Community Investing with Paul Salib

Welcome. This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Addison Young's U.S. Investment Sales Group, and his co-host Kim Trohler from his investment sales team. In this program, you'll learn game-changing strategies to outperform the market. James will teach you how to source, execute, and capitalize on the best real estate opportunities in New York and around the world. Now, here are your hosts.

Welcome to episode number 238 of The Insider's Edge to Real Estate Investing. I am your co-host, James Nelson, and I'm Kim Troller, also your co-host. And today we have with us Paul Saleeb, who is the co-founder of Castellon Real Estate Partners and CRP Affordable Housing and Community Development. And today you're going to learn about a disciplined, cycle-aware investment approach. And Paul is going to share how early experiences in currency trading and affordable housing finance laid the foundation for building a vertically integrated multifamily platform, acquiring over 80 properties, as well as his lending portfolio, and now also his work in the affordable space.

You'll also hear about the logistics and complexities related to affordable housing. Paul discusses underwriting, risk management, and operating across cycles, along with scaling an affordable housing development business. Paul founded Castellon coming out of 2008 and 2009, right? So he has a lot of great thoughts on durability, and he also wears both hats as an investor and a lender. So he's really in tune with how to underwrite risk and withstand different market cycles.

Absolutely.

And it was really great to hear how he's been able to be so successful. One of the things that I like to hear about Paul's approach to affordable housing in California is how they've been able to be competitive with even, you know, market rate, even luxury condo developers. And, uh, was really nice to hear that California has been so supportive of affordable housing development. So, uh, we're going to really go into the details there, as you mentioned, but also hear about his experience being a lender, which and a multifamily operator. So, I've known Paul for probably close to 20 years.

So, I was really excited to have this conversation with him in person.

So, we're gonna have a brief word from our sponsor before we do that. Check out jamesnelson.com. We built this site for you. That is where you can find the show notes, how to connect with Paul. There's also information on a new educational course that we are rolling out in partnership with Adventures in Commercial Real Estate.

Super excited about that.

So, again, a word from our sponsor and we'll get right into our discussion with Paul Saleh.

Avison Young's United States Investment Sales platform executes on multifamily, office, retail, development, and specialty asset transactions across top US markets. As experienced leaders in the industry, our integrated national team is here to help you make informed investment decisions, whether advising on your current holdings or identifying new opportunities nationwide. Our one unified platform is built on unparalleled collaboration and connectivity across 120 full-service offices around the world, giving clients direct access to the deepest pools Capital. We put our clients first, delivering tailor-made strategies to achieve superior results.

Welcome everyone. We are thrilled today to have with us Paul Salib, who is co-founder of Castellon Real Estate Partners and CRP Affordable Housing and Community Development. Paul, thank you so much for joining us today.

Great to see you and thanks for having me.

So we were talking, we've known each other at least 20, maybe 25 years going back to my Massianacle days, you know, back when Castellon was an active buyer, then became more active on the lending space. But before we dive in to, to your, your different businesses, I think it'd be great for our audience to hear a little bit about your history and how you got into the, the business.

