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Wartime Allocators & Rialto's Double Agent · The Promote Podcast

• Will Krasne (00:00) Don't Hiten Samtani (00:01) Let's go back to fifth grade. Will Krasne (00:04) My sculpture project about the Mayans won awards, so happy to. Hiten Samtani (00:09) You lent your classmate 10 bucks for lunch money. He can't pay you back. So you cut him a deal. Fine, give me seven bucks, but in two years. Will Krasne (00:16) I am a benevolent lender. Hiten Samtani (00:18) Very generous, but here's the thing. You're also last in line in the cafeteria, so everyone else gets served before you. So you've just agreed to eat a $3 loss, and you're still last in line. Will Krasne (00:28) and on Taco Tuesday no less. Hiten Samtani (00:30) Your classmates are losing their minds. Why would he agree to take the hit? But you don't care, because you got your classmate to pay you $1.50 in exchange for that term, and your other classmate, Dave, lent you $6 of that $10. Will Krasne (00:42) And let's be honest, who cares if babe loses? Hiten Samtani (00:55) Welcome back to the Promote Podcast, your insider guide to the money and mania of the CRE markets. I'm Hiten Samtani Will Krasne (01:01) and I'm Will Krasne Hiten Samtani (01:03) A shout out to our sponsors, Bravo Capital, a leading HUD in Bridgelander. Will Krasne (01:07) and LoanBoss, the best-in-class CRE debt management software. Hiten Samtani (01:11) This week, we have no choice but to tackle the topic of war. What is it for? What is it good for? The conflict with Iran continues to roil markets and CRE's biggest allocators are in sixes and sevens. Fewer young people are going to college, which puts a big question mark on what's historically been one of the biggest drivers of real estate activity. And finally, with special servicers continuing to play an outsized role in the market, some of their more, shall we say, exotic strategies are coming under a pretty harsh spotlight. Will Krasne (01:39) exotic, scummy tomato tomato. Let's get started with the punch list, our signature rundown of the newsiest news in CRE. ⁓ Hiten Samtani (01:51) I'm pretty galvanized, baby. Will Krasne (01:54) Yeah, so Tom Steyer, is Mount Rushmore, Farallon, a firm he founded in the 80s in San Francisco. Yeah, smartest of the smart money, hasn't been involved for a while, had a very kick-sotic, chaotic. Hiten Samtani (02:00) Heavyweight. Quixotic? Yeah. Will Krasne (02:09) Quixotic run for president came off terribly. He's now having a slightly less but still pretty Quixotic run for governor. He founded a firm called Galvanize, which was committed to decarbonization of real estate. Hiten Samtani (02:22) I thought that was out of style. This is the thing that fifth wall and a bunch of those guys raised tons of money on a couple of years ago, but since Trump came in, it's just the most unfashionable thing now. Will Krasne (02:32) Well, you've got two guys, you've got Chris Saka with lower carbon capital, and then you've got Tom Steyer. So you've got two legends with great track records who are switching to this. No offense to our guy, Brandon Wallace, but the returns for those two are slightly better. Galvanize just raised about $370 million for the strategy. And what I think is interesting about it is that they're using the AI boom as part of their fundraising narrative, but just the contrarian view, which is that AI and data centers are going to be pushing up utility costs and we're going to figure out how to bring those utility costs down. So we'll buy stuff. and increase NOI that way, which sure. Sure, Jan. Hiten Samtani (03:05) Right. they trying to buy buildings and then is this a real estate play combined with smushing down those costs or what? Will Krasne (03:11) It's like a real estate slash opco play. looks to me sort of like they've just been buying regular industrial multifamily and doing like the Freddie green rewards type renovations. Again, we talk about how narrative drives flows and this is a way in which the counter narrative can also drive flows. Hiten Samtani (03:23) another black box of a program. All right, next one. This is fairly seismic. Road to Perdition? Will Krasne (03:35) Road to Housing? The Road to Housing Act is pretty tectonic shift. President Trump had issued executive orders banning or limiting institutional ownership of single-family rentals after the Great Recession. Hiten Samtani (03:49) That has become such a major part of the equation. Will Krasne (03:51) And a lot of those firms were sort found on the backs of going to the courthouse with cashier's checks to buy huge swaths of foreclosed homes in Greater Atlanta and Tampa and all those places. Blackstone did it, Invitation Homes, AMH. There was really a whole industry that birthed... Boom. And I shifted towards cottages and they'd done sort Hiten Samtani (04:02) Starwood made a killing out of that strategy. You were going to say cottage industry, weren't you? Will Krasne (04:19) dedicated build to rent. So essentially building houses for the purposes of renting them out. So you're not buying existing homes. That's really been the case for the last four five years. Hiten Samtani (04:28) Yeah, so in contrast to say