again, a $345 million fund back in 1994, end of 94. So I got lucky there. I think although it was an educated decision. And then coming back to related in 97 to be able to work on things like Time Warner Center, I did spend six months talking to Related and getting to know Ken Himmel before I jumped back. And I spent time with the guys at Blackstone saying, look, I really, I'm a developer at heart and I was sort of hitting up against the glass ceiling where Tom Saylek and John Cukrel were. And so I made that move back in May of 97 and have no regrets because I learned a ton being back at Related and I had a lot of experience, I was given a lot of experience to really help shape that company with Ken Himmel. And it was really interesting. We got to meet some very cool people in the retail industry. And then I got to spend a lot of time with world class architects and, and go around the country really learning about what it's like to build a mixed use project.

So for some of our listeners who are maybe several years into the business and maybe they're working at a big shop, I mean, it seems like to me that every one of your moves was deliberate or there was a reason. But, you know, is there something to be said where, you know, if you move to another firm, you know, maybe that's a way to kind of jump up the ladder? I mean, what would you say? I mean, do you have any observations now? Is it better, you know, for someone to stay with a larger firm and kind of get promoted from within, or do you think sometimes to make a move that you can find a better opportunity elsewhere?

Look, it goes both ways. The grass is always greener. I think it's always better to stay with the firm. You're with. If you can continue to learn in advance and work on great projects and make money when those avenues shut down or you don't love what you do, you should change what you do. I always tell young people, you're young, you're smart, now's the time to figure out what you want to do. If you're working your butt off, working all hours a day and you hate what you do, don't do it. Change it if you can. Now is when you're not burdened by family and other obligations and maybe a house and a mortgage. So figure out what you want to do and change it. Now.

The other thing I tell really good advice.

The other thing I tell young people is you have to figure out how to make yourself a commodity. You have to make yourself wanted and needed. And the way I did it was I ran all the numbers. I was the numbers guy. And so whenever there was a meeting, they needed me. So I came in the meeting because I had the numbers. And back then it wasn't as easy to say, oh, let's change the rent from 70 to $72 a foot. And what does that happen to the model? And you know, we didn't have laptops back then and so it was just a different type of world. Today, all that's iterative, but. But the model is still very key when you're running complex development projects or acquisitions or you're working for a fund and you have to figure out how an acquisition might affect the fund with returns. And so I always say, make yourself useful. Find the guy that is the best deal guy and attach yourself to him and make yourself indispensable to him.

Great advice. So after related then you set off on your own. What prompted that and what did you end up building?

So.

Let'S see what happened. I built Time Warner Center. I was trying to find out what we're going to do next and I started working on some other deals. I went down to D.C. and opened up related Washington D.C. office. We worked on a very large mixed use development there. We got screwed by the District of Columbia and got kicked out of the competition. We thought we were going to win it. We sued the District of Columbia and actually won a judgment of over $5 million. Then I came back to New York and I started working on a project in Las Vegas that was called the World Market center, which was basically a huge furniture mart. And I ended up building 5 million square feet out there over a number of years. I was spending a lot of time out there and I started a new company out there called Related Las Vegas, which was a joint venture of Related New York and Related Florida. So I was the president, George Perez from Florida was CEO and Steve Ross was the chairman. And I got us involved in four very large mixed use projects out there. And we bought land on three of them. And the market sort of turned in around 2004, 2005, we sold everything. In 05.06, we made a couple hundred million dollars selling land out there. It was better to be lucky than smart. And I came back to New York and said to Steve Ross, okay, what are we going to do now? I just have two criteria. It's got to be fun and I got to make money. And so we never really closed in on anything. And I had a couple of opportunities come up and I decided to start my own firm. And that was probably may of 06. So I went to Stephen and I told them what I wanted to do and they asked me to stay on until the end of really October or December, somewhere between October and December of that year in 06. But I started the company called Artisan Real Estate Ventures in the May, June timeframe of that year. I brought on about six employees. Steven let me keep offices at Time Warner center basically through 08, although I moved to some satellite office that Related had. After some time, this company was doing two things. One, I was buying multifamily assets in Las Vegas because I saw how many people were coming to Las Vegas and I knew that they weren't building enough multifamily to house all the new people that were coming to Las Vegas. And the second thing I did was I was building in the Caribbean. I found a great piece of land that I became the developer of in Anguilla.

Wow, you picked some good destinations. That must have been a hardship to go do the site visits, right?

