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S2pocalypse Now & Pimco's Puppet Master · The Promote Podcast

• Will Krasne (00:03) Model doesn't mean anything. If you're an LP, the GP will say the model looks great. That means fucking nothing. And I'm Will Krasne. Hiten Samtani (00:28) A shout out to our sponsors, Bravo Capital. They're a leading HUD and bridge lender with extensive experience in both the multifamily and sniff worlds. Will Krasne (00:35) And loan boss, the best in class CRE debt management software. Hiten Samtani (00:39) This week we wade into the underbelly of restructuring, looking at Pimco's $1.8 billion lifeline on its disastrous office building bet. It's a valuable lens into the shenanigans that can happen deep in the nethers of the cap stack. Next, we gotta revisit the saga of Scott Everett, the multifamily syndicator, who's now declared that his $400 million fund is a donut. Zero return of capital. Look, we sensed this was coming, but it still hits. Will Krasne (01:03) Just like those margaritas and cabo. Some housekeeping before we get going. First, doing the mailbags still. I would have done it already, but we didn't get enough questions. We have way more listeners than when we did this last time. We should have gotten better and bolder questions. I'm like Ron Burgundy. I will answer anything you put in front of me. So email podcast at thepromote.com with any questions about not just real estate, anything, I will answer. Two reviews. We love reviews. So Hiten Samtani (01:13) Not enough love, what's going on? Will Krasne (01:33) Apple, Spotify, write whatever you want. That doesn't matter, but five stars. So it's a loophole. So even if you hate us, you can write that. But give us five stars. Hiten Samtani (01:41) SARS. And three, we're opening up a sponsor slot for the punch list. So you can hit us up at partnerships at thepromote.com if you want to get involved. That's partnerships at the promote.com. Will Krasne (01:51) And before we get into all of our stories, the aforementioned punch list our signature rundown of the newsiest news in C R E. Hiten Samtani (02:02) Baby. A B? Will Krasne (02:04) A B and Sons. Hiten Samtani (02:05) The mighty office and retail landlord out of New York, RFR Realty, Aby Rosen, aba to Will. So if you remember, RFR is Rosen Fuchs Realty. Now the Fuchs is, of course, Michael Fuchs, who had been hearing that he was out of the picture and so started digging around and realized that yes, in fact, when it comes to RFR's new American deals, Fuchs is no longer involved. He is still a partner in the legacy portfolio, and then he's going to take care of stuff in Germany. So a clean geographic succession. Will Krasne (02:34) One of my favorite closings the real deal ever did with A B, they ask, What's your biggest expense? And he's like, I've loaned my partner tens of millions of dollars and he's never paid me back. It makes sense. Fuchs has spent more time in Europe recently. I think A B still, despite being in St. Maritz and St. Bart's and all the different saints on Instagram, is ostensibly in New York. Hiten Samtani (02:53) He's a rare hybrid between a New York real estate titan and a cool New York guy as well. He's a top tier social aide. Will Krasne (03:00) Yeah, he is. He's married to what, Samantha Broadman, who's Boardman Yeah, big socialite. Makes sense. But also he's got the kids now. Real estate is fathers and sons as we say. And they're coming into that age where they're running their own deals, they're getting more responsibilities. And RFR, it still the R is on the door, you know? Hiten Samtani (03:02) Yeah. Gabby and Charlie are the sons. They came in during COVID. So it was a triage mode almost right away, reworking that giant portfolio, two and a half billion dollars of debt that they had to figure out. And they're through the worst of it. They've done very well on the Seagram. They've had some big refines and restructurings. Some big sales as well. I think they sold north of one and a half billion dollars of stuff in recent months. And we've talked about some of those trades. And now they're on the hunt. They're looking to develop. And it's pretty clear that it's going to be A B and the boys going forward. Will Krasne (03:34) And some big sales. Good band name. Hiten Samtani (03:49) Okay, next one. I love in general when the promote looks at these characters behind the scenes. So what's going on here? Will Krasne (03:56) We talked previously about Ken Griffin creating the Citadel corporate campus in Prickle, but how does one actually effectuate a full condo buyout? What's the name of the guy who did the buyout that we talked about? Joey Colombo the Legend. So Ken's guy, Joey Colombo, is actually a realtor named Mario Borda who has really c created a little niche of doing these condo buyouts. And there's a couple things that are important to note. You don't need to get all of them. You need to get eighty percent. Hiten