Smart Funding with Steve DeNardo

Welcome.

This is the Insider's Edge to Real Estate Investing with James Nelson, the principal and head of Avison Young's US Investment Sales Group and his co host Kim Troller 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 back to our new season of the Insider's Edge to Real Estate Investing. I am your co host James Nelson, head of US Investment Sales here at Davison Young, along with Kim Troller, my new co host. And this is episode number 227. This is the second episode though in the new season and today we are joined by Steve DiNardo and talking about smart funding. You'll learn about spotting small to mid size opportunities all aligning with sponsors in this conversation. Steve is president and CEO of River Oak Investment Corp. The firm pursues opportunistic and value add asset purchases and operational opportunities on behalf of a diverse set of investors ranging from institutions to individuals.

You'll learn about raising fund versus deal by deal capital and how trust is built through transparent reporting and consistent distributions. Steve shares lessons learned from investing in student housing along with expanding from equity to high yield debt as banks pulled back after Covid.

You know, on a personal note, Steve, and I'll say this shortly again, is a friend, a partner of mine as well as a mentor. So originally when I was at Massie Nacal about 10 years into my brokerage career, I brought the opportunity to our founders, Bob Nacal, Paul Massey, saying we should begin a real estate fund. I want to go invest in these opportunities. We see all of our clients doing these amazing things. How do we get involved with it? But we didn't know about actually running a fund. And so as I started looking around, River Oak became a very clear choice. They were in the space, they understood, you know, this segment of the market and how to go about it. And it was our experience with Steve and Derek Aiken at the time who is the cio did incredible things for the business because they just, first of all, you know, wonderful people and they really taught us that the business and how to partner with a sponsor, how to structure deals and no doubt a lot of the output. You know the book the Insider's Edge to Real Estate Investing came from what I learned from Steve. So I'm really excited to share this experience. And Kim, hopefully you got some of that same feeling from the discussion.

Yeah, that's amazing, James, and absolutely wonderful.

So we're going to have a quick break from our sponsor but before we do, you can always go to james nelson.com we built this site for you. That's where you can find the show notes for the episode. That's also where you can find how to connect with Steve. We're going to have a brief word from our sponsor and we'll get right into that discussion with Steve DiNardo.

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All right, welcome everyone to the Insider's Edge to Real Estate Investing. This is your co host James Nelson. I am head of US Investment Sales and Morning everyone.

I'm Kim Troller. Happy to be here. Welcome.

Wonderful. And with us today we have my good friend, mentor, partner Steve DiNardo who is president and CEO of River Oak Investment Corp. Steve, welcome and thank you so much for coming on the show.

Thank you, James. Thank you Kim. Nice to see you.

Wonderful. So Steve, I know we go back at least 15 years, maybe 20 years as we are partners in River Oak NYC 1 and 2 and we're going to talk a little bit more about those funds. But I think for our audience it might be helpful for you just to give a little background on River Oak because there's a platform, there's a couple different things that you do. So maybe just give us a sense of your activities.

Sure. So River Oak started in 1999. It was an outgrowth of my time at ING actually where I was head of Asset management for ING Realty Partners. And I saw a lot of the smaller deals getting thrown into the trash and I started wondering who is financing those deals and did a little homework. I couldn't find any really organized capital that was financing those deals. So I decided to start River Oak to be able to do that. And so we started in 1999, started very, very small and have grown over the years, initially starting with equity deals mostly on the east coast, mostly concentrated between Boston and Washington D.C. but we did spread out a little bit. We had a, an account with A Middle Eastern group where we did medical office buildings across the country. We have a student housing fund. And as you mentioned earlier, James, with you, Bob Nacal and Paul Massey, we did two New York City funds. More recently we've branched out and doing high yield debt. And some of that was initiated by just the change in the debt markets. A lot of the banks had pulled back after Covid and the increase of interest rates. And we decided that there was room for us, especially again in the smaller deals where we're not competing with the really large funds. And that's been quite successful. We've done eight deals so far. Fortunately been able to make a quarterly distribution every, every quarter since we started. And so far since I haven't had any complaints, I think the investors are pretty happy.

