9. How a Colgate Education Set Dan Hurwitz Up for Success

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.

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Largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Happy holidays everyone. This is your host, James Nelson. Welcome to the ninth show of Real Estate Investing Live from New York. Hopefully you are all home with the family for the holidays. Maybe sitting by the fire. Maybe the kids are waiting up for Santa with the cookies out. Meanwhile, I know you all have been sitting waiting for this week's edition of the podcast. So thank you again for your support. We've got a great show for you lined up tonight. We have a fellow alum of mine, Dan Hurwitz from Colgate University talking about his start and how he ended up climbing the way up to become the CEO of one of the largest shopping REITs in the world. And now what he is doing and the state of retail. And afterwards we have an exciting panel talking about how to structure real estate transactions. So before we get to that, we'd like to do the weekend review. Powered by the real estate daily beat, it's in sales. Hobson Development holdings has acquired 131 East 47th street from Bentley Zhao's New Empire Real Estate for $115 million. The Hong Kong developer is planning to construct a 34 story tower spanning 183,000ft with 200 units. Elsewhere in finance, Xtel Development has secured a $700 million loan from Citigroup and Rexmark to finance both 555 10th Ave and 510 East 14. The luxury rental properties contain 770 units. Citi provided a $485 million senior CMBS loan while Rexmark originated 215 in mezz loans. These were 10 year fixed rate loans and interest only in leasing. Fashion brand Kith has signed a 57,000 square foot manufacturing lease at 25 Kent Avenue in Williamsburg. This project was built on spec since 2013. Developed by Rubenstein Partners and Heritage Equity Partners, this is an eight story mixed use project with 350,000ft of office, 70,000ft of retail and 80,000 square feet of light manufacturing. Best Buy has also chosen to stay on the Fifth Avenue corridor but is now moving across the street. They have signed a 10 year lease for 40,000 square feet at Moynian's 535 Fifth Avenue. The lease will span the first second mezzanine and basement levels, and they will be paying $8.25 million annually during the term of their lease. So great to see renewed confidence there in that corridor. In real estate news, real estate stocks have rallied this year and were returning better than 20% after 11 months, according to a Wall Street Journal story, and this was boosted by declining interest rates. The better returns in 2019 come after four straight underwhelming years. Even so, these stocks slightly trailed the S&P 500 index. Owners of warehouses and fulfillment centers, which have capitalized on the shift to E commerce, made up the top performing sector among retailers, REITs. These stocks had a total return of 46.7% in 2019, led by Prologis 53.6% return.

Wow.

Apartment owning REITs were in the second best performing with returns of 29.3%. Elsewhere, Chinese investment in the US commercial market is plunging as restrictions on capital leaving the country and geopolitical tensions weigh on real estate deals. While Chinese investors are avoiding US Deals, there was an uptick in capital from countries including Germany to Turkey and South Korea. The Chinese investors put 1.4 billion into US commercial real estate in the 12 months through September, a 76% decline from the year before. Lastly, Two Trees Management has revealed an ambitious plan for Two Towers on the beach of an undeveloped section of Williamsburg waterfront. And last but not least, Mary Ann Gilmartin who we were thrilled to have on our second show. She has announced that she is now launching launching her own firm, Mag Partner, so wish her lots of luck. So please stick around. We have a quick word from our.

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And now it's time for our investors Spotlight. I'm here today with my friend Dan Hurwitz, who is founder and CEO of Raider Hill, who advises on retail investments. Dan is a true visionary, having served as CEO of DDR as well as interim CEO of Brixmore. He also spent time for Boscov's department store, opening up locations nationwide. So, Dan, we're thrilled to have you here with us today. Thank you.

Thank you, James. It's a pleasure to be here. Sure.

So, Dan, tell us a little bit about your childhood. Was there real estate in the family? How did you get into the business, so to speak?

Well, there wasn't really real estate in the family. There was more law in the family. My dad was a lawyer and was very determined that I not be a lawyer. And upon graduation from college, I really wasn't ready to go to graduate school and I really didn't want to work on Wall Street. And I was offered a job working on a construction site in Maryland on a shopping mall where I was a clerk of the works. And clerk of the works was not particularly complicated and I didn't really use my fancy education much on a daily basis. But I got to get a walk around the site, be outside, work with contractors, work with the banks on requisitions. And I found that being in the real estate business in general, there were a lot of good people in the business. So I liked the people I was working with. And I loved retail. You got a good read into what was going to happen. It's a good leading indicator of the economy going forward. And so retail and real estate combined, I just liked it and I hung around the hoop to see where it would lead.

So in our connection is through Colgate University, where we're both undergrad, and a liberal arts school where there wasn't any real estate exposure. So for those listening to the show who might be looking to get into the business for the first time. So I guess what you're saying is you don't need an education, so to speak, as a prerequisite to invest in the business.