Sure, sure. So actually, funny enough, when I, you know, went to college, I wanted to be in sports television. You know, I had a cousin that was a producer for NBC Sports and he had a great job. He was the producer for Wimbledon, the French Open, the Olympics, NFL, NHL, and you know, that seemed pretty cool thing to do at the time. So one summer I actually interned at NBC Sports, and I went to Wimbledon, which was an amazing experience. I lived with like 10 other college kids, like on, like, you know, a few blocks from the Wimbledon campus, which was just a lot of fun. And, you know, the first day I get there, there's like 10 college kids, and they're handing out jobs. You know, who wants to clean the compound? Who wants to get the meals? Who wants to you know, do the little things that needed to be done. And then people were volunteering. And then the— you know, they offered a job. "Who wants to do McEnroe?" Okay? And I, like, nudged the guy next to me. I'm like, "What does that mean?" "Oh, they give you a walkie-talkie and you follow John McEnroe around." I was like, "That sounds good. I'll do it." Little did I know what I was getting myself into. You know, McEnroe, he was a broadcaster for the network. And as you could probably imagine, he doesn't listen to anybody. So they, you know, would need to know where he was because we'd be going on the air and he's nowhere to be found. Around. So they gave me a walkie-talkie, and my only job was, "Don't lose him." Okay? So, you know, John didn't like having some college— you know, 20-year-old college kid following him around. So he would try and lose me. And the man can walk faster than any human being I've ever seen. You know, he would put on a hat, he'd walk through the crowds of Wimbledon. You know, I'm trying to keep up with him. And, you know, my press pass got me everywhere but the players' locker room by center court. Okay, so there was two entrances to the players' locker room and, you know, so I would wait outside one. I made friends with a security guard who I can see, but can see the other door. So if McEnroe went out the back door, he would wave and I would run and try and catch up with him. But it was, it was a great experience. And I actually ran into Mac maybe 6 or 7 years ago. I was playing at Sportime in a pro-am tennis tournament and I said, John, you probably don't remember me. You know, I was your, I was your runner at Wimbledon in 1996. And he looked at me like he knew he had messed with me a little bit, but we had a great conversation. I told him like when I was coming outta college, I had NBC Sports on my resume. Uh, and you know, I told stories about 'em and it helped get me a job. He's like, oh, look at that. You know? But, but then I realized that, you know, I couldn't even hook my VCR at the time up to my TV. Maybe sports, you know, production is not for me. So, I was good with numbers. And back then in the late '90s, you know, Wall Street was booming, the dot-com era. You know, nobody went into real estate back then. At least nobody, you know, you know, you know, nobody, you know, in my circle, you know, it was all Wall Street, right? So, so I got a job out of college on the trading desk at Prudential Securities down on Wall Street, you know, trading currencies. I wasn't trading. I was just an assistant on the desk at the time, which is a whole nother story I won't get into. But, but, you know, it was, it was an interesting job. But, you know, the one thing I didn't like about it is you're stuck in front of a computer all day long. And even in the wintertime, you know, you get in at 5:45 AM, you leave like 4:30, you don't see sunlight. You can't, you know, you can't leave your desk during the day except to go grab a sandwich downstairs. You know, it's kind of depressing. So how I got into real estate, you know, my uncle was in real estate here in the city. So he's actually a very good story. He, he was a building inspector. Uh, he worked for HPD in the late '60s and early '70s. He actually oversaw, you know, he was an engineer by education He oversaw, uh, the construction of Independence Tower down in Tribeca. You know, he oversaw like a lot of the Mitchell Lama deals back then. And then by the late '70s, my uncle understood buildings. My father was a doctor, and with a couple other partners, they bought about, you know, 30 buildings here in the city in late '70s, '80s, you know, and then early '90s. And back then, before the Tax Reform Act of 1986, if you were a doctor or a lawyer or some other, you know, ordinary income type profession, you could use depreciation losses against your active income as a doctor or a lawyer. So a lot of incentive for people like my father to invest in those deals. So grew up, grew up being, you know, hearing about real estate but never really thought about it as a career. And, you know, my John, my brother, who is my partner today, you know, he, he was working at Salomon Brothers at the time in their real estate group, you know, back then. You know, they would— the money would leave the bank, and then my brother's job was to paper it after the, you know, paper the transaction after the money had left. So different, you know, before the, the days of big regulation, you know, and that kind of thing. And then Solomon sent him to Tokyo in the late '90s to buy non-performing loans from the Japanese banks after their real estate bubble burst, which was a great experience for him. But also, we bought a lot of, you know, defaulted mortgages in 2009, '10, and '11. So, you know, wanted to transition to real estate, and I applied to the master's program at NYU and did that, which was a great experience, made a lot of good, you know, learned a lot, made a lot of good connections and friends to this day I'm still doing business with. And I actually went and taught, taught there as an adjunct professor from, you know, 2008 to 2021. So long time. So NYU was great. Then I was coming out of school, like end of 2003. And, you know, 9/11 had happened. There was a recession, but the job market was getting stronger. Okay, I was contemplating a job in Greenwich, Connecticut, but didn't really want to do the reverse commute. And I caught a very lucky break in my career. I got a job at the time with a startup called Redstone Partners, which it was a startup, but a very sophisticated one, because the people were very sophisticated. A couple of guys had left the related companies where they They worked directly for Stephen Ross, John Sokolovic, and David Levine. They brought like 5 guys from Related, teamed up with Prudential, and all we did was affordable housing. What, you know, what does that mean? Primarily the affordable housing tax credit program. And we did it as lender and we did it as developer. So we would, on the lending side, we would do higher leverage loans to affordable housing developers throughout the country. We would aggregate, you know, we had Prudential as our balance sheet. We would aggregate a huge pool of it, then sell the, you know, the A piece to Fannie or Freddie and keep the riskier piece. And then we also did, you know, both acquisition rehabs and some ground-up development. So I look back at that as a major break because I learned the affordable housing space, which we're doing a lot of today. And then, but my brother and I, you know, saw what our uncle had done. That was always the goal to start our own business and there was no better time than 2008 and 2009. You know, we had no problems. We weren't dealing with legacy issues. You know, we would just be fully offensive at a great time. So, from 2009 to 2014, we bought about 80 properties primarily here in New York City, although we did some stuff in New Jersey, the Philly area, but primarily in New York. You know, we built a property management company, you know, construction, asset management, accounting, acquisitions. And we really built a sophisticated multifamily platform. And we executed the business plan of getting in there, renovating, leasing, removing violations, making the buildings more energy efficient. And during that timeframe, rates really came down from, I'm talking '14, '15, '16, rates really dropped. And I look back at another important, not break, but important event is we had a building in West Harlem and we paid, my uncle was old school who I still listen to. He talked in rent roll, terms of rent roll multiples. We paid 6 times for the building. We renovated, leased it up. And then a group out of Japan paid us 18 times the rent. You know, in like a 2-year period. So, you know, from that point on, you know, we'd executed the business plan, we had maximized all the value out of the property, you know, it was a good time to exit. So, from that sale forward, we were addicted to selling, you know, packages, 4 buildings, you know, one-off deals, you know, you name it. So, of the 80 buildings, we probably sold 65 of them. And looking back, you know, Obviously, you know, you know, I don't think of us as smart. I think partly lucky too, you know, because I didn't see, I didn't see the hurricane coming that's come the last 6 years in our business. If you think about it, like, it's been really rough starting with the 2019 rent laws, okay, then COVID, then interest rates spiking. I mean, it's been a really bad, bad time, you know, so You know, and we still have a portfolio of assets here in New York today. And, you know, we're dealing with the problems, but, you know, we're looking back, you know, our problems are minuscule compared to, you know, given what's, what's went on in the business.