Yeah, well, I'll get into that in a second. But I also found a piece of land at St. Martin, sort of as a warm up to what we were going to do in Anguilla, because Anguilla was a very high end Resort and St. Martin was a villa project. So I was going from New York to the Caribbean to New York to Vegas to New York, Caribbean, New York, Vegas. And I had people in both markets, but I really needed to be there. And so I did a ton of traveling while trying to raise young kids. And then the Great Recession hit. And so 07.08, I got bought out of the Anguilla project. I sold the St Martin land at a loss, which was Very painful and humbling. And during that time in 07 08, I bought six projects with square Mile as my equity partner out in Las Vegas. We had about just under 2,000 units. And so I was spending a lot of time in Las Vegas managing that portfolio and then looking for new opportunities. And when the market crashed and Obama said, oh, you shouldn't go to Las Vegas, and it was sort of taboo. We were trying to pick up the pieces and try to help people in the market who had failed condo projects or had distressed debt and whatever else. And so I was backed by Lubert Adler and tried to do a bunch of stuff out there. Nothing really traded, but I had started some service businesses to help support myself. So we were working at a couple of condos for people, and one day I got a call from a headhunter about a job back in New York working with Larry Silverstein as his successor. So that was May of 09. I came back to New York, I met my wife and I met Larry in the same week. It was a pretty good week for me. In May of 09, wow. Larry and I hit it off. We had a couple of three and a half hour meetings and they were looking for someone to come in and really run the company while Larry was still there. And we just had a good vibe about each other. I met through all the criteria, had done office, I had done residential, I had done both acquisitions and development. And Larry, those were the core competencies of Silverstein Properties. So spent a lot of time with the family, with Larry, with the executives, some of which I had worked with at Related before. General counsel, head of construction, were previously at Related and predated me by many years going to Larry. And that was. So we shook hands in October of 09, and I started the beginning of 2010. So now I'm in my 11th year there and things are going fantastic. But I was amazing.

How did you so getting that call? I mean, they already knew that they were looking for a successor at the time. And you definitely had the real estate experience, but at the time, I don't know how big Silverstein was, but from a management standpoint, I would imagine it wasn't just, you know, to become the eventual CEO. It's not just running the real estate portfolio, but also, you know, the whole business and company. So did you have experience in that arena as well? I mean, that's such an incredible compliment at the time that they would not only, you know, bring you in, but also as the future successor.

So I had run teams of people and Subsidiaries, you know, I had probably 70 people under me at Related that I was responsible for from a compensation perspective each year when we had the related Urban Development company. But I never was the CEO of a company. So it was something new for me. And actually I think the Silverstein guys had met like 12 people and they narrowed it down to seven. And eventually they said, look, we're either going to make a deal with you or we're not going to make a deal. And we were able to cut a deal. But they said to me, look, you're on the younger end of the spectrum of people that were looking at. I think I was 44 at the time. And so they asked if I would start as an executive vice president instead of as the CEO of the company. And I said, are you going to pay me any different? They said no. I said, are my possibilities going to be any different? They said no. I said, well, you can call me janitor. I don't care about. So vice president and Larry and I sort of had a handshake that after two years, if everything was going well, I be made the CEO. So the end of two years roll by and Larry comes in my office. He says, you know, this is just working out better than I had ever expected. I hope you feel the same. I just have one problem. I said, what's that? He says, I don't want to retire. I said, larry, I don't want you to retire. If Larry Silverstein's in the office, I can get a meeting with anybody. I love working with you. So we agreed.

He's still in the office every day, isn't he? I mean he's such an unbelievable.

So we decided together that for the next two years we would operate as co CEOs. So I was flattered. Larry Silverstein is my co CEO. That's fantastic. So for 2012 and 2013, Larry and I were co CEOs of the company. And the end of 2013 we formally announced that I was the sole CEO and Larry became the chairman. By the way, nothing has changed ever since the first day I started there. So it's an absolute privilege to work with Larry every day. He's a ball of energy. He's incredibly smart. He's almost 89 years old, has not skipped a beat, knows where everything is, remembers more things than I do, and has an energy level that exceeds mine. And if you know me, I have a pretty high energy level.

Amazing.

And just a sweetheart guy.

Absolutely. And you did join. I mean this was right after 9, 11. And thinking back I mean, Larry has always been such a steadfast believer in New York and just the importance of building back the World Trade Center. I mean, you were getting involved in the company, I'm sure right during that time have had a huge hand in bringing it back. So that also to have that opportunity to really do something so important for the city and the country, what an amazing opportunity there.