Well, not at all. In fact, I think what you need is the ability to be a critical thinker. And that's exactly what you learn in a liberal arts education. I. For. When I was a history major, I've always been somewhat obsessed with history. That really set me up well for law school. Had I gone to law school. Because all you really do as a history major is read and write and defend your positions on your writings. That's not necessarily the direction I went, obviously, but my undergraduate education at Colgate taught me to be a critical thinker and to communicate.

So were you actually pouring the concrete or were you hammering nails? Were you keeping an eye on what was going on out there?

What happened was I really started by running the labor crew.

Right.

And then you would do bank requisitions.

Got it.

So, for example, when the contractors came in and said I had 15 electricians on the job, my job was to go out and make sure that actually there was 15 and not 13.

Got it.

There was never 18, by the way, but sometimes there were 10 or 12. So you were a clerk of the works, means you did all the paperwork. When the bank came down for their construction draws, you had all the answers to the questions that they might have. And I did that for about four or five months. And then our superintendent quit. And my boss came down and said to me, look, you're going to be the superintendent. And I said, well, that's very nice, but I was a history major from a liberal arts college.

And you're probably 20, 21 years old, 22.

I said, I don't know if I'm qualified for this. He says, well, you went to this fancy school. You're supposed to be smart. Figure it out. And if you do, he said, if you figure it out, I'll bring you back to New York and I'll get you involved in every aspect of our business. And that's exactly what he got it.

So you come to New York and then what? You make a move? You're still with the same company?

With the same company.

And this wasn't. This was still before DDR, correct?

Correct, Correct. Yeah. And I'm still with the same company called the Shopco Group, which was a shopping mall developer, basically east of the Mississippi and small company. So I got involved in everything. My boss, to his credit, the senior partner of the firm, lived up to every word he ever promised me. I was involved in asset management, I was involved in leasing, I was involved in development, I was involved in finance. And he brought me to every meeting for five years that he had in this business. So I got a Real good flavor for things. So by the time I was 27, I really had 10 years worth of experience, really in five. So when my boss actually became ill and was going to retire, it was time for me to leave the company. And I got offered a job by a department store chain out of Reading, Pennsylvania, called Boscov's Department Store, which at the time and still is, I believe, the largest privately owned real estate department store chain in the country. They didn't have a head of real estate. The founder of the company was the person who was doing all the real estate, and the company wanted to grow. So he came to me because I had met him through the mall business and he said, why don't you come be my head of real estate? So I did, and I left New York and moved to Reading, Pennsylvania for five years was my goal. I ended up being there for close to nine and ran the real estate. We doubled the size of the company, and I learned everything that I know about retail, and he taught me everything. I went on buying trips, store visits, and we doubled the size of the company, and it was a tremendous run. And the store is very successful today.

Wow, that seems like an amazing opportunity and experience. And maybe a lot of people in your shoes at the time would have said, well, I'm here in New York already and I'm going to continue to chase, you know, glass and steel out there, but you really went where the opportunity was. And so after the nine years, was that then when you made the trip to Cleveland or where did you go next?

Well, interestingly enough, I have a great history. My first job, my boss, Arnold Pravor, retired because he had some health issues. And then in my second job, Albert Boskov also retired because he was having some health issues. And I was very lucky because I was in my 20s, but my mentors were in their 70s, and those two gentlemen spent an awful lot of time with me and taught me the business. But I also knew that our career paths were. Timing didn't exactly line up. So when Albert retired and he was a true entrepreneur, when Albert Boscov retired, it became obvious to me that I was actually just going to do department store deals. And during the time of my stay at Boscov's, we did. We built a mall, we built two strip centers, we built two office buildings. He was an investor in real estate. So as much as he loved the department store business, he loved real estate. So we did a lot of fun things. When he retired, that was going to end. So we both decided that it Was probably time for me to move on, to do something where I can use all my skills. And I was approached by a public company, large public company out of Cleveland called DDR, which is now called Site Centers. And they asked me to come in as the head of leasing because I was coming from the retail business. And the retail business, you know, if you know that if you know retailers, you're a good leasing person. So landlords liked people from retail. So I had been on the landlord side, I went to the retail side. Then I was going to go back to the landlord side as head of leasing. And I did that in 1999.

So before you made that jump, did you ever think about going off on your own previously? You were involved in site selection, you were putting the deals together. The thought probably crossed your mind.

It did, yeah, the thought crossed my mind and I did have some people interested in providing capital to do that. But what was happening in the 90s was interesting because the advent of the modern REIT was really in its infancy. And I had grown up in the shopping mall, shopping center business on the private side only. There really was no public side of that business in the 80s. Really started in the early and mid-90s. And I thought that going to a public company would be incredibly educational for me. I thought that the wave of the future in real estate was going to be public companies that are professionally managed, not necessarily family run all the time. And I didn't know anything about that business. So now here I was, I knew the private side pretty well, I knew the retail side very well. And I had the opportunity to go learn about the public markets. And it's something I was interested in because it was all the talk in our business at the time, but it wasn't something that I really knew very much about. So I thought going to the public side would just continue my education. You know, nothing is really particularly well planned in my career. It was always just sort of what was interesting to me and what intrigued me. So the private side intrigued me and the retail side intrigued me. And then the next great movement in our business was the advent of the public company. And I wanted to get a taste of that to see if I could understand it and to see if I could navigate it well.