Well, Paul, I love, first of all, how you found your way into the business. And I'm just picturing you running around trying to find Mackinac. And maybe, I mean, if anything, they taught you persistence, right? I mean, it's the art of chasing the deal and following through. And persistence is, I think, a big piece to success in this business. Whether you're an investor or a broker. But then sometimes, you know, being on that trading desk and sometimes early on realizing what you don't want to do is almost as valuable as figuring out what you do want to do. So really kind of circuitous, but how it all came together and to be able to partner with your brother and build out such an incredible platform. And I think you— I know you're being humble when you talk about kind of the right timing, and certainly that helped. But I mean, to scale and acquire over 80 assets in that short of a period is, is nothing short of remarkable. So we would love— so maybe tell us a little more about how Kesselan then pivoted, also got active on the debt side. And then we'd also love to hear about your affordable platform that you started that's, I know, active out in California as well.

Also, before we dig into that, it would be great for our listeners to hear a breakdown, kind of fast forward to today, what your portfolio looks like in terms of market, asset type, and then equity and debt strategies.

Right, right.

Okay.

So today, really, we you know, 3 different business lines. We still have a New York City ownership portfolio, although we're not active in that. We haven't bought anything since 2018. You know, we're just managing the assets that we have, you know, and, you know, over time, you know, I'm a big believer in New York, okay? It's gotten rocked, but I think it's come back extremely strong. You know, the rents we're getting are huge. We have no vacancy in the retail. You know, the capital markets are still a mess because of interest rates. But if you look at like New York City, you know, I walk, you know, from my office in Midtown home every, every night, every restaurant is packed. You know, have you seen hotel room rates lately? You know, it's insane, you know, and then office leasing, you know, you know, we're not in the office space, but of course, I read, read all the publications. I mean, it's been on fire. I would not have thought this 5 years ago. You know, when COVID hit, I didn't want to leave New York. I was like the last person to leave. And I remember driving out of Manhattan, maybe it was March 25th. I mean, it was a ghost town. I was significantly worried about the state of our business and the world. And so I'm still bullish on New York long-term. I think it's got its short-term challenges, but that's a business that we still have. Okay. The second business is our bridge lending business. So, you know, after we went on that spree of buying buildings, 2014, '15, '16 came around, we were net sellers. Definitely didn't see any good acquisition opportunities, or very few. They were very few and far between. And we pivoted into the lending space because both John and I both had backgrounds in lending, him at Salomon Brothers and me at Redstone. And we knew we can, you know, we knew we had the capital, We knew, we knew how to underwrite and lend. What we didn't know is, can we originate enough loans to make it worth our while? And looking back, looking back, you know, a key figure in this was David Schornstein in Silver Shore. I think of our first 20 loans, probably, you know, 16 or 17 were with him.

He's been on this show twice. He is a prolific dealmaker. That guy knows how to find opportunities.

So yeah, so, so You know, we found quickly that given our relationships in the business and, you know, John and I make the decisions, like we don't have committee, you know, committees in the background. We don't have institutional partners. And I think that's a big advantage because, you know, we're not going to come and say, hey, committee said no, you know, or, you know, or our institutional partner backed out. You know, it's always been very important to us that we control our own destiny. And we early on in 2009, '10, We turned down some pretty significant institutional capital, you know, you know, because we essentially would be working for them, you know.

Were you—

so were you working off of a credit line, or how are you making these loans?