Samtani (04:00) Mega Campus. Wait, Colombo? supermajority to then essentially effectuate a sale or push the other holdouts to sell. Will Krasne (04:30) This does though is it creates a lot of leverage because you don't want to go first if you're one of the condo members because you get the lowest price. So the folks who go early before it's clear that someone is trying to do a buyout, they get the lowest dollar. But if you wait too long and you're the 81st percent, you get nothing. You get nothing. Good day, sir. So there's this interesting dynamic between wanting to wait but not wait too long. And Borda has done a great job of leveraging this. Some of these stories about how he gets these things done, and it's scores of transactions per deal. It's not going to one or two folks. This Hiten Samtani (05:01) This was a what a hundred and thirty-eight units. There's a hundred plus transactions you had to basically do in the span of a couple of years. So this is a long game. I wonder how commission structures and all that work on something like this. Do you get paid per unit and then you get a kicker once you deliver the supermajority? Will Krasne (05:17) There's gotta be something like that too. Because I think your budget also differentiates as well. Because I think in this article, it talks about how he kept telling people he wouldn't go over a million dollars, and then of course, like 35 units sold for more than a million dollars. You can't just go in and say, like, I want to buy this, I wanna pay more and more and more. Because the higher you offer folks early on in the stack, the more it becomes known that someone's trying to buy the whole building. Our true enemy has yet to reveal himself. So it's really this delicate dance. And it's about finding replacements for people who sometimes aren't financial Hiten Samtani (05:49) It was reminding me of two things. One is rent stabilized buyouts in New York City. Yep. And the other is assemblages. Assemblage, the art is very similar. It's stealthy. It's behind the scenes. It requires a lot of patience. You've got to strong arm people, cajole people, coax people. The payoff can be massive, but you can also get stuck. Yes. Very, very badly if you don't execute correctly. Will Krasne (06:09) And I think what shows that is that this is the rare article with a Miami realtor who did not respond to several requests for comment. Hiten Samtani (06:20) Okay, next one. More AUM gobbling. Kane Anderson, they've been buying up a bunch of companies, and they too, in turn, have been gobbled up now by Bridgepoint. Will Krasne (06:30) Yes, indeed. So it's just the real estate operations of Kane Anderson. That's about half their AUM for quite a lot of Bridgepoint stock, which very tax efficient is a good way to do this. But what's interesting, I think, too, here is they talked about how they need basically what our thesis of this podcast is, is that you can't be in the middle. You need the deepest pockets, the biggest balance sheet, the biggest reach, the biggest distribution. And Bridgepoint offers that in a way that Kane Anderson felt that they didn't have. So they pull the ripboard and sell. But of course it's right before a generational buying opportunity. The best that I've ever seen in my career. Hiten Samtani (07:04) It's described very poetically in this article in the journal. Paul Blank, who is now the chief executive of Kane Anderson, said that we believe we're at the beginning of a super cycle. What the hell is a super cycle? Will Krasne (07:16) Nobody knows what it means, but it's provocative. Gets the people going. No offense to Kane Anderson, but it's like a little bit slimmer pickings. It's not the brand name. Yeah. It's these other folks who are sort of in the middle, Artemis, this, Bridge even. You have to hit such escape velocity. And that number for what escape velocity means is it's bigger every day. ⁓ Hiten Samtani (07:20) We're just gonna see more and more of this. It's not Aries, for example. keeps going Absolutely. Okay, next one. So we've talked a lot about the rent stabilized carnage that we've seen in New York City. We've seen various LPs get wiped, we've seen bondholders get wiped. This was a particularly interesting LP who probably took a self driving car to check out the units before he invested. Will Krasne (07:57) Sergey Brynn probably the reason he's really against the wealth tax is because he dealt with the New York wealth tax, which is investing in rent stabilized buildings. Sergei Brynn had been an LP and A and E, and of course the A is Ariaga for John Ariaga, the legendary Silicon Valley investor. And John Ariaga's son is one of the largest landlords in New York, one of the largest rent stabilized landlords in New York. Hiten Samtani (08:18) Along with Doug Eisenberg, that's the A and E. They're huge in the rent stabilized space, so they have been one of the front and center casualties of everything that's happened since