So, Steve, what characteristics would you say define a River Oak deal in terms of basis, business plan, sponsor alignment?

Yeah, that's a good question. Let's start with sponsor alignment. It's always been important to us that we are dealing with somebody that has experience in either the marketplace or in the product type. We're not. And maybe almost as important is what their business plan is for the property. So we dig deep into that because as an example, if somebody came to us and said, well, we want to do this condo conversion, but if it doesn't work, you know, we could do rental and all this other stuff. And we always say to them, look, decide which way you want to go, because that's what we're going to underwrite is what, what is your business plan? And when you figure that out, come back to us. So, you know, obviously we're looking. What everybody else looks for is smart, honest people who. It doesn't mean they haven't had losses in the past. It's really just how they handled those losses and how they handled their partners. And so we dig deep into a person's background or the sponsor's background in terms of properties. What we're looking for, we trade in a band that's generally below $50 million in total capitalization. Most of that, again, is to avoid competing with the big guys. For the big guys, it's, it's tough to do smaller deals because it takes the same amount of effort and they have a lot more overhead than we have. So, you know, we, and, and there's a lot. So there's less competition. Gives us a little bit of a leg up. It's very common for sponsors to come to us after years of them trying to raise money through friends and family and, you know, making 400 phone calls to raise $20,000 at a time. You know, one phone call to us and usually we can fill the capital stack with, you know, one phone call if we like the deal. So that, that's generally been the business plan and that's both in equity and in debt. We've tried to stay below the radar screen of the big guys. Yeah.

And that's definitely that segment of the market. I know my early days in brokerage and Massie Naklan, all those sales that we saw, I mean it was, it was really the perfect partnership when we connected because we saw these great opportunities in these small to mid sized deals. Right. Which is where the volume was happening. And I might have the statistics because I know we tracked this when we launched the funds initially. But I think if I'm not mistaken, 90% of the transactions are below $50 million and yet 90% of the organized capital is focused at 50 million DOL plus.

That's correct.

So that, that was really the idea is how do we institutionalize this? How do we, you know and I know the purpose of Mkro Massi Nakal River Oak New York City 1 and 2 was we wanted to write those equity checks of 2 to 7 million dollars which can actually be a lot tougher to find, you know, than the $20 million check.

That's right.

But Steve, just to back up a little bit just so our audience understands, I mean clearly you've played up and down the capital stack equity debt, but you always have a partner. So is this kind of a typical maybe talk about what a capital stack would look like and we can use a River Oak NYC deal as an example. But if you have a $20 million deal, total capitalization, maybe just break that down on how much that sponsor is going to have to find financing and then talk about how the the equity is sourced.

Sure. So first of all, it's important to remember that our fund is totally discretionary. So that gives us a leg up in terms of making decisions. But if you take as you, I'm going to make it a $10 million deal just to make the math easier. So the sponsor might put up 20%, call it $2 million. A lender may be at 60% loan to value. So they're putting up another, call it $6 million and then that leaves a 20% gap in the capital stack. And that's usually where we came in. So we got known in the marketplace as a place to go when you had this gap. In fact, we called it GAAP equity financing to fill that gap so the deal could get done. Typically the structure would be that again the sponsor puts up real money. There's a promote structure so that it's basically a parry pursue return based on percentage interest owned. And then there's a kick up for the sponsor if they meet certain hurdles. This way everybody's aligned throughout the process and that's important to us. The amount of money that the sponsor puts up, you know, it varies. What's important to us is if they lose hurts. So they're, you know, they're in it with real skin in the game. And the promote sort of ensures that there's an alignment all the way through to the end of the end of the process, which usually is sale of the property.

So Steve, I'd love to hear more about who the sponsors are. Like the breakdown between maybe institutional and private capital family office and how you align your investment horizon and risk profile given that you're, you're working with these different groups that maybe have their own objectives.