a Lennar or Tole which builds homes with the end user being an individual buyer who would then live in that home. This is like, we're going to keep these on our books and rent them out to this growing class of affluent people who are not necessarily looking to put that white picket fence, American dream home ownership thing. Will Krasne (04:46) Home builders would build these, then firms like Predium or BB Living would buy them. Or in some cases, those firms have their own in-house development capabilities and would do it themselves. so, Invitational Homes just bought a built-to-rent development company because, again, that's really where the industry is going. It's towards these large, dedicated built-to-rent communities that are detached homes. The executive orders banned institutions from owning single-family rentals, but there was an explicit carve-out for BTR. So not But again, the industry had shifted away from that over time. Last week, the bill was released and there was a provision slipped into it, which basically was a forced sale for any institution that owns a BTR community within seven years. Hiten Samtani (05:31) It's always curious to me how they come up with these arbitrary numbers about turnover time. Is this like the, a fun life cycle basically or what? Will Krasne (05:38) It makes absolutely no sense. And what this essentially meant is that if you build or buy a built-to-rent community, you had to sell it to an end user. So you couldn't sell it to another investment firm. You had to sell it to a homeowner in seven years, come hell or high water. There's a lot of things wrong with that. It is preposterous policy. Built-to-rent homes are just not going to get built because no one's going to want to take that risk. And then also you're banned if you're an institution from buying these things. Something like a quarter million homes have been built as BTR over the last four or five years. There's about 60,000 a year. Those are homes that are essentially not going to get built. Now there's one carve out, which is that the definition of home. Hiten Samtani (06:18) is Will Krasne (06:20) two or fewer continuous building. Hiten Samtani (06:23) my god. This is being set up to be gamed so hard. Will Krasne (06:26) Well, this isn't even the best way to game it. So if you have three or more attached units, that is exempt from this. So an attached townhome community exempt. But if you had villas or cottages that were sort of duplexes, those are part of this. And again, that's a huge portion of what has been built as BTR. Now, the language of the bill also says at seven years, though, you don't have to sell it. You actually just have to offer it to the market. Now, I know what you're thinking and yes, this is exactly what's going to happen where a three bedroom, two and a half bath in Murfreesboro, Tennessee is going to be offered for $9 million for six days to satisfy the requirement. Hiten Samtani (07:03) This is a little controversial. When you get an H-1B visa in the US, you have to basically advertise that you can't find an American candidate that could do this job. So what people do is they just stick the ad in some freaking random paper in incredibly small font. They run it for 30 days consecutive and that's it. The broader point, Will, is when you create stupid policy, you kind of encourage stupid workarounds to that policy, right? New York, the 99 unit constraint. Will Krasne (07:25) Yeah, you Hiten Samtani (07:29) is leading a lot of developers to just basically file multiple plans on the same site for 699 unit buildings, for example. Will Krasne (07:36) And also just to be totally clear, this is completely against property rights because a lot of the communities in BTR, if you're buying from a home builder, they'll be deed restricted for a period of time. So essentially what the government's saying is like your property rights kind of don't matter, which there's a constitutional issue there. So glad to see that the business utopia we were promised by this administration is essentially just violating everyone's property rights. Hiten Samtani (07:57) The big bad private equity is the easiest punching bag to have in the whole housing debate. The most emotionally fraught asset class, obviously. It's just easy to do this. Okay. Next one. So we talk a lot about finding opportunity in broken capital stacks and we've seen so much of that over the last call at 18 months. There's also opportunity to be found in the portfolios of convicted felons. Will Krasne (08:19) Yeah. There's alpha in all kinds of places and what crowdfunding give us and crowdfunding can take us away. Hiten Samtani (08:28) So, 1500 Barkit in Philadelphia, massive hulking complex, also known as Center Square. in play for a while, and now we have a pyre. Will Krasne (08:37) PMC Property Group and Dean Adler, pretty of Lupert Adler fame, one of the leading lights of PA real estate. They are buying this for what? Just under $95 million? Hiten Samtani (08:40) pretty big name in there. That is what, like a third of what? Nightingale? Nightingale, obviously the epic Ellie Schwartz vehicle that is responsible for what is said to be the largest crowdfunding scam in real estate