It seems to have worked out very well, even if, and I believe luck also certainly plays a big part in my story. So for those of our listeners who are looking to start out, because if they don't have real estate experience or they don't have that graduate degree today, very tough to land at a publicly traded company. What would be your advice to someone starting out looking? Is it better to start at a small shop or go to school to try to land at a big shop to start off? Any thoughts on that?

I think the most important thing to do is to not be overly general. I think the one area that I find people looking to get into the business that's most troubling is when they come to you and I'll say, why are you here? And they say, because I want to be in the real estate business. And I don't really know what that means. I think people have to try to find a part of the real estate business that truly interests them because they're very different.

And how do you find out about that? If you have no experience in real estate, but it seems like an appealing field and you do want to dive in, for you, I guess, retail, the appeal was, you said fast moving, There was a lot of action in the space. But today, whether it's life science, whether it's logistics, where would you even start if you were to pick a new asset class today?

There are a couple places where had an impact on me. The first one was the International Council shopping centers, which when I was first coming into the business was really not just deal making, but very educationally based. So for someone coming from a liberal arts education who didn't have experience in real estate, you could go to every conference, go to the panels, go to the speeches, actually talk to the people. You know, one thing about retail is a very inviting business. You know, if I called someone up who had just written a book, they took the call, right? And it was really interesting that way. So the international Council of shopping centers, a trade organization's in general, are very helpful. Urban Land institute is very helpful. And the libraries that both those institutions have could be very beneficial to someone reading. And you're going to get an idea of what the industries are like. One of the things about today, because kids do kids college men and women, do internships and do all kinds of things, they kind of know what might interest them a little bit. Not a lot, but a little bit. And I do think real estate in general offers a variety of different disciplines that might be good for people who are more analytical, but they might not be as good for someone who's more communicative. I mean, you can be an analyst or you can be in leasing, you could be in development, or you could be in asset management or property management. So you got to sort of figure out what area you're going to be successful in because you're probably not going to be very good at anything you're not interested in.

Couldn't agree more. And I think that's a great point about the organizations which are out there because and we did have Hugh Kelly on one of our earlier shows where he talked about going back and getting a master's and there's certainly benefit there. But if you're still trying to figure out what you want to do going to whether it's a biz now, breakfast, hearing a panel, it's 100 bucks to show up and hear what speakers are saying on a topic or icsc. What amazed me was out in Vegas at probably the largest conference every year, 30,000 people. You have college students and they give discounted tickets and they're out there trying to go to the various booths and learn. And it's great advice. So you're a DDR for I believe 16 years. You start in leasing, you end up as CEO. And I hope the previous CEO did not get ill. It was three in a row. I'd start saying are you putting something on the water? But no, you work your way up. What happens after head of leasing there?

What happens after head of leasing went from head of leasing to head of leasing and development to chief investment officer to president, chief operating officer? Then the recession hits and obviously the company had fairly significant headwinds during the recession and the board made the decision to change the CEO at that point in time. And my boss at that time left and they asked me if I wanted to be CEO. I think I was the only person who would have taken that job at that time. The stock price had gone from $66 to $1.54. And they come and say, hey, you want to be CEO? You're kind of like, well, I guess.

There'S only upside at that point.

There's only upside at that point. That's right. And there was a lot of of things that we could have done and ultimately there are a lot of things we did do and it ended up being a very successful run for me. But it was beyond exhausting. I mean being a public company CEO, particularly in real estate and in the recession that was over levered that needed to raise capital when there wasn't any out there was a tough job. But I will say that the company prospered tremendously, did extraordinarily well during that five year period of time. Total shareholder returns at the very top of our sector. And as a result of that I felt good that it was Time to move on and leave the company in good shape. And it was.

You're being very humble about this, but this seems like a remarkable turnaround. So what was it specifically that you did when this company was on the brink to. Was it a change in the investment thesis? What did you do differently to bring that company back?

Well, I think we focused really on the operating of the assets. I think one of the things that people missed was that even though the balance sheet of the company was weak, the assets were strong. If you have a good management and you have a good operating platform, you really can have very stable cash flows, high credit quality cash flows in the retail business in good times and in bad. And I think it was not well known at the time because our weak balance sheet overshadowed the quality of the assets. So we really turned internally. We just went to work. We went to work. We started listening a little bit more to the investment community who was very attuned to what was happening during the recession. And we started to prune the portfolio. We sold a lot of the weaker assets because there was always a buyer. There's always a buyer for a bargain. And when you're a price taker, you can sell anything. At that point in time, we were looking for cash.