Yeah. So in terms of the sponsors varies, it's usually a small group that may have been in, in business for a few years. They have a couple of deals under their belt. It's very unusual for us to finance a first time around group. It's usually somebody that has a few properties that we can measure their success in those properties. It's not usually institutional investors because they don't really need us. They can either go to the large funds or self finance family offices also not so much on the sponsor side, but they've been on the investor side with us. So our funds do include high net worth individuals and some family offices. And there's some, there's many names that you would recognize amongst the investors in terms of the risk profile. That's a really good question because for us that's where all the triage takes place is what you know, especially in New York City, as James knows and maybe has taught me that in New York City no two properties are exactly the same. They could be on the same block, but across the street from another, each other. And that changes the dynamics of what's going on in that market. And so it really takes, and one of the reasons we, you know, we liked teaming up with Massinacal at the time is that Massi Nacal was real experts, especially in the boroughs of understanding those small nuances in the marketplace. So that was number one, Number two was what we thought of the business plan and number three was the sponsor themselves in terms of their, their we, our belief in their ability to actually execute. We've been very fortunate over the 26 years is that I can't really think of many instances where the sponsor couldn't execute. There may be one or two things out of their control, like the Great Recession in 2008 and 2009. That's totally out of everybody's control. Or Covid. Totally out of everybody's control. But in terms of the things they could control, we've been very fortunate that sponsors have been able to basically commit to their business plan and get it done. Doesn't always mean we made a lot of money, but, you know, most instances we came out ahead.

To go back to your point on, on really being a specialist in a market and living and breathing it and knowing what side of the street might maybe affect the dynamic of an asset. I know that's something that James touched on in his, his book as well, the Insider's Edge. So I see that your portfolio spans the Eastern seaboard in t makes a large, makes up a large portion of your portfolio value. What sort of drives your, your market selection and geographic allocation when you're making an investment?

Yeah, I, I think it's more opportunistic than, than having a subjective business plan, especially on the debt side. Because on the debt side, deals are finding us more than we're finding deals, especially during this period where a lot of the banks who say they're in the business, but they're really not, they're not lending unless it's, you know, a ball straight down the middle of the fairway. So a lot of we, thanks to my partner on the lending side, we have a pretty strong pipeline of existing mortgage brokers and direct pipelines into developers. So it's been opportunistic, though once the deal is presented to us, then we still go through the normal triage process. What do we know about that market? What can we learn about that market? And on the debt side, what we add to the triage is understanding what's going to take us out of the deal. These deals are structured really as contractual deals. We know what they're going to pay us on a quarterly basis. We know when the maturity date is. What's important about the maturity date is what happens at the maturity date, what's going to take us out. So we're not only underwriting the beginning of the deal, we're also underwriting the end of the deal. Wonderful.

So, Steve, I think this question will be helpful to everyone listening, regardless of what role they play in the transaction, whether they're the sponsor out There looking for equity, whether the borrower, looking for debt, whether they are a passive investor who's looking to make an LP investment. And that is really understanding what makes for a great sponsor. Right. And also talking about from your shoes, how do you qualify them? Because I think what you said earlier was it doesn't mean that someone has never done a bad deal. If you've been doing this long enough, you're going to have challenges. Right, but how do you really get comfortable, you know, that, that you know the sponsor is going to be doing right by the project, has the expertise. But I'm talking more about, you know, are they going to make for a great partner? Right. So, so we'd love for you to comment on that.

Well, there's, there's two sides to that. There's the objective side and the subjective side. So let's talk about the objective side first. So we look into their background. In many cases we'll hire, excuse me, a firm like Crohl to do a background check. Number two, we'll look into their history in terms of what their professional background is, how long they've been in the business, so on, and then we'll do a financial analysis of their personal financial statements. So that's all the objective stuff, which you know, I think everybody should do. The subjective far obviously is a lot harder and that really takes a lot of face to face time with the sponsor understanding them, how they think, how they came up with the business plan, how they found the property, what attracted them to the property, what makes this different than something else that they either have done or that's different in the marketplace. It, and how, what is their thought process around all that and that it really takes just a lot of conversation. It, it's, it's, it's the, you know, it's the equivalent of like finding a doctor or a dentist. How, how do you get comfortable with what that sponsor can do and what their thought process is?