history. Yes. He had gone on this buying spree, buying up these hulking office towers all over Atlanta. We've talked about the Atlanta Financial Center as well. Will Krasne (09:08) I never bought it. That's sort of the problem. Hiten Samtani (09:11) That's true, Important clarification there. But he basically left quite a large and impressive portfolio. So PMC and Adler are going to do what an office to Rezzi play at, imagine here? Will Krasne (09:22) It's such a big complex that they're going to do a little bit of this, a little bit of that. I'll be 500 apartments, a 300 key hotel, and then they're still going to keep 500,000 square feet of office. That's how big this property is. So you talk about price per pound. This is pretty stinking cheap. Hiten Samtani (09:26) Little column A, little column. permit me a little media inside baseball here on this particular deal that I found fascinating. Of course, it had to go wind itself through the courts. CBRE was the court appointed receiver on this and was marketing this. Normally in a court appointed process, the sale price and all of the kind of financial details are out there for everyone to see. CBRE though was so desperate for ink in Green Street that they basically asked the court to hold off on disclosing all that so that they could get that hit in Green Street, which is where all the institutional investors hang out. Will Krasne (10:08) paper record. Hiten Samtani (10:11) You talk about having kind of the dream LP in your project, someone who just writes a big check, doesn't ask you too many questions. Really fascinating example coming out of Manhattan. Will Krasne (10:20) You want a guy who's really busy with other types of business, who's got, you know, he's got an island, you know, maybe he'll invite you to for a crazy party. But when the deal goes well, we found out one of those this week with Jeff Epstein. Jeff, I'm talking about the New York. Hiten Samtani (10:36) What the hell are you talking about? So there's a project, Madison Square Park, it's being developed by a called David Mitchell. Some people might remember that name because he's also Zeal Feldman's partner on this new affordable housing venture called Good Homes. He tapped Jeffrey Epstein to fund one of his kind of splashy Manhattan condo projects. Will Krasne (10:53) Real Deal had an article calling him like the embattled David Mitchell. How is he so tied into Jeff Epstein? He was even like meeting with Saudis on behalf of Epstein. They were very intertwined. then Jeff put this in, did no diligence and very splashy condo project. Yeah. One of the buyers was. Indeed. I'll. Rear post-afflict. I can't quite keep the timeline straight. Hiten Samtani (11:11) JLo herself. But apparently Epstein got cut a really nice deal here. So not only did he serve as a regular LP, he also invested in the development vehicle, which basically gave him a really nice return profile. There's a quote in here from a rival developer, I guess, who said, we would trip over ourselves to do that deal. New York real estate has always kind of been a black hole for shady money. Developers tend not to ask too many questions about it. Epstein thing aside, this is just, this is how it works, right? Nothing was unusual here except that this was Jeffrey Epstein. Will Krasne (11:45) Totally, it's par for the course. The org chart's crazy for a deal this size. Takes longer than you think, it's more expensive than you think, and everyone makes a 1-7 and says, eh, okay. Hiten Samtani (11:54) Alright, that's it for the punch list. We'll be back in a second with war. Alright, I'm here with Aaron Krovitz from Bravo Capital. Aaron, let's get right to it. What's the story behind this mythical 100 % HUD approval record? Will Krasne (12:15) straightforward. We have an amazing team. We're a pure play HUD. We're focused on bridge to HUD all day. We're both fully HUD licensed and we also offer a balance sheet bridge financing where we could finance deals over a hundred million dollars just like we did in Miami, Brooklyn and Jersey City. Hiten Samtani (12:31) And what's the secret sauce? How do you put it all together? It's alright. Will Krasne (12:34) It's underwriting. We don't rush deals to market and hope they stick. We know what HUD wants before we submit, so there are no surprises. And we have a real balance sheet. So when we go, we go. Hiten Samtani (12:44) You were telling me when we were chatting offline that you closed a HUD Express lane deal in four days? That's absurdly fast for HUD. Will Krasne (12:50) Hit 10, that's why we get up in the morning. At Bravo, we're here to break records, we're here to innovate, and when you have tight documentation, the right underwriting, that means speed, approval. Hiten Samtani (13:00) And speed means the sponsor can close quick. Thanks Aaron, good to have you on. Will Krasne (13:03) Thanks again and you can find us at bravocapital.com. Hiten Samtani (13:07) you We've carried out some of the most powerful, complex military strikes and maneuvers the world has ever seen. We're major strides toward completing our military objective. And some people could say they're pretty well complete. Will Krasne (13:17) home and You said the war is quote, very