Well, I missed the tough years. I mean, when people think of Larry, they think of the perseverance he had to get through all the muck. And you know, I didn't start till 2010, so he was doing this for nine years without me. And he pushed this thing along despite, you know, the politics and forces against him. So he's an incredible human being to have had the perseverance to do it and to actually get it done. When I came on in 2010, there were 180 people at the firm and one of my mandates was to not work on World Trade center and to actually push us into new businesses, which Larry gave me the ability to do. And today we have about just over 400 people working for the firm and we're in lots of new businesses, all real estate related and all, you know, based on our core competencies. So it's really terrific. And you know, Larry's been there side by side with me, helping me build this. So it's been really incredible, amazing.

So can you. I'd love to hear your thoughts on what deal you're most proud of. And let's say, you know, Pre Silverstein, you know, what deal? What were the challenges? How did you overcome it? And then I'd also like to ask the same question for today.

Well, when I think of what we've done downtown and I'll add to that Four Seasons in Orlando. You know, when I started two projects I got with the Four Seasons downtown and the Four Seasons in Orlando and we didn't even have a deal with the Port Authority on the World Trade center yet. So that was still in limbo. That didn't happen until, I think the end of 2010. And so my office was right outside looking right down on the site we had when Larry opened 7 World Trade center back in 2006. We brought in Moody's in 2007 as our main tenant and they're still the largest tenant in 7 World Trade center, about 750,000 square feet. And Silverstein and Calstrs together bought Moody's old office building at 99 Church street and, and we took the building down. I wasn't there at the time. But in 08, they took the building down, put foundations in 09, and then let the site sit because there was no market to build a hotel condo project. In 09. We were still right in the heart of the recession. And so my office looked right down on the site, and we had a nice construction fence up, and Municipal Arts Department Society did a great design around the fence. And. And so that's what we looked at for a long time. And what I'm most proud of is putting together some very creative financing eventually with Banco and Bursa to get that. I'm sorry, not to get that. Let me back up a second. Scratch that. So while we were working on that, the Four Seasons guys came to us and said, hey, we have a site down in Orlando in the park in Disney World that we'd like you to look at. And this is just before I started. They made a commitment to Four Seasons to figure out their building down there. It was going to be the largest Four Seasons in their chain, but it was all hotel in Florida. So when I came on, we also had the Four Seasons project in Orlando. And when I went to try to go finance it, I was knocking on people's doors. In 2010, I had a hotel, new construction, Florida. Those are three boxes that weren't on anyone's radar screen, if you recall. Miami was crushed, Fort Lauderdale was crushed, Palm beach was crushed by the recession. And no one was doing hotels, and certainly no one was financing new construction at the time. It was an uphill battle. And it took a very creative financing package with Anko and Bursa from Mexico City to get it done. Dune Real Estate Partners was my equity partner along with Four Seasons, who kept their money in the deal. And we got that building under construction, I believe it was the end of 2012. And then I turned my attention to the Four Seasons in New York, and it was just under a billion dollar project. And again, had worked with a lot of banks to cobble together a senior mortgage and a junior mortgage, and it just didn't work out. And we ended up doing one giant financing with one lender, Teachers tci. What is the name of the company? It's Teachers Investment. Oh, sorry. Martin Erfello from London. I just forgot. I forgot the name of the.

I'm not helping you out either. I was thinking the Children's Investment Fund. That's not it.

Right. Children's Investment Fund.

Oh, it is it.

Okay.

All right, good.

So the Children's Investment Fund from London lent us basically $670 million and we had 290 million of cash in. So that was a 960 million dollar budget. And we got it under construction the end of 2013. We were lucky enough to pre sell the hotel to a Middle Eastern group. So before we put the shelf on the ground, we didn't have the hotel exposure. And we built this billion dollar project and had good timing with the condos. Sold out. 157 condos. Sold out all but, but I think we're holding to three or four right now. And we made a lot of money in California, made a lot of money for ourselves and built a beautiful product that actually Larry Silverstein moved from 59th and park down to the 80th floor of the Four Seasons Tower which is called 30 Park Place.

He put his money where his mouth is. What an incredible story.

So very proud of those two projects. And then as time got on, I was pulled into World Trade center because it's just too big not to be pulled into it. And was very involved in the financing for 3 World Trade center, which we completed almost two years ago. And it's about 83% leased today. Beautiful building. Hopefully will be fully leased by the end of this year once we get through this little hiccup of a virus. And we're, you know, we're going gangbusters trying to figure out how to get two world trades in our business, which will be a $4.3 billion building.