And what about, sorry, just to follow up on that with references. I mean are you, if you're looking to make it a loan to someone, do you want to speak to their other lenders and if so, is that helpful?

Yeah, at times. You know, some of it depends on what the project is, how much risk we see in the project, you know, right now because bank lenders are probably down around 60% loan to value, we could put in a high yield piece and not be above 75% LTV. And so we may not care what other lenders have thought. And truthfully a lot of Lenders won't tell you. I don't know if it's because of privacy reasons or whatever. So we make our own determination on what we feel the honesty and capabilities of the sponsor are. We will talk to other people they've done business with. You know, not necessarily lenders, but other equity partners. They're a little bit more forthcoming with what they can say about the sponsor.

So financial statements, background check, track record, references aside, what role do relationships play in determining your next business partner?

It depends. We do love having repeat business with, with a sponsor because now we have the actual firsthand experience and that's always important. But the pipeline of deals is so large that we have to do our own triaging of, of, of any new sponsor. Just because we may, we're probably not going to know them. We're going to have to dig deep into what their history is, especially with regard to either the market they're playing in or the property type that they're playing in. So let's say we had somebody who did six deals in Denver and now all of a sudden they want to go to Phoenix. Well, we got to hear a pretty good reason why they want to go to Phoenix. It's not going to be real appetizing to us unless we hear a really good reason, like maybe they have another partner that's experienced in Phoenix and they're signing on with this other partner. But if they don't have a really good reason, then we're probably going to pass.

So, Steve, I'd like to back up a little bit and talk about operating out of a fund structure as opposed to deal specific. Right. And if I'm not mistaken, everything that River Oak does has more or less been in a fund structure. Right. So maybe you could talk about kind of the benefits, you know, the pros and cons of raising a fund and having that discretionary capital that you talked about as opposed to. And maybe a question, have you ever considered doing deal specific where you're raising money for a specific opportunity?

Yeah, and I think for anybody who's getting started in the business, that's a seminal question. You know, a lot of people do it deal by deal. And I was to some extent, I was brought up in the fund business, even going back to my days at First Winthrop, which was a syndicator, it was a pre raised fund really. So I was most familiar with the fund structure. I was always concerned on the deal by deal basis that I could tie up a deal but then not be able to get the capital together. And my View has always been if you fail once to close on a deal that you committed to, your reputation is pretty much shot. So the combination of my personal experience and maybe that worry about not being able to close on a deal, I decided to move to the fund structure. And most of it had to do with being able to control the capital and make the decisions. Now the downside of that is you've got to raise capital in a blind pool. Most of the time the investors you're going to don't have a property that you can point to that they know they're going to get invested in. So in the beginning especially, it's hard. And so, you know, first time through, I went to friends and family who knew my background and were willing to invest. But from then on, especially because we're a reg D qualified investor, I can't advertise, I can't openly solicit. So everything from then on is based on referral or you know, people I personally know. And so it you build up a track record that people can look at rather than specific deals that are going to be in the new fund. And you know, thankfully over 26 years we built up a portfolio of about 400 investors that's probably down some since some of them have passed on to greener pastures. But you know, at any one time we probably have 100 investors that are interested in what we're doing. And the hard part is, unlike a large institutional fund where you're dealing with public pension funds that have an allocation of real estate every year with high net worth individuals or family offices, they don't necessarily have an allocation of real estate every year. So you have to catch people, sort out the right time. I like to go after people around bonus time in January and February or after I've just distributed money to investors. The to show people that you know what our track record is and you know how the whole thing works. And. But it's hard. The hard part is raising the capital for sure.

Sorry, go ahead.

No, that's. Go. Go ahead, Kim.

With, with blind pools where the investor clearly has no insight into the assets that will make up the fund. Trust is a major part of that. How do you go, especially when you're dealing with high net worth individuals when it's it's their personal accounts that they're investing with. How do you go about building trust with your investors? The 400.