What years were these?

This was 2010 to 2015.

This was really before the advent of E commerce. At the time, how were the shopping malls doing in general? Were there sales numbers? I guess you said the fundamentals were good. Does that mean that the shopping centers were still. They were still growing? Or was there signs on the horizon that the retail world as we know it today has changed?

Well, there were signs on the horizon for sure. I mean, but the signs then were the same as the signs now. You know, if you're a good merchant, you'll do fine in any cycle. If you're a bad merchant, you won't. I mean, I've said this many, many times. We're in the real estate business. We think real estate is very important. But in retail, I've never seen good real estate bail out a bad merchant. And I've seen a lot of great merchants succeed in lousy real estate.

But doesn't it also have to be the right kind of merchant? Because today they would say, okay, if you have. Whether it's a Marshalls or a Burlington Coat Factory, shoppers still want to turn up and hunt for a bargain. But maybe the luxury brands might not fare as well today. Is it also the merchant with the right business plan and approach today?

Yeah, no question. And you have to have the right merchandise. I mean, I had a meeting not long ago with a retailer who was telling me all the great things they're doing to distribute goods and all the hundreds of millions of dollars they're spending to distribute goods, both bricks and mortar and online, but their sales are terrible. And I just turned to the CEO and I said to him, that's a very interesting point, but when are you going to put something in the store that people want to buy? When are you going to put something online that people want to order? For our game, it's about merchandising. And the best merchant wins, whether it's online or whether it's bricks and mortar. In this particular case, in the environment we're in now, it really does need to be both. But if you don't have the product that people want, then it doesn't really matter how good your store locations are or how cool your website is. You have to curate the right merchandise mix. And it has to be relevant. It has to be priced right today. And you have to be able to be relevant to the consumer and a broad base of the consumer. And if you're not, they'll let you know. I mean, we don't have to guess about who's winning and who's losing.

People report sales, you know, if the merchants are so critical to making a real estate deal work, and for our listeners, they've got a vacant piece of retail and they're thinking about who to put in that space. How did you know whether or not a merchant has the right business is going to be successful in a space?

Well, one of the things you really do need to do on our part is because we sign long term leases. It's not like the office building business. You have five or seven or whatever it is. I mean, we serve very long term leases with a lot of these tenants. So you have to get to know them, you have to understand their strategy and you have to believe in them. Doesn't mean it won't change over the course of the whole, and it often does, but you still have to. When you make the commitment to dedicate space to a retailer for an extended period of time, you really need to make sure that they are relevant today and you think they're going to be relevant tomorrow. Some people just get it. You know, when you're in a room and you're meeting with someone, they're giving you a study, they just get it. And then there are those people that come in and complain about the weather and complain about the calendar shifts. And complain about the Internet as opposed to people who are saying, we have to become better merchants and if we become better merchants, we're going to win. Those are the people you want to invest in. And the credit quality of cash flow in our business is critical.

So your gut feelings on the strength of a tenant, I mean, you can look at their balance sheet and see how their other stores are selling. But for you, that gut feeling on is this going to be a tenant that's going to survive? Is a key part when you decide where to invest.

That's right. And we get their sales, so we know whether they're relevant to the consumer and we know what their sales are trending. And again, the balance sheet is helpful. But sales aren't always the answer. Many times you'll say to a tenant, how are your sales? They'll say, we're up 3%. I say, that's very nice, but are you making money? And the answer is no.

So how do our listeners find that out? Because you have access to, I would imagine, to the best research out there. But if I'm trying to decide, you know, am I going to put a five guys in there? Am I going to put another hamburger chain? I mean, how do I find out who is the best company to go with and who's going to last?

Well, the great thing about our business is that we're all consumers. You know, you have to trust your judgment. I mean, there's very few people, I'm sure listening to your show today that haven't had a hamburger.

Right.

You know, they know who does it great, and they know who's not doing it. Well, there are very few people who don't shop. Even men today are shopping for themselves much more than they ever have. So where do you shop and why? And trust your instincts a little bit. Trust your gut, because you are actually the consumer. And I'm not saying that everyone who lives on Park Avenue is the typical consumer. Don't get me started wrong. I think you have to understand your place as well. But if you really look at what happens across the spectrum, very few people don't comment on retail. Everyone comments on retail. Why? Because they all participate in retail. So they all have a comment, they all have a suggestion, they all have a theme. Believe me, as a landlord, you hear from people all the time about what we should be doing better and what our tenants should be doing better. So I think as an investor, you have to understand the quality of the real estate, because good real estate stays leased through all cycles. So we don't have to worry about that, particularly in retail. I mean, it's a $5 trillion a year business, so there's still tons and tons of retail sales being done. And the Internet's going to be somewhere between 6 and 8% of that. Right. So there's a lot being done in bricks and mortar. So I do think you got to trust your judgment and understand your role as a consumer. And if you think to yourself, this is somebody who I would frequent, if this is somebody who I think is giving me value, if I think this is someone who runs their business, well, they probably are.