complete. And how long should you You could say it both. Hiten Samtani (13:44) So last episode we made passing reference to the conflict in Iran which had just started. Now we're very much in the thick of it and markets are completely discombobulated. So we got to talk about what that means for CRE. Will Krasne (13:56) On our video, we need to make sure we have the blaring Chiron marketing for oil. But yeah, look, this is a really big deal for CRE. We've been in an era of high rates for the past few years. Trump's trying to get his handpicked Fed guy in there. success. Who, again, the height of the Great Recession. very much middle of Yeah, cares about inflation. But oil prices are skyrocketing. Oil and energy is a huge input into inflation. so oil was over $120 a barrel. It's come down a little bit. Hiten Samtani (14:09) That's right. Much cares about inflation. Volatility is something we should point out here. It's been zigzagging like crazy over the last... Will Krasne (14:28) It was up like 25 % or something in a week and some of the futures moves were some of the most violent in memory. It's going to impact the inflation numbers. Anything with energy and input is going get more expensive the longer this goes on and that's going to really offset the declining rates. Hiten Samtani (14:43) Some of the world's biggest allocators are obviously major players in the energy markets. Think of what Nikolai Tangin is going through right now from Norges. ⁓ Will Krasne (14:52) I just imagine he's just like very chill hanging out enjoying his socialized ⁓ health insurance in his podcast. Hiten Samtani (15:00) We're making light of this, but obviously this is a major, think of what happened in New York City in the 1970s during the oil crisis. In fact, things had gotten so bad that the great families of New York real estate actually got together, corralled by Lou Rudin, and prepaid their property taxes to the city. For some reason, I can't imagine any of them doing anything similar now. It's just a different story. Will Krasne (15:20) They're not really the great families anymore. You'd be getting Bruce Flat, actually. Connor Teske. Yeah, to try to do that. yeah, this is what happens. It's going to make development much more difficult. Oil and energy prices going up are tax on consumers. Consumers have already been stretched. We've talked a lot about the supply side of the equation for multi especially. Now we're going to have to wrangle with the demand side of the equation. Like what happens if that goes down? Hiten Samtani (15:25) Yeah. This is also, Will Wright, the ultimate vibes question. Besides the very tangible impacts on, this is the ultimate vibes question because you have this war now. We just kidnapped the president of Venezuela a few weeks ago. The point is under this administration, without even making a political point about right or wrong, if the trigger for war can be that quick, what does that mean for long-term investment decisions by Alec? Will Krasne (16:06) Absolutely. Everyone hates uncertainty. Investors hate uncertainty. It's almost like, me whatever the rules are and as long as I know what they are, we can figure out a way to build 99 units. when it's just a hair trigger, we might go anywhere, anytime. That makes it really, really hard. And if you're a global allocator, we're not just talking about the US. just talked about Heinz is expanding into the Middle East. Like, what does that look like right now? What happens to trying to buy Asia real estate? Hiten Samtani (16:30) conference and some of the stuff people were saying. Will Krasne (16:32) very timely. Some of the quotes I thought were really, on point. On stage, speakers noted the war was already having an impact on sentiment, even as many said it was too early to judge the long-term ramifications. People are, quote, Hiten Samtani (16:44) People are very scared. Yeah. Hamish McDonald, Black Rocks Asia Pat Guy. Will Krasne (16:48) Yeah. And he said political risk is now front and center, although adding that Asia is quote, relatively safe, but nothing is locked in on the capital raising or deal front. And that really says it all. You always want to have a minimal time in the market because only bad things can happen. If you're in the middle of raising a big real estate fund, this is something that you've got to contend with. Hiten Samtani (17:09) When you're raising money, LPs are looking for a reason to say no, right? The success to raising money consistently is just barrel through each reason. This is a pretty damn big reason to say not yet, right? And not yet is as good as no. Will Krasne (17:22) Not yet is as good as now because it takes so long for these wheels of the big institutional allocators to turn. And also how many deals in the last week that just got re traded or dropped because the 10 year went up 25 basis points in a week. It makes it really hard for transactions to happen. We've had low volume of transactions because of a bid ask spread and now there's going to be more potentially because of uncertainty. Hiten Samtani (17:46) And we also have no real end game in sight here. The administration is kind of sending mixed messages about A, what the goal of this war