Yeah. So the. This there's a couple of things. One is our track record. 2 is the offering memorandum which tries to go pretty deeply into what the business plan is, the offering memorandum is just like we want to know what the business plan is with a sponsor. I believe our investors want to know what our business plan is. And it's a business plan. And once we write it and they sign on, we're pretty much stuck with that business plan. There's. You really can't change that plan unless you go back to the investors, which is not an easy thing to do. So they've got, so they've got the history, they've got the business plan, they've got a, you know, they're generally a referral which makes them sort of a pre qualified candidate. And then finally, you know, direct discussions with me or members of our group to get comfortable with us. Fortunately, I'm not, I've never, I've never felt like I was a great salesman. But I think people know that I'm honest, I'll tell them the truth, good or bad. And I, and our reporting structure has been one that we try to answer questions before they're asked. And I think once that gets known by the, you know, the general investing population that, you know, that does build trust over time. And I, you know, I wish I was a better salesman, but that's all I can rely on, is trying to build trust.

Absolutely, yes. And Steve, just to underscore that point that you made about, you know, sometimes we call it the good, the bad and the ugly and I witness it firsthand. I mean, sometimes, you know, the salesman to me is saying, oh, you know, we can ride this out there. There's a better way to approach this. And I think, you know, sometimes in a way under promising and over delivering. Right. I mean, and it's, I think it's the best way to be is you always have to be realistic about the challenges and what's taking place and just over communicate. So you and your team have been incredible at that. I did want to back up though, again, and not to harp on this question of fund versus deal specific, but again, you have a very accomplished career, right. You manage this portfolio for First Winthrop. You oversaw a $5 billion portfolio at Aries Realty Capital, which was owned by Mutual of New York. And then right before founding River Oak, you ran a billion dollar fund at ing. And so, you know, you certainly had that institutional background where you said, okay, I've worked at these bigger shops, now I'm going to do this on my own. There is a track record. It wasn't maybe yours personally, but, but you know, you certainly had a large hand in it, whereas I think a lot of the listeners to this show who are thinking about starting off in the business, they might not have that long track record that they can point to. So I think it almost becomes inevitable that they have to go deal specific because you know, the idea of getting someone to just commit to a fund when it's just kind of a thesis and you don't have a track record, I mean, what, what would you say to that? That person who wants to get into, to start investing, but they, they don't have that long track record that might warrant raising a fund.

My advice is start small and be successful in those first deals. If your first deal's a failure, you're probably gonna have a problem raising the second one. So even if you personally are going to lose money, make sure the investors don't. And I'll give you an example who's quite famous right now is Steve Witkoff. Steve Witkoff started, he was a lawyer and then he started his own real estate business and he started with walk ups in Harlem, I believe. And he used to go and collect the rent by himself. And now Steve is a billionaire. He's representing the United States and major negotiations around the world. And I'm not saying that's the path everybody is going to be able to take, but if it's in effect, if it's your only choice, then follow that prescription. Start small, use friends and family money, but just make sure it works. Do it, you know, do an ultra safe deal if you have to, but just make sure that first deal works. And after that you'll start to find that it's easier and easier to raise capital and easier and easier to get bigger.

So that being said, I think it'd be great to shift gears a bit and talk about some, some real deals that you've, you've recently closed and maybe some lessons that you've learned along the way. We know that you, you sold a student housing asset and a Clemson last year. What made that deal compelling? What was the story? What did you learn?

So there's a couple things I think we have to start at the beginning in that Covid gave us an unusual opportunity. And when I say that is that Covid, you know, institutional investors tend to, whether they know it or not, they tend to operate as a flock. And when Covid happened, they all pulled back and there's what's known in the student housing business as Power five or now I think it's actually power four schools. And what that refers to are the real big athletic conferences. So Big Ten ACC, SEC, SEC schools within those conferences are considered in the Power 5. So when the institutions pulled back, all of a sudden there were these opportunities for somebody small like us to come in and invest at Clemson, which is an ACC school, at Indiana, which is a Big ten school, at South Carolina, which is, I think it says he C school. So we had these unusual opportunities to get in because there was less competition. So that's the beginning of the story. We got in at an opportune time. As the market got better, Covid was behind us. Now institutions are trying to get back into it. And so we now have a property like Clemson, which is a Power 5 school, which had it in increasing enrollment. It's got a good reputation, good football team, so everybody know who they are. And it gave us the opportunity to put it on the market for sale. And you know, we did pretty well. It was a 17% return. I don't think anybody complains about that. And, but you know, the current market is still making it difficult to sell right now. So we're looking to refinance a few of the properties, stay in them for, you know, wait it out till the markets get better.