Fantastic. So we only have a couple minutes left. But one thing, and I was really excited to have this conversation with you because, and I only read a portion of your bio, but I mean, it's not just your, you know, your experience, but your involvement in the community and being the governor and head of ULI and the work that you're doing now for the Zell Lurie Real Estate center at Wharton and not to mention the epic ski trip that you run every year. And it's, you know, what I would imagine is your relationships that you've established through all these connections have been helpful throughout your career. And so, you know, I guess the question would be, I mean, is your, you know, your relationships, you know, whether it's personal business, does it all kind of become, you know, one in the same? And if so, has that been, you know, the key to your success?

Look, I have a great network of friends and colleagues and peers in the real estate industry. I would tell you that my personal life, probably 75% of my friends are in the real estate business just out of luck or out of the fact that that's Where I spend most of my time. I work 24 7, I socialize 24 7. A lot of those people happen to be in the real estate industry and it's definitely helped me. I try to make it a point that not to piss off anyone in this industry, which isn't easy to do when you're working on high profile deals and a lot of money is at risk. But I've made it a point that if I know there's someone that doesn't like me in the real estate industry, I reach out to that person and find out why and try to fix it. It just bothers me to have someone not like me. Others don't have an issue with that, but I do. I've kept a very good relationship and a pretty wide network of people close to me over the many years. I've had great mentors working for Larry Silverstein and Steve Ross and Dan Nideck and David Hamamoto and people at Blackstone. It's just an amazing network of people. I've had, I think Mike Facitelli and Marty Edelman as mentors of mine. Whenever I do something in my career, I always talk to those guys. I've been very fortunate with that. I think networking is really important because the people that I was doing deals with 20 years ago are now running the companies that I'm doing deals with. It's very helpful when you can call up the CEO or the guy who's running that group and say, hey, my team's looking at this. They're working with your team. And you know, we were really serious about it. And so, you know, they know me and I have a reputation of doing what I say I'm going to do. And so that's helped us a lot in getting deals, no question.

Well, Mario, this is such incredible advice and definitely an inspiration for our listeners. So really appreciate your joining us on the show today.

Thanks very much for having me.

Hi, I'm Mark Rose, Global CEO of Avis and Young, the world's fastest growing real estate services firm. And we are proud supporters of Voice America. With over 5,000 professionals in 120 offices in 20 countries, Avis and Young delivers local expertise in partnership with global reach. Because we are principally owned, Avis and Young prioritizes client success over shareholder profits through our open architecture. Our firm's experts provide value added client centric investment, sales, leasing, advisory management and financing services to clients across the office, retail, industrial, multifamily and hospitality sectors. Our culture is the bedrock for collaboration that enables each assignment to benefit from the collective intelligence garnered from a company wide database performance. Learn how we deliver different@avisonyoung.com to learn more.

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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 my friend Pierre Debas from Romer Debas llp. Pierre is an attorney who works with investors here in New York and he helps with exchanges and is also familiar with opportunity zones. And he recently wrote an article that appeared in Bloomberg on the topic. He's also a source for the Wall Street Journal and the New York Times. And so we are going to be talking today about how 1031s work and then he's agreed to come back on the show next week and then we can talk about the differences between 1031s and Opportunity Zones. So Pierre, thank you so much for joining us today.

Thanks, James. It's an honor and a pleasure joining you on the show today.

Perfect. And I know we just concluded a class on this where you're now also teaching continuing education. So in its simplest form for our listeners, and many of them are first time investors, but we also have some veteran investors tell us a little bit about what is the 1031 in its simplest form and how does it work?

Yeah, the 1031 I think is something that I love promoting to the real estate community. And the reason being is that it's a tremendous tax deferral mechanism that any investor should be aware of. And if you are in the business of continuously investing in real estate or that's your model or objective for the long term, it's imperative and mandatory to be familiar with what a 1031 is. So with all that, right, 1031, what are we really? What is really the gist of this? It's an IRS reg that's provided for decades and decades ago to incentivize people who own real estate for investment or business uses to continue to use those funds to invest in real estate again for investment or business uses. So now it allows you to sell a property, take all the proceeds, roll it over into a new investment property and not pay any gains tax whatsoever on the profit from the sale. Now, it's not a tax avoidance, which is oftentimes a misconception. It's a tax deferral master mechanism. So you're deferring the taxes essentially until you cash out. But in doing so, there's a number of benefits to that which I'm sure will go in on the show.