Okay, so we all— yeah, that's a good question. So we have a fund, okay, that we've raised money for. We have about $600 million loan portfolio today. And, you know, we always knew we want to be on the lower risk spectrum. Okay, where, you know, we don't want to put out billions of dollars. We want to have no defaults. Okay, and we made it through COVID, the interest rate hikes, with really no issues whatsoever, which is pretty remarkable, you know, look, looking at that. But we're very disciplined on proceeds. Okay, that's the one idea. If we want to do a deal and we don't get it, it's always because someone's willing to lend more. So we want to play in the lower risk spectrum. We want to make loans And even though we're an owner-operator, you know, and we're very sophisticated in property management and construction and owning, you know, we have no interest in owning the properties we make loans on. We've made over 600 loans. We've taken 3 of them back. And believe me, you know, the outcomes are fine, but they're not spectacular. Okay, so we want to get our capital, so we want to lend money, get our interest and our origination fees, get paid back, and recycle the capital. So to answer your question, we have a fund, and then we have credit facilities with the banks, and we also do one-off deals with banks. So we'll, you know, we'll put up 30%, the bank will put up 70%. But more recently and more interestingly, we did an IPO on the Israeli stock exchange last summer, early last summer, which was a very interesting experience. You know, we were approached by a banker about this time last year Yossi Levy, great banker. He, he emailed, we had spoken with him years earlier and then, you know, he just emailed us one day. He said, hey, I'm in town, wanna stop by and say hello? So come on over. Had a 2-hour conversation, you know, really attractive capital. And, you know, after he left, we're like, this is kind of a no-brainer. So we quantified what the busted deal costs would look like. Okay. If we're talking about initial public offering. You know, we're assuming like if this doesn't go well, we're going to be out a lot of money, but it was very manageable, you know, and we decided to move forward with it. And 6 months later, you know, we closed the IPO. We went on a roadshow to Tel Aviv, you know, had like 30 meetings in 5 days. We had rockets shot at us, but, but we'll do anything for a lower cost of capital.

So casually.

No, it wasn't like, you know, when we were there, like we're at a restaurant and then the sirens start going off because Israel and the US had bombed the airport in Yemen and they were retaliating, but it wasn't like, it was no big deal. It's actually a way of life there. We were in a restaurant, the sirens go off, music stops, everybody goes downstairs to like down below. I wouldn't call it a bunker, but just down below. 15 minutes later, it's over, music starts again, and everybody goes about their business. But there was a rating agency. It was a real IPO. So very interesting experience, and we're looking forward to doing more, you know, in the Israeli capital markets.

Hmm. And as for your third business line, I assume that's the affordable housing platform. Can you talk a little bit about how that came about and how that's structured?

Yeah, that's a very, very good question. So given my background from my Redstone days in this space and kind of the multifamily platform we had built, you know, over the last decade, Well, we started doing this in 2018. So yeah, about 10 years into our company, we decided to make a push into the— it's called LIHTC, Low Income Housing Tax Credit space. And we knew we didn't want to do New York. You know, politically, it's not so easy. You know, from what I heard about it, if you weren't the top 6 players, it's hard to break in. And we decided to focus on California. For several reasons. Number one, land acquisitions, okay? When you wanna buy a piece of land out there, I mean, we sometimes get a year of due diligence and 2 years to close. We're about to sign up a deal in Mountain View, right near Google's headquarters. We're gonna have 3 years to close, okay? Okay, so that's, you know, so—

And is that because a lot of the land's not entitled and so no one's willing to take that risk with hard money? I mean, obviously everything here in New York is hard deposit. 60 to 90-day close? So is it just because you don't necessarily know what you're getting?

It's not the market out there. The market in New York is, as you know, is unique in that sense. You go to other parts of the country, you know, you can get these type of terms. Some sellers are no. Some sellers won't do that. And if the land is really a winner in the affordable space, we'll close on it, you know, before we have our capital stack put together. So I'm not saying it's always the case, but in a lot of cases, those are the type of terms we get. And, you know, once we win one source of funds, one or two sources of funds, the rest of the funds fall into place. So by the time we go hard, we have liked to have secured a key, key piece of funding for our capital stack, and then we're comfortable going hard.

Right. Paul, what would you say is the biggest misconception that investors have about affordable housing today?

That's a good question. You know, you should see the properties we're building in California, okay? First of all, California, they want their affordable housing in better neighborhoods, in better areas. They want the kids going to the better school districts. They wanna be close to transportation. You know, they wanna be close to jobs. So we're building in some of the best neighborhoods in the world, in the world. Mountain View, right next to Google. Santa Clara, right next to NVIDIA. You know, Balboa Park in San Diego, which is like the Central Park of San Diego. And you go by these buildings, you would never know they're affordable housing. Never.

Yeah, I saw the video for the project that you opened in San Diego with the courtyard. I mean, beautiful units. I mean, really nice looking project. But how do you compete for the land? Because here in New York, for example, we have land that clearly is priced for luxury condos. And then there's other sites where there's not a condo market where you can make a rental work. So, so, you know, clearly there's condo demand out in those markets that you spoke up as well. So how do you compete against the condo buyer and make the affordable math work?