How do you think about co tenancy as far as what is the right tenant mix? You don't want tenants who are cannibalizing each other. How do you figure that out? Especially maybe when you're buying into a center that's maybe it's maybe distress, maybe it's half leased. How do you figure out how to program the space?

Well, I think one of the things that you have to be realistic about is why a center is in the position it's in. There's a difference between value add and distressed. You know, if a center is distressed, we tend to stay away. Value add is when you look at a center, you say, I don't understand why this is bad. As it maybe the prior owner did a lousy job. Maybe their leasing people weren't as aggressive as they should be, maybe they didn't have the capital necessary to invest in the tenants in order to make this great. But at the end of the day, the fallback position is, is this a good piece of real estate or not? And if it's a good piece of real estate and you feel that you can professionally manage it or manage it better than the prior owner, then it's a value add opportunity. If you look at it and say, boy, you know, this was owned by a really smart group that had good people. I don't know why it's 75% leased. I think this is distress and you probably should stay away. Right.

And have they done that by reprogramming the space? I mean, the big talk now is experiential retail, where you go in there, you can touch it, you can feel it. Maybe you don't even buy it there that day, but you can order it online. You know, clicks to bricks. I mean, what do you make of all that?

Well, I think it's clicks to bricks makes a lot of sense because buy online pickup in store is absolutely a trend that's here to stay.

Or did I Mean bricks to clicks.

Did I get that backwards?

It works both ways. You can.

But I do think, you know, I think experiential is very nice. I think it's nice to talk about and you can do, you know, great public art and all kinds of cool things in your public space and you can have a trampoline park and you, and you can do whatever you want to do. But at the end of the day, people go to your shopping centers because you have the right tenants and your tenants have the right merchandise. It's all about curation. It's all about merchandise mix. So I think you have to be realistic of adding the experience, but the experience has to be hand in hand with the proper tenant mix. And if you don't have the proper tenant mix, no experience will bail you out.

That's great, great advice. So I want to circle back to your story. So after DDR, you were interim CEO at Brixmore and now at Raider Hill. So maybe take us through the rest of your story and how you landed where you are today.

Well, when I was moving back east, we started Raider Hill at the beginning of 2015 and at that time, right around that time there were some. And we started an investment and advisory group and we were out looking to acquire shopping centers. And then there was a hiccup of financial accounting error, among other things, I guess at Brixmore Property Group, which is a very, very fine company today. And I was called by the largest shareholder and asked if I would consider being the CEO, which I wasn't going to do because I was all done with the public markets. I had been in the public markets for 16 years, but that I would, because of my relationship, I would do interim CEO, try to take the company through a rocky period of time and then replace myself with a first class management team. And that's ultimately what we did.

So you don't mind being on the firing line is what you're saying it was.

It's a great company. I did my homework. I looked at the company. I thought if the company was severely broken, there really wasn't a lot I could do. And I don't like to let people down and I like to be honest about it. But this was a really good company. It was a good company that had good assets and a dedicated workforce. And I just felt that people had been kicked in the teeth a little bit and they needed a little pick me up. I thought the market needed a vote of confidence that somebody who they knew was actually going to come in and try to stabilize It a little bit. But most importantly was I was given by the board the authority to go out and hire a first class management team and that's exactly what we did. So I was able to be in and out of there in six months and it's been a very successful story.

Oh, that's fantastic. So at Raider Hill, so you act as advisors, you invest on behalf of institutional groups. Is that how you would characterize what you do?

We do in our own capital as well. So we advise different institutions in different portions of the retail sector. So whether it be the mall sector or open air sector, or in some cases, while we don't like distressed assets, we do look at distressed debt because very often playing in the distressed debt field, you could find your way a path to some very high quality assets, which is what we've done in the past as well. So we work with different institutional capital partners who are interested in retail but a little scared of it. Everyone's a little scared of retail right now. One of the things that we can do is, I think, provide some comfort and we help mitigate risk. The people who want to invest in retail blindly are going to get hurt today, there's no question about it, because there's too much on the market and there's reasons why it is. And you need to be able to determine why that's a good value or why that might not be a good value, but the yield is still good and there's still people chasing yield and there's still high quality of cash flow at a reasonable yield compared to other sectors. So people are intrigued by retail. They just don't quite get it as much. And one of the things that we do is we help mitigate risk and we can advise them on what we feel are prudent investments. Very often we tell them, no, this is not something we should invest in and this is why, or this is not something we should invest in at this price.

That makes a ton of sense. Throughout your career, is there one transaction that you look at and you say, this is the one that I'm most proud of or most financially successful? What would you point to and what made it such a success?