Perfect. So let's talk a little bit about the time frame. And for those of you listening in now that there has been an extension due to the coronavirus. So my understanding is if you were looking to identify or close between April 15th and Pierre, is it June 15th. Excuse me, July. July 15th. You are going to get an extension during that time frame. But before we get to that, why don't you just talk about that 180 day schedule and identifying and then maybe we can talk about how these extensions are going to work.

Yeah, of course. I mean, the timing of our topic couldn't be better because the two deadlines any investor needs to be aware of is that when you sell a property, the IRS requires you to identify the property that you want to buy that's technically called the replacement property, within 45 days from the date of the closing of the property you sold, which is called the relinquished property. There's a couple different rules, as you know, for identification, but the most common and the one we'll use for today's purposes is talking about the three property rule. So if I historically, how this works is, let's just say round up and say today was April 15th. If I closed on my relinquished property today, I would have 45 calendar days from today getting me to essentially May 31st to identify up to three properties that I intend on buying. And the IRS regs require me to close on any of those properties so long as I use all of my proceeds from my sale within 180 days of the date of my closing of April 15th. Right. So it basically gets you close to six months where you have to close on that property historically, and I can't recall a time in my career where I ever saw any flexibility in these gates. The government, the IRS is extremely rigid. I've never seen an exception in any of these deadlines where it's to the point where if you're one day late on any of these, on the 45 day, 180 day rules, your exchange is blown one day late for any reason. So now fast forward to what we're going through today. How can the IRS possibly impose these restrictions in the middle of a pandemic which a, you know, in doing hundreds of commercial deals like yourself, you can relate to how difficult it is to negotiate and conduct due diligence in a commercial deal under these circumstances. That's number one. So if you're in the middle of an exchange and you're looking for the replacement property, you know, it's going to be pretty difficult to secure a replacement property. Present day number two, if your deadline is coming up where you have to close by a set date during this time period that we're talking about April 1st to July 15th, you know, we're trying to our office, you know, as a real estate lawyer, we're closing several deals virtually at the moment. But even still, it's nowhere near the same volume that we typically close. And it is unequivocal that the volume of deals closing is going to decline substantially because of this, irrespective of the fact that we're doing our best we can virtually. So the IRS now saying, okay, we understand closings may not be able to take place. We're not going to to penalize the taxpayer, the exchanger in this situation. Any deadlines you have for 1031 or opportunity zone that were between April 1st and July 15th are pushed back to July 15th. So if my deadline to close on a relinquished property was June 1, talking about the transaction that was consummated before the pandemic took place, I now have July 15th to close on that transaction. I also have until July 15th to identify. So that's where the note, the notice that the IRS issued last Thursday isn't incredibly clear on. It doesn't actually address specifically 1031 in Opportunity Zone transactions. It addresses other types of tax returns and other aspects of IRS tax code in more of a general format. So all of us in the real estate industry are under the assumption, interpretation that obviously would include 1031 and Opportunity Zone. So I think as this unfolds, we'll really have to watch out and see. Okay, A, is the pandemic going to go on for longer than any of us anticipate or hope, and B, if it does, what other. What extensions will the ir. What further extensions will the IRS provide for?

Perfect.

Okay, so, but in normal times, you have the 45 days to identify up to three properties, and then that 45 days would typically happen within the 180 days. There's two other ways rules to identify properties. So maybe you could touch on the 200% rule and then the 95% rule.

Yeah, so we always talk about the three property rule for the most part, because to be perfectly honest, it's the most common and simplest form to meet the 200% rule is fairly utilized. Basically, you can identify any number of properties as long as the total fair market value does not exceed 200% of the total fair market value of your relinquished property. So to give you an example, if you sold the relinquished property for A million dollars, you'd be able to identify as many like kind replacement properties as you want as long as the total aggregate does not exceed 2 million. So essentially double what your relinquished property goes to for. So that gives you a little more flexibility in the event that you want to acquire multiple properties. And the three property rules not sufficient for your identification. The second one, I'll be quite honest, I can't recall the last time I've seen somebody utilize. This is the 95% rule. This is definitely the most complex of the three where you need to identify significantly more like kind replacement properties. And the first two options provide for. So then your limit is the total number or value of identified replacement properties permitted under the 95% exception. Where essentially you can, you can identify any number of properties, you can identify 25 properties, but you actually have to close on at least 95% of the value that you've identified. So, you know, a good example you can always say is that if I sold a replacement property for $10 million and I want to buy, you know, let's just say I want to buy 100 $100,000 units throughout the country. And I obviously, you know, the first two rules don't provide for that. As long as I close a 95% of those, I'm unlimited in how many properties I can identify. But like I said, that's definitely the least, the least utilized mechanism of the three options.