the twenty nineteen rent reform. Will Krasne (08:29) It's not been a super fun time to be A and E. And they bought out Sergei Brennan who was an LP in one of their funds ⁓ Hiten Samtani (08:36) Sold the dope back in the wire to Prop Joe for twenty cents on the dollar. Market wire buys, you feel me? Here, Bryn is selling his stake back to A and E for just six cents on the dollar. The statement that came up, do you want to read that here? Will Krasne (08:46) Oof, that's tough. Yeah, they're A and E, it's very funny. It's a very self flagellating statement in a lot of ways, where they say the simple and deeply troubling fact for renters is that institutional capital, both equity investors and lenders, are fleeing New York City's rent stabilized apartment sector. Now, I will say in real estate, we think we're the most important. Everything touches real estate. We love it. But one important thing to leave everybody with here is that don't feel bad for Sergey Brin. Because the gross value of the stake in these properties was valued at roughly seventy nine, eighty million, the records show, he still has a net worth of two hundred sixty eight billion dollars. Hiten Samtani (09:24) Just some perspective. Okay, I'm here with Aaron Crowitz from Bravo Capital. What are some of the elements of the business that you'd like to see come in or evolve in the next, let's call it 12, 18 months? Will Krasne (09:41) More optimizing for quality. And if that's what your goal is, your first question has to be, how can I attract more quality borrowers? And of course, higher leverage, lower rate, speed of execution, scalability, those all matter. But if you ask a borrower today, what do you want from your lender? They'll tell you, We want off-market deals, equity, and I want to bring in teams that can do that to not have a shoulder shrug. When your borrower needs something, right? And to not say, sorry, like I can't do that, but to say, I will run through a wall for you and I'm gonna find a solution. Hiten Samtani (10:20) Thank you, Aaron, and where can people find you? Will Krasne (10:22) People could find us at Bravo Capital dot com. Hiten Samtani (10:33) There are investment sales that happen from time to time, but in this market, most of the action, most of the good stuff is happening in the nethers of the capital stack. And we have a fascinating example that we're gonna chop up right now. So CXP, Columbia Property Trust, they had defaulted on about $1.8 billion of debt and they just received another lifeline, but the specifics are so interesting here. Will Krasne (10:55) They are indeed. So CXP, if you may recall, was taken private by Pimco at literally the worst point in the entire Hiten Samtani (11:02) Twenty twenty one for three point nine billion dollars. Really rough trade. Will Krasne (11:07) almost immediately defaulted. They had a debt package from Goldman, City, Deutsche Bank, the entire left lead side of the menu. Hiten Samtani (11:13) There was a billion dollars or so which was held on the balance sheet, and then there was about 500 million securitized and then some Mes and some B pieces. Okay. In 2023, early 23, CXP defaults on the debt, and this is when things start to get really interesting. Will Krasne (11:28) Let's take a little bit, Huey Lewis, back in time because prior to Pimco buying CXP, CXP had bought Normandy Real Estate Partners. That's right. Which was a big New York owner operator of mostly office assets. Hiten Samtani (11:43) And the co-founder of Normandy was a guy called David Welch. And when Welch sold Normandy to CXP, he went and founded a company called Greenbarn. And he did it in partnership with SL Green's former CIO, David Schaunbra. Yes, he did. So it's the two Davids in charge at Greenbarn. Will Krasne (11:57) But he was one of the only guys who left. A lot of the Normandy team essentially went over to CXP. Hiten Samtani (12:02) What we love to say is that in real estate incest is a good thing. Will Krasne (12:06) Yeah. I mean Hiten Samtani (12:10) It is. What do you want? It's true. So so Green Barn was backed by little known rhythm capital as we like to call them, and this was their first big place. Will Krasne (12:20) Important to note that David Schoenbrunn was one of the real architects of S.L. Green's credit strategy. So Green Barn with David Welsh, who was operating and running office assets in New York forever. Obviously, S.L. Green, one of the largest landlords. But David Schoenbrunn wasn't just an office guy, he was a credit guy. So Green Barn, they were looking to do obviously real estate equity, but also opportunistic credit. So Green Barn goes ahead, buys the golden piece, and then together with a bunch of their partners, started just sort of Slowly gobbling up other little pieces here. There's a lot of letters in this cap stack, so you know they're going pretty far down the alphabet. Hiten Samtani (12:56) Yeah, Greenbarn bought the Golden Piece, then they bought