I think, you know, it's got nothing to do with financial success. I can assure you that. I think the most impactful transaction I worked on was a mall in Scranton, Pennsylvania. And I said, you know what, I'll take it. I'll take that project. If no one else wants to work on that, give me that project. Anyone can lease it a great mall or a Great strip center. It's hard to lease some of these projects in tough markets. So I thought that that was going to give me the ability to sort of show what I could do. And you know, the expectations weren't that high. So I took that project and it was a very successful project.

A couple hundred thousand feet or was it vacant when you bought it?

No, no, it was a total ground up development project where we had to tear down three city blocks of downtown Scranton.

So this is million square feet.

I mean this, this was 700,000 square feet. It was two department stores, two office buildings and ground up development and we connected to a national park.

So you had a wow. So and you had to explain to them why Scranton?

So why Scranton? But, but, but that was okay, you know, and, and some I won some, and I lost some, but the project opened, it was very successful, I was very proud of it. And it actually was more of a launching point for my career than any other project that I had because I was recognized for what I did in Scranton. And I guess people, you do it.

In Scranton, you can do it anywhere.

Well, and it's a wonderful town and I never regretted going there. It has terrific restaurants and wonderful people and I really enjoy, enjoyed it.

What would you say above all are your keys to success?

I think overall the most important thing is to really embrace diversity of thought. I really do. I think diversity of thought and look at projects not the way everyone else is looking at them, but the way you really think they ought to be looked at. Understanding that there are different perspectives on different aspects of real estate on a regular basis and the opportunity is there. You know, you may not see it. Somebody 20 years your junior might see it and you better listen if you want to do well. I think what happens very often is people get very set in their mind like, no, I can't do this project in Scranton. But you can. And you can not only make money, but you can do good for the community and you can help build your brand. You can help do certain things. So I think diversity of thought is probably the most important thing. Listening and surrounding yourself with really smart people much smarter than yourself, and then letting them go to work and listening to what they have to say. You know, the people you surround yourself with will make you better. And if you recognize that, it'll take you a long way in real estate.

And we're almost out of time. So just the last piece of advice that you would give one of our listeners on the show. And again, maybe they're not in real estate now. And I know you said go to the organizations and that's great, but putting together that first real estate deal, what's a piece of advice you could give them to make it happen?

Do your homework, look at the real estate, evaluate it the best way you feel you can and ignore the background noise. Don't listen to just the headlines. Don't listen to what people, the talking heads might say here, the talking heads might say there. If they were so smart, they wouldn't be talking heads, right?

They'd be putting their money where their mouth is.

They'd be out investing in real estate and hopefully doing well for themselves. So I think don't trade on headlines and trust your instincts and surround yourself with smart people and you'll be just fine.

Perfect. Well, Dan, we really appreciate you joining us here today and for our audience, please stick around. This is James Nelson. I'm your host of Real Estate Investing Live from New York on the Voice America Network. And now we're going to go to a word from our sponsors.

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Welcome back to Real Estate Investing live from New York. I'm your host James Nelson. And now it's time to turn to our panel discussion where today we are going to talk about the capital stack and how to structure your real estate transactions. With us we have Steve Dinarda, who is CEO and founding partner of River Oak Investment Corp. An opportunistic and value add fund. We also have Peter Steyer from my firm at Avis and Young, who is the senior director of our capital markets group here in New York. And then finally pleased to have Marius Schulson who is co founder and CIO of Equity Multiple, a crowdfunding platform. So, gentlemen, thank you so much for joining us here today.

Thank you.

Thank you.

Perfect for having us.

So for our listeners out there, you probably heard our first show and our interview of Bruce Ratner. And Bruce talked about his first, first real estate deal ever where he syndicated and he got three dozen investors together to do his first deal. I think a lot of us would probably call that friends and family. Peter, maybe we should start with you to just break down the capital stack at its most basic form when you look at a purchase price, if we want to use an easy example, let's say the purchase price is $10 million. Okay. And let's say you go to a bank and you get a $6 million loan. Right. Can you help us? If there's a $4 million equity requirement, what typically happens next?

Sure.

So if it's a $10 million transaction with debt at 60% or $6 million, a $4 million equity requirement on a. I'm not going to use the word typical because really there is no typical transaction any longer. But for the most part, 10% equity from the GP and the remaining part of that capital stack would be in the form of an LP equity partner.

Okay. So just for the listeners, so GP general partner, that's what we would typically call the sponsor, the real estate developer, the person who's actually going to roll up their sleeves, do the day to day, do the work, and then the lp, the limited partner would be again, they're bringing the majority of the money to the table.

That's right. So the LP partner who's bringing, let's say 90% of the equity to the table would be in most part in reliance of the GP for day to day managing the partnership, as well as if there's a construction element or a value add element, be looking to their expertise in order to basically bring the property to fruition of where they want it to be, whether it be one, two, three or five years down the road in order to possibly attain an exit at that point.

Steve, your fund is typically the 90%. So can you talk a little bit about the relationship between the GP and the LP.