Okay, perfect. I think it would also be good to note now that there's also. Well, typically we see forward exchanges, but there's also reverse exchanges. In this case, you would be buying the property first, assuming you have the capital to do that, and then selling within that 180 days, that 180 days swing both ways. Is that correct?

Yeah. So the reverse exchange is something I really like talking about because it really depends on market conditions when you see it. But more or less the reverse exchange is the opposite of what we're talking about. You acquire a replacement property before you sell the relinquished property. So it really depends. We see it more commonly in a bull market where an investor sees a property that they're completely bullish on and they want to acquire that property and not wait to basically liquidate the relinquished property. And they're able to do so because a, they're either liquid, where they can buy that property in cash and utilize and I'll talk about the mechanisms for this, or they're able to obtain financing to secure that property, short term financing and restructure that debt through the payment of principal from the proceeds of the relinquished property. So the long and short of it is that you buy before you sell it, right? And in order to do so, you actually have to set up an exchange accommodation title holder, an eat. And the EAT technically is the one that takes title to the replacement property. And depending on the structure of financing, whether it's traditional institutional financing, financing or self financing, that the lender, the lender will be involved in the EAT structure as well. And once the sale of the relinquished property takes place again, you still have the same 45 day and 180 day parameters to adhere to. You take those funds and essentially either pay down the financing that you took or you pay yourself back. And at that time, the exchange accommodation title holder transfers title from the EAT to the actual exchange order.

Sounds like you need a good attorney to help walk you through it. So, yes, I don't think we did the disclaimer, but I know for our listeners when we're talking about these types of structures, you definitely need to run it by counsel and also speak to your accountant. But I'm glad you mentioned the setup for the reverse exchange. And I think important to note also for the forward exchange, which again is most common, that you need to provide for that when you're selling a property, you need to put that in the contract and then you do not take the money. A qualified intermediary actually holds the money during that period. So the advice I always like to give is make sure, obviously it's a reputable firm when you're dealing with a qualified intermediary. But I also like to say go with a dual signature bank account. Go with a bank that you know where that qualified intermediary signs it. But then you to to release that money. Because unfortunately there have been some horror stories where qualified intermediaries run off with the money. So you just want to be careful. So, Pierre, we only have a minute or two left, but I think it is important to just explain to everyone that if you're looking to fully benefit from the 1031, you have to replace the equity, but the debt as well. Obviously if you want to buy a property that's larger, you can take on more debt, but maybe just remind everyone you know how to maximize this benefit, because if not, you know the portion that you don't exchange, I mean, I guess you can always pay tax on, but maybe just explain that to our listeners.

Definitely. So whatever debt you have outstanding in the relinquished property, you have to carry over at least the same level of debt on the replacement property. The whole purpose for the irs. A lot of people say, why does IRS allow for this? They're not getting paid. It's lost opportunity cost and tax revenue. The benefit of this to both exchange or the economy and the government is that it enables the real estate investors to have more liquidity to acquire higher purchase price assets, invest in property, increase cash flows which as a result increases income tax and generates wealth which at the time that the exchanger decides to stop exchanging properties and to cash out, the government gets paid a very handsome check at the end of the day. So by doing by so number one, you have to carry over the same amount of debt and you are always able to increase the amount of debt and obviously equity that you place into the replacement property. If you don't, if you own a property outright or you don't want to use all the proceeds to obtain a replacement property, you can do a partial exchange where you can take part of the proceeds, conduct a 1031. However, whatever cash you pull out for yourself and take home, you pay gains taxes on. Even if that was your initial equity contribution to the relinquished property when you acquired it, you still pay taxes on whatever money you take home.

Perfect.

Well, hey Pierre, thank you so much for joining us today. Super helpful. So appreciate your taking the time.

Thanks James. My pleasure. And thanks again for having me. It was a really, really good talk.

Wonderful. Well, that's it for this show. This is your host, James Nelson, Real Estate Investing Live from New York. Definitely. Follow us through the various social media channels at James Nelson nyc. Tell your friends about the show and please remember to post comments and ratings. Thank you again for your support. Until next week.

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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