I'd love to dig a little bit more into student housing. I don't think we've actually talked a lot about student housing on this show. So, you know, how much would you compare it to say, multifamily investing? How much are you looking at? You know, clearly the demand drivers, which is, you know, the size of the school. But I'm sure you're looking at what's the existing dorm supply, you know, maybe the university's offering on campus, what's happening off campus, what's being built? I mean, it's probably not all too dissimilar with how you might look at a multifamily development. But, but yeah, what, what differences are there and how do you get comfortable with what makes for a good student housing investment?

So, yeah, there are differences. First of all, the. As an asset class, student housing has only been around. Excuse me, really, maybe from 2008, 2009, something like that, where purpose built student housing became more common. I know you went to Colgate, James. I don't know what you lived in in terms of a dorm situation or off campus situation, but especially in the Northeast, a lot of kids when they lived off campus were living in a, you know, three or four family house, and that was considered off campus housing. But in 2008, 2009, you know, professional development firms started to create purpose built student housing off campus. So over time things started to become apparent. Not that it's different than real estate in general, but things like location, while important in every bit of real estate, but walking distance from campus is something that's pretty important. Something that you maybe tangentially look at in regular apartments in terms of how far from shopping you are or something like that. But walking distance from campus is one of the things that's pretty important. The other thing is that in terms of a difference, I think people in the beginning thought multifamily and student housing were basically the same thing. I have found over the years that it's not. Student housing is much more management intensive and much more marketing intensive. And the successful firms have figured that out. And I've seen very few multifamily firms go into student housing and be as successful as they were as multifamily companies. And that's a pretty big difference. We, we have only invested with one sponsor. We've done 10 deals over the last 15 years with them. And that's all they do, student housing. They know it inside out. They're really good at marketing, reaching the student population. So on things that are important to us when looking at a student housing deal is what's the student population trend and what, and how many competing properties are there. So if you look across the United states, only about 33% of students at four year colleges live on campus. So you got two thirds of the students really living off campus. And so when you start to do the, you start to look at statistics of okay, how many, how many beds are on campus versus how many beds are off campus and you start comparing that to what the student body is and how fast the student body is increasing. Sometimes just a 1% increase per year in the student body. You know, if you're in a 30,000 students school, that's 300 students that now need to find student housing. Well, 300 students is enough to build a purpose built student housing project around. So it's a combination of the trend line in the student population and the availability in terms of competition and the availability to be able to build. So one of the things that was interesting about Clemson was there's a, there was a moratorium and building new student housing until they could build a sewer system that could keep up with it. That put us, that's one of the reasons we invested there because it gave us an automatic advantage because nobody else could build. And then further, there was another prohibition against building, I forget, I think less than a half mile around the campus because it was Already so crowded around the campus. We were about a mile and a quarter from campus, was a little longer than we would like in normal circumstances. But since you couldn't build anything closer, that made us the next closest thing. And we had a shuttle system and you know, it worked out pretty well.

With student housing you're typically able to achieve a higher yield than traditional multifamily. Can you walk us through some of the risks associated with student housing? Because it's, it's an interesting one because it's really the, the credit of the tenant is not really the tenant, it's the parent, because the parent one that's signing that, that's paying most of the time. So yeah. Can you just walk us through some of the risks that you've experienced?