Well, okay, another plus about California is, you know, it's a high-tax state, so they have a lot of money, you know, to throw at this problem, and they're very diligent. You know, they want us— the affordable crisis out there is probably worse than here in New York, and they want to solve it. So there's lots of pots of money for funds, whether You know, you have the tax credits, you have the tax-exempt bonds, but there's all kinds of other, you know, money for homeless veterans, money for farm workers, you know, project-based vouchers, you know, and the affordable rents in California are quite high because area median incomes are high. Okay, the rents and affordable housing are based off of area median income. So, you know, we're— so if we have higher AMIs, we're able to leverage more private debt which helps the capital stack work. We're definitely sensitive to land costs. We have the best land acquisitions guy maybe in the country, in my opinion, that works for us here in New York. He's been with us from day one, and he's really an unsung hero in what we've done out there. So, California has a lot of money, land acquisitions are easier. Also, a lot of good markets out there. Like here in New York, It's really just New York City. I mean, I know affordable developers do stuff up in Rochester and Syracuse, in that area on Long Island, but, you know, look at California. We built in San Diego, LA, you know, the suburbs of LA, Pasadena. We're breaking ground in Santa Clarita. And then the Bay Area, forget it. You know, we haven't built in San Francisco proper, but we built all around it. Burlingame, Santa Clara, Santa Cruz County. Belmont, you know, Sonoma County. So there's just so many good markets in California, and each jurisdiction has their own pot of money to put toward affordable. So for all of those reasons, it's been, it's been great. We're breaking ground on our first deal in Nevada. We're breaking ground in Reno in a couple weeks. We just finished something in Washington, D.C. We were actually brought in as a partner, but we ended up taking it over. We just finished that and that's in lease-up.

Affordable?

All affordable. So, it's a great business. You know, there are high barrier to entries in affordable. You know, number one, I did a lot of it early in my career. Two, you know, dealing with governments is never, you know, it's always challenging, could be challenging. And it takes a long time and, you know, people aren't willing, you have to have a lot of patience.

So, with these three business lines, which drives the most deal flow and how do you kind of see that shifting over the next, 5 to 10 years?

Well, as I've said, we're not really active in the New York acquisitions anymore. So that's, you know, I don't see much growth there. I think lending and affordable, they complement each other well. You know, lending is consistent, slow and steady, the singles and doubles, then the affordables like the triples and home runs, you know, where, you know, they come more infrequently, but when they come there, you know, they're, they're pretty significant. So So, the businesses actually, they actually complement each other quite well. I think we're going to grow slowly and steadily with both. We don't have any desire to, in the lending anyway, to go out and do $5 billion of loans in one year because, again, we want to be on the low-risk, low-risk deals. And it's not easy to put a lot of money out at low risk.

Right?

So, I think both businesses will be slow and steady. Although on the affordable side, we do want to break in, you know, we love California, we're going to continue to do a lot there. But, you know, as I said, we're doing our first deal in Nevada, just a little more diversification, I think would be good.

So, on the affordable business, is it really driven, I guess, by the land that you can find and what type of subsidy is available? It's almost like what comes first, because I was also, when I was looking through your portfolio, and it seems like, I mean, I don't know if it's well over a dozen projects, but, you know, different types of uses. One was for senior housing. So, are you really trying to first find the need within a municipality and then go find the land to support it? Or are you trying to find the land and then figure out what programs would be best for it?

No. Well, something I like about California, it's very fair. Meaning if your project scores, you win, and there's not much subjectivity in the scoring system. So where we've looked at other states where it looks like it's fair, but if you dive into it, there's some subjectivity in the scoring. So to answer your question, James Nelson Nelson, you know, we, we figure out, you know, we, we study the regulations. My team is excellent at this because the regulations are always changing. They study the regulations and they understand what type of, what piece of land would work. So something called highest resource, close to transit, there's an emphasis on farm workers, you know, so the kind of the finance area of my team talks to our land acquisitions group and says, this is what we need. We need 100 to 200 units, you know, in a rural area within a quarter mile of transportation, close to a grocery store. And then my land acquisitions team, as I said, they do an amazing job. They go out and find exactly what we're, what we're, what we're looking for. And I think we bring a New York attitude out there a little bit. Like, for example, you know, they can't— in California, they came out with something called the SuperNOFA, like a big pot of money. And the draft regulations came out at like 5 o'clock on a Wednesday. By the next morning, my team had You know, like, probably stayed up all night reading. And by the next morning, our acquisitions team had an email in their inbox. Hey guys, this is— we need X, Y, and Z. This is what will win the SuperNOFA. And, you know, where other developers might not have read the regulations for till they were final, because they don't change much from draft to final, you know. So, you know, we bring that attitude. Also, when we found a piece of land, You know, when we found a piece of land that we thought was really a winner, but it was, we felt there was some competition out there, we offer to go hard $25,000 day one. Like it's something that's so small, but the seller looks at us like we're crazy. Like they've never heard of that before. So we bring our New York bag of tricks out there, you know, and sometimes that pays dividends. Yeah.