is, B, how long it could potentially last. We could call it mental success right now as or we could go further. Will Krasne (18:02) and we're going to go further. We also have the dueling forces of the worst jobs report since the pandemic. On a jobs report like that, you would have imagined that rates would have come in pretty significantly. And in fact, the opposite happened because people were overwhelmed with fear that oil was going to increase in price and drive further inflation. You generally think in a war, especially a war where there's a bad job market, Hiten Samtani (18:09) Guy JP has something spicy on that. Will Krasne (18:29) Everyone's piling into safe assets. That's not been the case at all. Hiten Samtani (18:33) You typically think about real estate allocation and the ensuing investment as he who has the gold makes the rules, right? Maybe we need to modify that. He who controls the nuclear codes makes the rules. Will Krasne (18:44) Yeah, and I think this the final quote from Perry kind of says it all offstage fund managers were even more candid some of the participants said their major worries that a prolonged war will drive up inflation of borrowing costs which will not just dent returns but may also weaken investor appetite for new deals and that is what this entire industry is built on we've seen what's happened over the last year to date essentially with KKR Apollo Blackstone on private credit fears fears that AI may not generate the returns that we thought What happens if investors stop allocating to new funds or looking to do new deals? These things are a flywheel that requires constant motion. that motion, God forbid a white boy gets a little motion. But if that stops, these things could be for a world of hurt. Hiten Samtani (19:36) Well, you've worn many hats in your glorious life so far. Pro baseball player, thespian, tornado remediation specialist. I want to ask, which was your least favorite? Will Krasne (19:45) First two, ugh, they were dreams. The third was a nightmare. Turning into a dream though. However, if you asked me a few months ago, I would have said Excel Monkey was my least favorite. Modeling out the debt tab was really, really annoying. Maturity dates, extension options, rate caps, ugh. My spreadsheets were beautiful, but at what cost? Hiten Samtani (20:06) Sounds like you had good ROI, but your ROIBD, return on invested brain damage, not so good. So what changed? Will Krasne (20:12) I discovered Loan Boss. All my loans, live, on one screen. No more, let me just pull that up while I jazz hands a capital partner. And the extension option tracking with automatic notice reminders. I used to have a Post-It note on my monitor for that. A Post-It note, a 10. But the one-click DSCR testing, every lender adjustment, every unique requirement, automated. Ugh, my God. Hiten Samtani (20:33) No more getting surprised by your own cap stack. Listeners, check them out at loneboss.com, that's loneboss.com, and tell them the promo sent you. Will Krasne (20:52) There's just fewer students going to school. Hiten Samtani (20:56) seems like a pretty basic nothing inside, but I think it defines the problem here. Taking the skyrocketing price of tuition and the amount of obscene debt you have to take to even just go to a normal school nowadays, combine that with the feeling that some of the youths have... ⁓ To what? That higher education isn't really the path to a higher career now? Will Krasne (21:10) Dudes! When I talk about things that like keep me up at night, like this is, this is really it. This and like the declining birth rate. Hiten Samtani (21:22) The Maxim has always been meds and eds, right? Will Krasne (21:25) Every single investment committee memo you see for a multifamily deal talks about our office, retail, talks about meds and eds. Like we are really focused on meds and eds, which are medical and education. Those are the stickiest jobs. They're good paying, but they're also people who are generally going to rent. And it's not just the students, it's the college professors, it's the folks who work at the university, it's the researchers, it's the hospital workers, it's the administrators. And these are tens of thousands of jobs throughout. pretty much every major city in America. Hiten Samtani (21:56) Not to mention the catalyzing effect that a higher education campus can have on all the real estate around it, right? You'd think of NYU and how that area has been transformed or even more dramatically, Harlem is now Morningside Heights. Will Krasne (22:10) Yeah, they just tend to expand over time. It's important to say, who said that there are fewer people going to school? Like, in what city is he from? Hiten Samtani (22:18) Fili. cradle of higher education in the US. Will Krasne (22:22) This was Anthony Bricali, the associate vice president for planning, design, and construction at Drexel, which is one of the previously expanding universities in Philadelphia. A major, major shift. And it's going to require a change in how firms underwrite investments because you can't rely on, well, you can. Again, these things can last longer. thought people are still, AOL still makes like a billion dollars at EBITDA. But you can't just