Sure, sure. Yeah. We are generally that 90% limited partner position. And we're in a sense buying into several things with the general partner. One is the typical real estate location, which is obviously very important. Two is the quality of the bricks and mortar. Three is the quality of the general partner. Do they have expertise in the particular property type? Do they have expertise in the location? And four is the business plan, in effect, we're buying into the general partner and his or her business plan. What do they have planned for the property? Do we believe they can execute? And you know, so that's what we're putting our money behind.

Marius, maybe you could talk about because your crowdfunding platform, you will also raise equity for sports sponsors. So you probably see the most deal structures out there and I don't know how many hundreds or thousands of transactions you'll tell us you've closed to date, but maybe talk a little bit about what is a typical promote. So if the developer is putting down 10% of the equity they're going to get because they're doing most of the work they're looking to promote, make a disproportional return on that investment.

Yes. So given the amount of deals that we've transacted on, and it's above 90 at this point in the last three and a half years, we've seen sort of a huge sort of array of promotes and structures. Typically what we're seeing is the promotes and structures are sort of dependent on the actual kind of deals that they're doing themselves. If it's a fairly light value add, like taking a apartment building and then sort of just sprucing up some of the units and just. They bought it. Right. Candidly, it's a lower sort of outsized return. If it's a pure. If it's a true ground up development, then what we're seeing is, you know, is a multi tiered promote whereby once the preferred return is hit, and the preferred return is the return between the LP that you say that you'll minimally hit in order to get the first level of outsized return. We see anywhere from a 15% pref all the way to a 30, 35% pref over a certain hurdle.

Peter, what has your experience been in structuring? And you raise a lot of equity. You're an intermediary, so you get retained by a sponsor. If they have a project, how are you advising them? What is the best? I mean, I threw out an example which you were very kind to Respond to. But how are you advising sponsors today?

So for starters, they should have either in their own wallet or identified their portion of the GP interest, their equity, as opposed to saying they have to go out and raise it. On the GP side, we call that.

Having skin in the game. If the sponsor doesn't actually have their own money in a transaction, the concern is are they going to really have a vested interest in it?

Exactly. Unfortunately, too many times comes to pass where a GP has a development fee in the transaction or a transaction fee that they would like to contribute as a portion of their GP interest, which is typically frowned upon by an LP partner. A lot of times that interest is taken down a notch or basically lessened to some effect because they want to have the GP own capital, as you say, skin in the game in that transaction. Once that's been identified. James, as you said, the business plan is an important integral part of the transaction in order to attract an LP partner. Typically the LP partner is looking to the GP for their expertise and the fact that assuming that they've done it before, that they'll go after them and put their faith and confidence in them. Except for a few situations with regard to major decisions, typically an LP partner is going to want to participate in one or have a seat at the table with regard to major decisions like a sale, refinance, annual budgets and anything that would deviate from that business plan on a going forward basis. So that's an important integral part of the transaction as well.

So just to give two examples, so one could be a cash flowing. Let's say we're buying an apartment building, the rents are 30, 40% below market, but there is cash flow that you're buying into. Maybe you're buying that at an initial 4%, 5% return, but you're doing this because clearly there's upside and there's going to be a future capital event. So that's kind of example A example B would be a vacant building, no cash flow. You're going in there maybe to condo and sell off individual units. So there isn't any cash flow for a two or three year period and then hopefully there's a pot of gold at the end for that. First example, if you're representing the sponsor and looking to structure the deal, what kind of returns are they offering to investors first?

And what I would consider foremost, as we would be advising the sponsor, is to negotiate for a parapassu transaction with regard to their 10% or their equity, whatever percentage that may be to go in that will be parapassu or so.

Parapassu, meaning they're getting the same treatment they're alongside. Right?

Exactly. Because the property is cash flowing and there's not that developmental or major developmental type of situation that the GP or the sponsor has to go through in which to achieve returns. So the property is returning, but there's just. It's going to take a few years to reach, maybe longer to reach where they want to be as far as stabilized rents in order to bring it up to market. So the parapassu element is important. And then the waterfall, as we talked about initially earlier, is try to negotiate the best waterfall as far as that goes, a lower hurdle rate, a lower initial hurdle rate, which would be incredibly important as opposed to Looking at a 10, 12 or 14 initial hurdle rate in which for the sponsor to start to achieve the proceeds into a waterfall, have a lower hurdle rate maybe in the 6 to 8 range. So then they could start to participate much earlier on in the process.

Right. And for that vacant building, I would imagine that that promote now accrues because if the property is not cash flowing, that there's nothing to distribute. So there, there's a return clock. Right. And then, then you're essentially settling up at that capital event, which could be two, three years from now, Right?

Precisely. I could give you a direct example without naming names, but an initial hurdle rate for a vacant, say, office building that would be turning into a condominium, the initial hurdle rate would be say 14%. And then you'd start to go into the waterfall.