Talk a little bit about the capital stack for these. I know it changes for, you know, BASE, but you said there's different buckets of capital. So what does a typical capital stack look like? And then, this is ultimately a fee-based business, right? Because you're not— are you putting your own equity into these deals?

Yeah.

Let me walk you through that. So, we put up all the pre-development money, okay, which can be significant, you know, especially if we buy the land. And it's somewhat risky capital, right? Because what happened, you know, we're spending $1 million, $2 million, more, $2, $3, $4 million on pre-development. What happens if we don't succeed? In securing the rest of the funding. We could lose all that. Knock on wood, that hasn't happened. And I think that's also a function, again, our land acquisitions team is securing winners. And we're not going to go into a deal unless we know we can pull it off. But let me try and give the audience like, you know, a back-of-the-envelope way to look at a capital stack. So, say we're building, and I'll just, just to use round numbers, say we're building 100 units in Mountain View, let's just say it costs $100 million. It doesn't, but let's just say. We'll get allocated $65 million of affordable housing tax credits that we'll turn around and sell to probably a bank for $60 million, okay? That's our equity in the property. So what does the bank get? They get $65 million of tax credits that they paid $60 million for. They get 15 years of depreciation losses.. And they get, most importantly, CRA credits, Community Reinvestment Act credits, which, you know, especially the big banks, JP Morgan, Bank of America, Wells, US Bank, you know, they really need to fulfill those needs. So that's our equity in the project. Okay, then we'll go out and, you know, Citibank will buy $30 million of tax-exempt bonds, and that's our construction-to-perm loan. So we've secured $90 of the $100 million. The $10 million piece that we're missing between the equity and the debt is the tricky part, okay. So, you know, the state of California has different programs like the SuperNOFA or the mixed income program, and then local municipality— local municipalities also have different buckets of money you know, like San Diego, just as an example. There's a lot of great municipalities out there in California, but San Diego, for example, we've done several deals in, you know, and they have different pots of soft money to fill that gap. So once we have our, you know, in this example, $100 million to build, you know, we get our pre-dev money back and we break ground and we build. And, you know, what I really like about the business is, you know, we're doing You know, it's a good, it's a decent living. But, you know, we were doing a lot of good for society. So, you know, we're about to finish a project where 20% of the units are for homeless vets. We finished, we actually got the TCO yesterday on a project in Pasadena. Tenants are probably moving in as we speak. And, you know, as you know, Pasadena was rocked by the wildfires. So, so, you know, that's great. We've built for farm workers. We've built for something called at-risk of youth homelessness. So, you know, kids that grew up in an orphanage, they're now, you know, 18 to 24, and they're on their own for the first time. And I read something the other day was that— which actually was actually quite alarming— the homelessness rate for that population is 50%. Oh, you know, so, so we're, we're doing a lot of good for society. You know, and, you know, so in addition to everyday Americans, you know, teachers, firemen, police officers. So to me, this is a much better way to spend our time than trying to chase 15% IRRs in a traditional, in a traditional real estate deal.

Yeah, right. I'm very curious, as someone who wears both hats, you're an investor and a lender, how does that influence your underwriting standards? Do you maybe underwrite more conservatively for debt than you do for equity, or what's the kind of standard across the board?

I think that's a great question. I think our experience as an owner and a developer really helps our lending business. Okay, so, you know, when we're looking at a loan that requires some level of construction, you know, where it falls apart a lot of times is hard cost numbers. Okay. We built, so we know what it costs, you know. So, for example, like, especially in California, you know, we get a loan request and we look at the borrower's hard cost numbers and they're assuming, you know, you know, $200 a foot. We know we just built a deal down the street for $350 a foot, you know. So, I think having our own portfolio really helps. Also with rents, hey, what are we getting on St. Mark's Place, you know, for St. Mark's?, you know, in rent, you know, we just leased a unit for $90 a foot. Okay, they're telling us it's $110 a foot. So I think having that data internally helps a lot. So I think that's the biggest advantage.

Yeah, absolutely. It makes a lot of sense looking inward and just leveraging your own data.

Yeah.

So maybe talk a little bit about how you run kind of a bicoastal operation. So you're, you're spending time here, you have an office here in New York, I think you You said you have 2 or 3 offices in California. Now you're going into Reno. So do you set up a physical office there? I mean, how do you oversee this and kind of how are the, you know, the 2 separate businesses run?

Right.