bank on a no-name college or even a mid-tier college driving economic value right now. Hiten Samtani (22:53) let's put some numbers to it, right? The total number of annual US high school grads peaked in 2025. It's expected to decline by 13 % by 2041. I mean, that's significant. Will Krasne (23:04) And there was an uptick of students born prior to the OA financial crisis, and that's been keeping this train going. But that boom is burning off in the form of lower college enrollment. yeah, 13 % is tectonic. It's Yeah. Can't even express how massive that is. All of these ancillary services that are necessary to support campuses, those are going to get hit. What happens to all of these jobs? It's emblematic that we're looking at this massive paradigm shift between AI. Hiten Samtani (23:18) Huge. Will Krasne (23:32) how injury level jobs work. This type of stuff happens. mean, it changes everything. Hiten Samtani (23:37) to spare a thought for my guys at the student housing operators. How are they going to kind of grapple with all this? Will Krasne (23:42) They already are. You're seeing schools go bankrupt. You're seeing campuses get sold on 10-Eck. Hiten Samtani (23:47) been some lower level consolidation in some of these schools. Will Krasne (23:49) And that's happened at schools you've never heard of and towns you've never heard of. But it's coming. It's coming for the lower hanging, super expensive, but don't really get you a brand name degrees. Those schools are really tough. Like if you're Ole Miss, you're going to crush. Like if you're at University of Georgia, like you're going do great. If you're Princeton, no problem. Hiten Samtani (24:07) you're basically going between places that have an elite reputation, right? The IVs and the West Coast IVs, so to speak, and then the schools that give you that kind of rich, full 360 college life, right? Everything else where you were going there to potentially get a job that pays you 50 grand to start and then kind of work your way up, you might as well go to whatever the new equivalent of University of Phoenix is, right? That's the thinking here. Will Krasne (24:32) All of these things, you don't need that much of an indifference because everything's about the marginal renter. It's the marginal tenant. Those are the people that drive the market. And if you just have that little bit go away, man, the softness, literally every memo I wrote at Starwood and Carlisle, this is a strong meds and eds market with the stickiest tenants. it's just the things you could rely on for decades, really, maybe just aren't there anymore. Real estate's always going to be there. All of these things change. The way we use space changes, the use of space doesn't. So again, if you're just myopic about how you look at one of these things and how you underwrite or there's only one way to do it, no, absolutely not. ⁓ Hiten Samtani (25:11) quickly do allocators and the biggest fund managers catch on to this kind of thing? The language we're talking about, the MEDS and EDS language, how quickly do you reckon it starts being asterisks just a little bit? Will Krasne (25:22) It's like a week leasing season, then it's two. And then it's like, well, actually, this market's really cheap. We never thought we'd be able to buy in at this type of basis or this operator didn't know what he was doing. All of sudden, you're like trying to catch a falling knife. Hiten Samtani (25:33) Seeing the auction sites with campus sales, that's a little... Will Krasne (25:36) I think George Washington, very expensive school. And you're like, these guys, they're not hurting for cash. They just sold their Virginia science and technology campus to Amazon for a data center for $427 million. Hiten Samtani (25:48) I don't know dude, that might have just been very smart business on their part. Will Krasne (25:51) It might have been, but at some point, if the endowment was big enough, if they felt good enough about enrollment, it's like how Hemingway said you go bankrupt. If you were just relying on one of these types of demand generators, like you can be in trouble. Hiten Samtani (25:55) I it was. We had an unusually macro episode so far. It's just we couldn't help it. There's such big things happening right now and we needed to talk about, but let's go micro here. This is the kind of thing we live for, Will Krasne (26:20) This is great. So you flagged this, so why don't you kick us off? Hiten Samtani (26:24) quote the immortal Alonzo Harris. Will Krasne (26:27) It's not what you know, it's what you can Hiten Samtani (26:29) is improved. The real estate soulmate to that is it's not what you owe. It's what your special servicer lets you get away with. We're seeing this as special servicers are becoming more and more main characters in the CRE capital market story. The kind of deals they're striking in the background with with sponsors are getting a lot of scrutiny because again, the ones that are ultimately holding the bag are bondholders. But the ones who have control over what happens is not necessarily them. Will Krasne (26:57) And those incentives aren't always aligned either. So why don't we just sort of get into it. This was a creative office in Long Island