Yeah, we've been fortunate. You know, we always have the parent on, on the lease, that's for sure. The other thing is that something that has changed in the business is there's no, there's really no such thing as a nine month lease anymore. It's always a 12 month lease. So there's. You don't really have any downtime or it's perceived as no downtime. You know, our sponsor is really pretty good at jumping on delinquencies pretty quickly. Our delinquency rate is very, very low. The biggest risks really is the, the capital improvements that you have to keep up with. It's pretty. For a while it was extremely competitive in terms of what the amenities were. When I went to college, you know, if you had a, if you had a dorm room with a bathroom, that was great. In the mid 2010s, the competition raised to the point where you had to have volleyball courts and hot tubs and basketball courts and big screen televisions in every dorm and bed bath parody and so on. And some of those things are still important. But the trend has now been that parents are less interested in paying for all those amenities and care much more about the quality of the education the kid is getting. And to some level of comfort, bed bath parity is still pretty important. I don't think anybody builds without that anymore. And so you know in the 2010s that the capital improvement side was always a risk whether it was worth building or not. So like we had a property in Pennsylvania, was in western Pennsylvania. Now I'm forgetting the name of the school. Senior moment. But our sponsor wanted to put in a pool.

Slippery Rock. I don't know. I'm guessing.

Yeah. Thank you. Slippery Rock.

I don't know where I pulled that from. I had a friend who played water.

Polo there in Pennsylvania and we had a great property there right next to campus. And he finally convinced me to put the pool in, even though I knew would really only be used three months of the year. It's going to be used in May and early June. Then graduation would happen and it might get used in September. But it became important because it had to match the competition of the new properties coming into the market. So, you know, again, was it a, you know, in hindsight it was probably, you know, a good investment putting in a pool. When you have a $30 million project, putting a pool is not that big a piece of the capital stack.

So one last question on the student housing sector, and that is, how do you know if your biggest competition is going to actually be the school itself? And I've kind of noticed in my oldest sons at usc, you know, they clearly have housing on campus, but then you see a bunch of these new developments off campus and they're all privately developed, if I'm not mistaken. And I might be getting this wrong, but I think Yale, for example, owns a lot of this off campus housing. I know where I went. Colgate, you asked. Not that it's, you know, these, you know, new purpose built developments, but a lot of these three and four families. Colgate came in and just bought a big swath of the downtown to, you know, to offer that housing to kind of control the quality. Now if you're competing against a school that's a not for profit, you know, they're doing it for a different reason. You're doing it for a return. So how do you, how do you make sure that you're not going to be competing with the university that's going to be, you know, building and delivering housing at a lesser cost?

Yeah. So there's a couple of things. One, we have found over the years that schools really want to put their investment dollars into academic buildings, not dormitories. I don't know all the reasons for that, but you know, for a school to build their reputation, it's got a lot more to do with academics than housing students. Number two, the cost differential isn't as much as you think, partially because the school wants to use their money for academic buildings. The ones that have the available land to build student housing have usually partnered with, with a private developer. So while the land is being contributed, the cost of building is still there. Number three, even with building on campus, which is not happening all that much, they still can't house all their students. And then finally your Example of Colgate, that happens at Columbia and Pennsylvania, most of the northeast schools. It's not easy to build student purpose built housing at those schools because land costs are so great and the land availability is so, so, so small. So what the schools have done instead is buy up properties around the school so they can control the quality of what's happening. My son went to Penn and when in the four years he was there, Penn bought a tremendous amount of property around the school. And the trend I think first started with Columbia. You know, Columbia owns so much around Morningside Heights now that it's, you know, it's a major real estate player.

Steve. I also went to Penn and I can attest to that. I lived in the off campus housing for three years.

True. Yeah. And you know, and you know, Penn is a special situation too because you have Drexel and Temple right there. And so it's actually hard to tell where one campus ends and the other campus starts. And in fact you, you have some properties that has house students from more than one school.

Right.

So. Yeah, go ahead.

I'm just going to pivot a little bit. The story with the amenities and the capital improvements that you were describing with student housing clearly sounds a lot like the office narrative today. What is your outlook on office? What's your allocation like towards office right now?