So we, you know, we have 4 offices. We're headquartered in New York, but we have an office in San Diego, Corona, which is outside Los Angeles, and then in San Jose in the Bay Area. We have really good people out there. You know, I'm there a lot, obviously. You know, and our New York team is there a lot. So I'm not the only one racking up the JetBlue, you know, status. And, you know, we have really good people on the ground out there. We've had some growing pains, but, you know, that we've learned from and gotten through. You know, Reno, people don't realize this, it's only a couple hours from Sacramento, which we build a lot. So I don't see us opening an office there. And yeah, it's just a lot of oversight, you know, and good, great people. Like I said, John and I, From the day we started this company, we always try and hire the best. You know, hire— it's the related model, you know, hire people smarter than you and let them do their job. So that's always been our motto. So we have great people on the ground out there. And we're always on Zooms. And like I said, we're all going out there all the time. So, so it works.

And how do you look to scale your business moving forward? And again, does look like— I mean, some of the affordable developments you did were, you know, 37, 50 units, couple over 100. You know, you hear some of these mega developments here, they're, you know, hundreds of units. I mean, is that part of the business model that you'd rather have multiple projects and it's easier to kind of raise capital for each? Or do you think, you know, if you fast forward 5, 10 years from now, are you doing, you know, these massive affordable developments?

Yeah, you know, that's a good question. In California, you know, the 9% credits, You have the 4% credits and the 9% credits. 9% credits are for smaller deals. You know, in terms of the bigger deals, our pipeline going forward, they are getting a little bit bigger. So right now, I think our smallest one was 25 units. Our largest is 160 with everything in the middle. Right now we have several deals we're working on that are 150, 200, 300. Although as it gets up there, we break them out into phases. Because it's hard to pull off a 300-unit affordable deal, you know, in California. It's doable, but, you know, that's a large tax credit chunk that, you know, someone needs to absorb to buy. So, although the bigger deals pencil better. So, it's—

I'm sure sometimes maybe those get syndicated with multiple investors in them.

Yeah, yeah. The syndicate, the tax credit syndicators can do that, but it's more, those large checks are getting hard to place.

Mm-hmm.

I've got a broader capital markets question. So you founded your company coming out of the GFC. Fast forward to 2019, as you mentioned, there were the rent laws, then we had COVID, then we had the interest rate crisis. How has the dis— how was the distress in 2008 different than the distress that you see today? And were there any lessons that you learned during the GFC that you were able to protect yourself against when we went through this kind of new capital markets distress period following COVID?

I think the big difference between the financial crisis and today is rates were going down back then. The Fed was really clear, like, we're going to do whatever it takes, cutting rates, where today, it looks like they want to cut rates, but yet inflation, is it going down? It doesn't seem so. So, I think that's the big difference. Rates were clearly going down back then. They went nowhere but down for us. We got very lucky. Like, I remember our first deal that we bought in '09, the rate with New York Community Bank was 5.75%, and it dropped to as low as, you know, 2.75%. You know, so I think that's the big difference. Rates really declined back then, which added fuel to the fire because '12, '13, '14, as you sure you remember, prices exploded.

Right. And in terms of lessons, was there an area where maybe you got burned in 2008 and then like, Over the past few years, you were able to protect your portfolio given like the lesson that you kind of took away from that time?

Well, I think the biggest mistake we made back then is we should have bought everything. You know, there were so many deals that I was arguing over a couple hundred grand, you know, with the seller that we lost, you know, we should have bought them. But operationally, no, I don't think so.

And what about jumping back into the market? So, you know, again, it's been, you said since, it's been several years since you bought your last property here in New York? I mean, what would it take for you to say, okay, now is the time where I feel the values have bottomed out and that we're going to have another run?

You know, it's a good question. You know, there's nobody I listen to more in the real estate business than my uncle, and he thinks we should be buying like crazy now.

You know, what kind of product?

New York City apartments. Regulated, not regulated, okay, but regulated. I mean, again, we're a family of rent roll multiples, okay? You know, We sold for $18 million. Today you can buy for what, $5 million?

Yeah, some cases.

But you have to believe that politically things are going to go back more to the center. Some of these people out there, there's a couple groups that have bought thousands of units the last few years. I wish them well. I mean, I guess they're betting that the rent laws will become more sane and I hope it works out for them.

Well, it's kind of a return back to the basics of you're buying for cash flow. I mean, it used to be so many of those years that you talked about, a lot of those investments were predicated on selling for, you know, a tighter exit cap, and, you know, that was really when you made money on the deal. I mean, today, I mean, the financing is accretive and you can actually buy for cash flow, right?

Yeah. So, to answer your question, would we jump back in?

Maybe.

But, you know, like I said, we have our hands full with our two businesses that are really cranking right now. And, you know, and like I said, I think I'd rather spend my time, you know, building affordable housing for people who really need it, you know, than to chase, you know, IRRs.

What about office-to-resi conversions?