Perfect. Maybe this is where the negotiations begin. Steve, I know you've invested in your funds, invested in dozens of transactions. You've always said no structure looks the same, although you said most of them are hockey sticks in the sense that you're going in the first year or two because you are a value add opportunistic fund. And again, for our listeners, if you're just looking at a stable cash flow coupon clipping asset, we call that a core asset, where you're just collecting income. When you talk about value add, that's when you're really improving the asset. You really, I think your sweet spot is in that value add space. So what is your typical deal that you strike with a sponsor?

Yeah, so we are in that value add space, which means our money is going in to do something positive to the property, whether that's a rehabilitation, repositioning, replacing management, something is wrong with the property and we have the opportunity to improve it in terms of initial returns, what's called the pref rate. Will depend on how we view the risk. So if it is a building that has tenants, but we're looking to convert those apartments to better apartments and raising the rents, we might have a lower pref rate, might be as low as 8 to 10%. But if it is an empty building, like you mentioned earlier, we might be closer to the 14 or 15%. We do demand that our sponsor, general partner, put in capital. As Peter said, It's 10%. We're generally in the 10 to 20% range, which is, you know, it's pretty standard. But the important thing there is that the skin in the game really creates an alignment of interest. Believe it or not, we want them to reach their promotes because that means the deal is doing well. And our standard opening gamut is if you put in 10% when you reach that first hurdle, we'll up it to 20% and go from there. And if it's a really complicated deal, we'll allow step ups in that waterfall so that you may be able to reach 30 or 35%.

Got it. So, Marius, mid teens returns, I mean, that's great when the project is a home run, but debt also, I mean, today you can borrow money at a very attractive rate. Now the conventional lenders out there, they're not going to go all the way up the capital stack. They're only going to. Lenders are generally conservative by nature. Maybe they'll only do 50% or 60%, but there are other debt instruments that can find their way into that capital stack. Mezzanine debt. Why would somebody, someone look to raise equity in the costs in the mid to high teens when maybe they can get mezzanine debt in maybe the low double digits?

I think it just really depends on control. Well, what that sponsor is looking for in terms of control priority, things of that nature. The nice thing about raising common equity is, as Peter was saying earlier, generally you're pari passu, right? So that means you're sharing in the cash flow along the way. If you're coming as preferred equity or mezzanine, which a lot of our structures are, we get paid first. The preferred equity gets paid first. So consequently, if there isn't enough cash flow or it's a business plan that isn't, that has like ups and downs and bumps to it. Taking on preferred equity sometimes can be. Taking on common equity is a little bit, you sleep sounder at night because you don't have to hit a certain hurdle monthly to keep control of the project. With preferred equity and mezzanine, even though it's cheaper capital per se. It comes with its own sort of, I guess, clawbacks in such that if you don't make certain payments and you don't keep it current, then that mezzanine lender preferred equity can foreclose on the property. That's the trade off.

Peter, how do you advise your clients again on the capital stack if it's a large enough transaction? Are you looking at Mezz? Are you telling them, hey, lever up as much as you can and then the last piece will raise the equity or what is the ideal structure in your mind?

Well, first and foremost, you have to know the sponsor. You have to understand the complexities of where they are within their portfolio, what other projects they're in the middle of or not, and what their risk profile looks like as far as taking on, let's say, a piece of preferred equity and or mez versus common equity for starters. So if the transaction could permit, I'll always offer a mezzanine or pref equity alternative to the sponsor, typically actually always to take, let's say if we have in the capital stack the senior the debt piece at say 60%, identify a piece of mezzanine financing to take it, depending upon the asset class, from 60% possibly all the way up to 80, possibly 85% of the transaction, and then the sponsor would have to come up with the remaining approximate 15, possibly 20%. With that, there should be a sufficient amount of interest reserve in order to cover the mezzanine piece for a period of time, plus more time, because nothing ever really happens the way you ever predict it to happen from a timing perspective and then go from there. But the nice part to the sponsor is they own 100% of the project, they're calling the shots, they're making all the major decisions and they go from there. And the returns to them are exponential because they're not. If a mezzanine piece, let's say, is say 12, possibly 14%, maybe a little bit cheaper than that, again, depending upon the asset class versus bringing in common equity and ultimately by the end of the day and the exit you're giving away possibly mid to high teens.

Perfect.

The way I always talk about it, I'm sorry to jump in, I was done is when we talk to sponsors is if we're coming in as pref equity, the way to look at it is in real estate terms is you're essentially getting 100 over 15 versus if you come in with an LP partner, it's a tiered promote where you're getting sort of different amounts of the deal along the way.

Good.

Well, gentlemen, we're going to end on that note because we're out of time. And I like ending on hitting it out of the park because that's what we're looking to help our investors do. That's it for this week for Real Estate Live from New York, I'm your host, James Nelson. Thank you, gentlemen again for joining us and look forward to having you back on the show soon.

Thanks.

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. It.