City. man, like that, it just brings me, sometimes you think about like a certain bar or you hear a song and you're like, it just brings me back to a time. I hear creative office in Long Island City and I'm like, this is like 2016, like anything was possible. Hiten Samtani (27:03) Creative Office. little time capsule. Any shitty building had a second life as a creative office. Rusting walls, all right. Let's make it a tech tenant friendly thing. Anyway, there's a JV between Atlas Capital, there's some of your guys here, Atlas Capital, Invesco, and Partners Group. Will Krasne (27:32) serious guys. So Atlas Capital now who are selling selling out 80 % Yeah. Vesco who are all over the place. And then Partners Group, which is the Swiss Hiten Samtani (27:36) And or Eddie Clarkson. They caught up for a second in the whole syndicator mess, by the way. was a million plus square feet of office, Long Island City. They got a $300 million SASB on it. So single asset, single borrower, CNBS deal. At the time of the deal, it was appraised at, let's call it half a billion dollars. Will Krasne (27:45) This deal shockingly didn't work. pretty good. So they default as any rational person would have expected. what happens is you go into special servicing and Rialto, who we've talked about a lot on this podcast and how they took over a bunch of the New York rent stabilized portfolio. Hiten Samtani (28:16) Oh, through the JV with Blackstone, right? Yeah. I still don't understand why Blackstone hadn't just bought these guys. They were apparently being shopped quietly in 2024 by B of A. I'm surprised Blackstone didn't pull the trigger because they were in the mix here. Will Krasne (28:28) I'm surprised as well, maybe honestly, because of stuff like this. So they default and your options are really like, give the keys back, try to sell it, which you can't try to refinance it, which you can't. So really just give the keys back, but they didn't. Hiten Samtani (28:31) You They didn't and Rialto struck a deal with the sponsors, which essentially said, all right, we're going to give you an extension. And then this $300 million outstanding debt you have, you have the option of paying it back in two years at a pretty steeply discounted payoff at what? $223 million? Will Krasne (28:58) Yeah, so was a pretty big haircut. So this is interesting because first I think, let's talk about the timing. So why did we also do this now? Hiten Samtani (29:09) did the DPO deal now because the appraisal was set to come in at a much, much lower value. And if that happened, they would have lost control of the process basically. Will Krasne (29:18) Yeah, and they wanted to keep control of the process because they got this DPO and you might think, okay, well, they have first loss, so why are they doing this? That doesn't really make sense. And the borrower kicks in. I assume that was to pay down the loan, no? Hiten Samtani (29:30) Close to 19 million bucks. Not quite. So just under 10 million of it went to a Rialto controlled reserve. Just over 2 million of it went to Rialto for the loan mod fee. And then the rest of it was to purchase a rate cap and finish closing costs and all that. So essentially none of it paid down the principal or went to the bondholders. Think of it as like that money essentially just funds the mechanics of the deal that Rialto put. Will Krasne (30:00) together. So essentially, like this is the acquisition fee of a special servicing deal. Like that's basically what we also got paid. Let's just call it what it is. And part of the reason why we also did this is if they get the keys back, they get nothing. And then they've got to take on this albatross. Hiten Samtani (30:16) Yeah, someone like a special servicer is essentially incentivized to keep the show going for as long as possible because they get paid their interest, their fees, all kinds of stuff. Will Krasne (30:25) So careful. I picked the wrong play, the wrong director, the wrong cast. Where did I go right? Right, and then they're getting this extra juice off the top. they're losing some of the principle, okay, sure, but they get to keep this thing going. And then there's sort of the hope note that they're on background saying... Hiten Samtani (30:42) Wait, wait, I think it'll be interesting for listeners how this worked out. So this is a great story, shout out to CMA, Commercial Mortgage Alert. So the bondholders are griping about how this was structured. There was no transparency. We just never knew what was going on. We got no justification for this process, et cetera. And this is what they said. This was a very good quote. They said, okay, great, grant the extension, that's fine. But you don't need to push through a loss with a discounted payoff down the line. It makes no sense. A B of A CNBS guy also said the following. This modification crystallized future losses while reallocating principal that could have been used to pay down bondholders into a reserve account. Rialto, by the way, did not comment directly for this story. They did take a different route. Will Krasne (31:25) Yeah, so they said on background, this will achieve a stabilized value execution that wouldn't be possible. And look, yeah, there's an argument to me