the City piece, and then when Taconics unsetted its real estate arm, most of their guys went to Exonic. And then Greenbarn and Exonic did a JV and bought up the rest of the Golden Piece, the City Piece, and the Deutsche Piece. Will Krasne (13:10) So at this point, what you've got is basically a distressed credit play where you've bought stuff below par, you get paid off, you make a nice little credit return. Hiten Samtani (13:18) The last dollar basis for Pimco was about $1,000 a foot on this portfolio. The lender group that came in, it's about 40% of that. Will Krasne (13:25) Yes, that is less. But again, at this point, if you control the senior debt, you really are looking for a credit yes profile return, which is someone's gonna come in and buy this, refinance you out. You get paid off and your discount to par is really what drives your return. However, this cap stack, very complicated. As we said, multiple tranches, many letters, and these guys know these assets really well because they owned quite a lot of cool. They finagle away through the back door to get control of this thing. Hiten Samtani (13:51) They're the same people. Sometime in twenty twenty four, the first time they did a loan mod, they negotiated some control rights. So that gave them a seat at the table to get things going. Will Krasne (14:04) And again, CXP is staring down the barrel here because office debt capital was really hard to find. And you've got people who are going to give it to you. You give up some control. A lot of running an asset is based on how much you paid for it. So it's people who knew what they're doing at a lower basis. Importantly, they got a bunch of leasing done because New York office has really turned a corner. Hiten Samtani (14:24) Bounce back with a vengeance, yeah. For example, at two twenty nine West Forty third, which is the old New York Times building, they did a renewal and expansion with Forcent, a marketing company, for two hundred and fifty thousand square feet. Pretty Will Krasne (14:35) Good. Pretty good. That'll work. What's interesting here is that a traditional lender is probably just gonna try to put a gun to the sponsor's head, get to sell it, especially these assets. These are ⁓ really nice assets. There's gonna be a bid. We've seen with other stuff that little known rhythm capital has bought, like Paramount. Everybody showed up at the doorstep for that auction. Yep. There would have been a bid. These guys a little more flexible, a little more nimble, and willing to do a bunch of dirty work and are able to operate these things. And so they're looking to Do what they can, bring in partners, rework the debt and flip the cap stack so that they're now running the show. Hiten Samtani (15:09) Yeah. So for example, in SF, there's an asset called Six Fifty California. They brought in Presidio Bay, which is a well known operator out there. There's one asset that they're probably going to give up on. There's another asset that they're marketing for office to Rezi. So they can look at a portfolio like this and do what needs to be done as opposed to execute to a specific mandate that just the lender has. Will Krasne (15:29) This is really the new world that we're in right now where if you were doing one thing forever and that thing ends up being out of favor or facing structural headwinds, do you just not do anything? I'm serious. Do you just keep trying to buy like class B office buildings and and renovate them if like that that business is kinda over? And so having the ability to switch and I think this is really like folks like Rhythm, Apollo, all these big firms that have this broader mandate. bigger pockets of capital, they can do these different strategies and have the capital for it. And that's again why we're seeing folks like Kane and Artemis all sell, because if you can only really do one thing and that one thing's really challenged, it's really hard to go raise capital. Hiten Samtani (16:07) Right. And the other point here, as we said, about half a billion dollars of this is securitized. Torchlight is controls the process in this case. The lender entity can't necessarily call the shots as such. They can't be a property manager, asset manager, they can't be an agent. However, there's some workarounds that you might be able to put in place here. Yep. Will Krasne (16:26) It's funny, Rupert Murdoch famously never really told anybody what to write. It just so happened that everything at the New York Post in the Wall Street Journal just reflected his worldview. What are the odds? Hiten Samtani (16:37) So what happened here was CXP hired Greenbarn as an advisor, an external advisor, and the recommendations that they would make were non-binding. Will Krasne (16:45) It's all semantics. These things are so big and complicated. And you may think like real estate's passive. It's incredibly not. That's like another one of the theses of this podcast. And so even if you are in trouble