Yeah. You know, we've seen a lot of them on the, on the bridge lending side. We haven't done any. I think they're harder than people think. I think if we were to back an office-to-resi conversion, it would have to be with a top-notch group that's done it multiple times before, because we've passed on several of them. In the last couple years. Because, you know, I think, you know, in looking back, a big mistake I made in my career, I should have been building ground up 15 years ago. But I was always, you know, I had a finance background, you know, I thought renovation was the way to go. And, you know, we did fine. But, you know, I think building a building from the ground up is much easier, much easier than, than converting an office to a residential building.

Building.

It's interesting you say that because, you know, many would say that developing is definitely the riskiest proposition because— and I certainly agree once you get out of the ground, but, but so much of the, the pre-development work and figuring out, you know, not just entitlements, but I mean, here in New York it's dealing with neighbors, you know, could be dealing with the MTA. I mean, and again, it's the time, you know, how long, you know, it takes you, you know, twice as long to build a project even if it's a success. So So, you know, those I guess are the risks getting out of the ground. But I guess what's great about what you're doing in California is, like you said, by the time you close, it's been completely de-risked, right? Because you have everything essentially approved.

Yeah, yeah. I mean, by the time we get to a closing table, you know, we're fully funded at that point. And we're never going to go into a deal unless we feel 100% confident in the budget, particularly the hard cost number, because they have run on us in some examples. Like hard costs have gone nowhere but up. The last 5 years, but we were able to, you know, successfully mitigate that risk through conservative underwriting primarily.

So as we start to, to wrap things up, really curious about advice for, you know, we have aspiring real estate investors, we have brokers, we have maybe investors who've done work on the fair market side, they're thinking about affordable. I mean, kind of what path should someone consider getting into the business? I mean, it seems like there's so much action on the debt side right now. I think I heard the other day that there's 400 debt funds out there. So you would think on one hand, you know, that, that, that's, there's a lot of competition in that space. Maybe a little scarier at this point to go into the equity side. I mean, affordable seems like an entirely different business. I mean, how, how, how do you, you know, for, for, for those looking to get into the business, kind of where, where would you start today?

Well, I, okay, so I taught at NYU for 13 years. So I got this question all the time. I think for young people, affordable housing, you know, is a tremendous career. Number one, it's extremely complicated. My classroom at NYU used to, used to overlook the Empire State Building, and I would tell them an affordable housing deal is more complicated than someone buying the Empire State Building. And it's true. So if you can do an affordable housing deal, you can do any deal in real estate, is my opinion. Two, with affordable housing, so few people understand it. If you understand it, you're always going to have a job. Which I can't say the same for lenders or equity investors. You know, it's, you know, you'll always have a job. Like I said, you're doing a ton of good for society. And it's, it's, it's, you know, pretty good living.

So how would you advise that someone gets those hard skills and learns the affordable business?

Yeah, I mean, number one, you could take some classes. I think NYU has a class now, you know, and try and get a job, take a class, learn the business. Okay? You know, because when I went on my interview at Redstone Partners, whatever it was, 22 years ago, I remember being in the interview and they're talking about tax credits and tax-exempt bonds and soft money and this and that. I had no idea what they were talking about. So learn, learn the business and then try and get your foot in the door, you know, through a lender. You know, Citibank Community Capital, for example, is the largest lender in the country. JPMorgan. All the big banks have huge departments for this stuff. You know, there's equity syndicators. That are always hiring. There's developers, obviously. So that's a great area for a young person to go in today. Lending's a great business too. I don't think it's as stable as a career as affordable because one thing about affordable housing, it's such a problem in this country. I don't think it's getting solved in my lifetime. I think you, and it's pretty flat, meaning like even in like the financial crisis, yes, it dipped, But, you know, deals were still getting done. You know, where, you know, in the lending space, you know, you have a bad recession or a financial crisis. I mean, I remember during the financial crisis, you know, all those Bear Stearns and Lehman Bankers all out of a job. You know, I don't think that's happening in affordable.

One last question for you because you didn't start out in real estate. What major lessons did you learn in the securities world that you've sort of applied to the real estate business?

Well, I think I learned a lot about the world economy, trading, like being in a currency trading environment.

Yeah.

Like, you know, CPI is coming out at 8:30 AM, everyone's glued to the computer, you know, how different economics impact, you know, financial markets, you know? I think that was the biggest thing I learned in the currency trading.

Well, Paul, this has been amazing. Thank you so much for sharing your story. And I know our audience is gonna get tremendous benefit from it, so we really appreciate it. Yeah, like I said, thanks for having me.

Been fun.

Thank you so much.

I want to thank you all, as always, for joining. You can go to jamesnelson.com. We built this site for you. That is where you can find the show notes for this. It's how you can connect with Paul, see all the great work that they're doing. There's also a lot of helpful tools on there. So, and last but not least, if you've not already, please subscribe to the show wherever you're listening to it. We love your feedback and ratings as well, so appreciate that. Until next week, thank you again for joining.

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