Well, we have basically zero allocation to office and some of that had to do with COVID and some of it has to do with, do with the fact that the, in my view, the only proper, the only office properties that are doing well are the brand new ones. When you look at what Brookfield has done and other major developers in New York City, it's, you know, it's the stuff in Manhattan west, the stuff that one Vanderbilt. So on that it's getting all the attention now I'm hearing and maybe James and Kim, you can attest to this, it's starting to trickle down a little bit as, as those properties have filled up. Yeah. But you know, like I think one Vanderbilt, if, if I'm correct, the last lease they signed at towards the top of the building was $300 a square foot. I mean that's, that's, to me, that's amazing. I don't know, I don't know who can pay for that, but somebody's paying for that now. I know at Manhattan West, Brookfield signed a law firm at about $200 a foot. So if you're wondering why your legal bills are going up, here's your reason. Yeah. And I think, you know, the retrofit like you take the buildings on 6th Avenue, many of which were probably built in the 60s and had, you know, before COVID had been pretty full after Covid, you know, they're, they're all struggling. And the retrofitting of those properties to compete with these new properties is enormous. So, you know, I'm not sure that 6th Avenue can convert so easily to residential, but you, you can see why more and more developers are looking at residential as possible conversion. So from, for our perspective, commercial office isn't on the radar right now. Unless on the lending side, something really special came up. But in the four years that we've been doing this, there's not been anything that special yet.

Well, Steve, seeing how over the course of your career you've invested in all different asset classes and really up and down the east coast and beyond, you obviously have a knack for finding, you know, where the opportunities are and with timing. So we really appreciate your sharing your story. Just one parting question before we wrap. So we have a lot of listeners right now. You know, some might be in school, some might be brokers looking to go to the principal side. Seeing how you've been involved again, pretty much in every role up and down the capital stack. If someone said, look, Steve, I'm ready to get into the business, I want to, let's say, go work for a larger shop and I want to really learn how to source opportunities, how to operate them. Is there a preference or do you have any advice on where do you go work for the ownership side? Are there advantages to go working for equity shops, debt shops? Any advice there on where someone might want to begin their principal career?

Let me set a preamble in that. I think real estate is one of the greatest industries that you can be involved in. I, I sort of lucked into it. It wasn't like I grew up saying I wanted to be in real estate. I sort of stumbled into it. But what other business is there where you can combine finance, marketing, mathematics, management and so on in, in, in one pot and get to experience it all? So I feel very fortunate that I've been involved in real estate. There's never been a dull day in my career, so that's number one. Number two, if I had a preference in how to learn the business, I would suggest people do one of two things. First, probably number one on my list would be a job and leasing a special commercial office. Leasing. Because that's how, in a way, that's how I started. My first job in the real estate business was running The Chrysler Building properties. So that was 2 million square feet, one square block in New York City. Most of the job was leasing. And if you put your mind to it and learn everything about that lease, every line, what it means, you probably now know 80% of what you need to know about real estate, because every line in that lease means something. So to me, that, that gave me a real leg up in terms of really just understanding the business, but also understanding mechanical systems, understanding how rent inclusions work and rent escalations work, how to market a property, and so on. If I had a second choice, it would be go into asset management, because you, again, need to know everything about the property and both the good and the bad and what can happen. And when, as I first winthrop, we would take a new acquisitions guy and send them to New York to work in asset management for one year before we would let them loosen the acquisitions. So to me, those are the two best ways. Probably not the only ways. You know, James, I don't know exactly how you got into it, and there are plenty of other successful people who've done it a different way, but at least from my personal experience, if you really want to understand the business, those are the two best ways to get a leg up.

Yeah, real estate really is so interdisciplinary, and there are so many different paths that you can go down. So thank you so much for, for sharing yours and your story.

This has been amazing. You've been, like I said, an incredible friend, partner, and mentor. So we just, we really appreciate your sharing your story and we'll make sure, as always, in the show notes, to include how to connect with you and learn more about what River Oak is doing. So, and for all of you listening, and thank you to those joining the live stream. And I, I could see you all stuck with us. I could see the numbers. You know, it's a good conversation when, when you see the numbers are going up and not trailing off. So we appreciate that. And you know, the best thing you can do. And again, if you're listening to this later, once it's released as a podcast, is share this episode with a friend. That's. I do that all the time. I listen to multiple podcasts per week. I hear something that I know would be helpful to someone, I pass it on. Right. And that's a great way that you can share the knowledge. So, on behalf of Kim and myself, thank you again, as always for joining and we look forward to connecting with you next week. Thanks again, everyone.

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