that this thing's toast. Everyone takes a massive loss or alternatively, you buy a little bit of time. Hiten Samtani (31:31) There's an argument to be made there. Everyone takes a massive loss and the sponsor's not even gonna look at this asset. Like once they know it's... Will Krasne (31:43) Yeah, they're never going to look at it again. They're basically trying to give the sponsor enough incentives to see the business plan through. And this is something we haven't really talked about a ton. But if you're a sponsor and you're out of the promote or you're on a deal where you're losing money, those deals don't just end. You got to keep doing them. And so they're trying to incentivize the sponsor here to at least have one asset management analyst a week be like, hey, it's called Leasing Broker and be like, did we sign any leases this week? You talk about Realto not con... commenting directly, like you want to talk a little bit about how like background works and like why someone would do this versus commenting through a spokesperson. Hiten Samtani (32:15) You typically would not want to comment on such a sensitive story on the record, which means Realtor is probably not going to put their name and address bondholders directly. When you speak on background, which means, hey, this is coming from an insider, there's some authority attached to it, but you have plausible deniability if a bondholder says, what are you doing in the press coming up against us? So it's a really smart way to get your point out there, give the reporter or the press outlet some credence that, hey, this is real, it's coming from me, but it's not quite coming from you. So you kind of win-win there. Will Krasne (32:43) that makes sense. I think more broadly, though, there's a lot of these sort of organ deals which really needed a hope and a prayer. There's a reason like Starwood bought L &R. There's a reason why Rialto is so profitable. You talk about like rent seeking. It's the most rent seeking thing in real estate. Hiten Samtani (32:58) Absolutely. I think a lot of non-CMBS types may not be fully aware of it, but guess who gets to select the special servicer? Right, it's the controlling class representative, which is... Alto. This tension speaks to a broader gripe and growing gripe really with special services, which is there's too much opacity. It's like a black box. They're doing something in the mechanical turk and you don't know what it is. And as a bond holder, you just get that final sheet. Here are your losses. Will Krasne (33:05) Enlighten us. Here are your losses and you never had a say in it and you know this is a very path dependent outcome that you had no choice in. You're just along for the Hiten Samtani (33:36) we should say this is not only rail, so that's under pressure on these kind of things. Do you remember the case of that massive hold back on the ballast steel in SF? Yes. $164 million kind of went missing for a bit. Will Krasne (33:47) Yeah, for fees and costs and what... Hiten Samtani (33:51) It's a dynamic that's going to get more and more scrutiny as more and more stuff kind of hits the so-called wall of maturities and gets worked out. We're going to see a lot more of this stuff. We're going to see more litigation too. Your boy Carl Icahn came at realtor over his maltrade. Will Krasne (34:05) I forgot about that. Everyone's coming out against reality. You know, if Icon's mad at you, you must have done something wrong. But I think broadly, too, if you're a sponsor, like, where do you want to go for debt? And private credit has exploded. But CNBS has always been if you want the max proceeds for non recourse, like that's the way you got to Hiten Samtani (34:21) Did you see Al Ofer went to the CNBS market for the first Global Holdings, they did their first ever CNBS deal on 1250 Broadway. Pretty sweet proceeds there. Will Krasne (34:24) I did not. That's what CNBS is, but then you gotta deal with all this. And then gotta deal with realtor. Hiten Samtani (34:44) And that's it for the Promote Podcast this week. The war with Iran means that CRA's allocators and those who court them are in limbo. Markets like certainty. this ain't it. Institutional investors might have to rethink how big a driver higher education will be in their future plans. And Realto's DPO solution has some bondholders going WTF. Will Krasne (35:04) We'll be back next week with more CRE Insider Goodness. Thanks again to our sponsors, Bravo Capital and Lonebox. Hiten Samtani (35:12) You can find them at BravoCapital.com and LoanBoss.com. By the way guys, write us a review, it's been a while. Will Krasne (35:18) We keep getting the reviews but write them. Like, this doesn't take very long. Hiten Samtani (35:22) We're both sweating it out here. I try to make the best podcast possible for you guys. Will Krasne (35:26) You remember that era a couple years ago before he sold the ringer when Bill Simmons complained about I give you all this free content and you don't like it. That's how I feel. don't appreciate it. That's how we feel now. I thought it was bullshit when he said it, but now he was right. Hiten Samtani (35:37) I'll see you next week, Amigo. Thank you. Ciao. Will Krasne (35:39) Thank you.