and your lenders are bringing down your neck, if you're able to have an external advisor and that person can help run the assets with suggestions, they might be good suggestions better than you could have thought of on your own. This type of deal. The markets get more efficient. Thirty years ago, you could just find a building off market that was way below market leases, repaint the lobby, get folks in at higher numbers, make your returns that way. That's over. Hiten Samtani (17:24) At least in the major markets at a scale you can't do that. Will Krasne (17:27) Outside of making, you know, a big market bet at inflection, like DivCoS did in San Francisco, like SL Green did with one Vanderbilt. But as the markets get more efficient, these types of transactions were being creative, figuring out loopholes the wrong word, but figuring out a way around to where you can exercise a modicum of control in such a way that you can drive the outcomes without necessarily being the guy on the piece of paper. You didn't have to do this 30 years ago. This is what you have to do now. Hiten Samtani (17:56) Two things on that. One, good use of the word modicum. I like that. Haven't heard that in a while. Thank you. And two, the same dynamic duo, Greenbarn and Exonic, are also in the other cap stack we discussed, the eight Carlisle slash 111 Washington Fide saga. That deal is finally closed. Maxim's come in with a $300 million loan. And then these guys got paid off on their nav loan and have now taken a Mes position for about $77 million or so. So CXP. What I'm curious about is if this hits all the marks that the lender group's hoping for, is this one of those rare occasions where you're actually gonna get, quote, equity like returns on a debt like position? Will Krasne (18:32) That's the whole point. You're certainly doing equity like work. Hiten Samtani (18:36) Sure. 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 (18:58) 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 dead tabs was really, really annoying. Maturity dates, extension options, rate caps, ugh. My spreadsheets were beautiful, but at what cost? Hiten Samtani (19:18) Sounds like you had good ROI, but your ROI BD, return on invested brain damage, not so good. So what changed? Will Krasne (19:25) 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. Hiten Samtani (19:39) Don't Will Krasne (19:41) I'm not proud of it. But the one click DSCR testing, every lender adjustment, every unique requirement automated, ⁓ my God. Hiten Samtani (19:49) No more getting surprised by your own cap stack. Listeners, check them out at loanboss.com, that's loanboss.com and tell them the promote sent you. Will Krasne (20:00) I wrote the titles for each of our segments and they don't often make it into the tape, but I think in this case it should. This segment is titled in our doc S Two Pocalypse Now. ⁓ Hiten Samtani (20:12) Well done. I love the smell of mapm in the morning. We kinda knew this was coming. This was one of the very high probability outcomes from all of this. Scott Everett, S2 Capital, $400 million multifamily value add, big quotes fund, return zero. Nothing! Zero dollars is gonna go back to both common and pref investors. Will Krasne (20:33) So this is like the Bluetooth Blutarski GPA. Well, he became a senator, so I think Scott's gonna maybe do all right here. Hiten Samtani (20:41) How do we get to this position? We had talked about S2 and their private read complications a few episodes ago, and we were actually accused of being a little bit soft on S2 in that podcast. And at the time we didn't know what we know now, so Will Krasne (20:54) I think there's two things that we need to differentiate between first, right? The losing of the money and the investments and everything. And then the fact that just today it was announced that S two Industrial posed through it. Yeah, you just pose through it. Like this isn't gonna take down his business. He Hiten Samtani (21:11) We made gajillions from fees on on this multiple. Will Krasne (21:15) Yeah, he's not gonna have to return that money. Maybe he faces some litigation or something just because people are mad. I who knows. But there's two separate things here, right? No one's really getting mad at Pimco for losing that much money on CXP that we just talked about, right? The point we were trying to make on the previous fund is that he is graduated from being just a syndicator with no balance sheet who won deal goes awry, doesn't let him raise any more money. He had IEQ, he is iconic, he has like real serious people in these funds. Real investors. And he's able to continue to raise money. He just raised the distressed fund. He's doing all these buys on the industrial platform that they sort of formed with for capital. So again, this is a fire fire. Let's call it a spade a spade. This is a disaster. Hiten Samtani (21:54) Okay, so you've raised the money on the other fund too, but doesn't a declaration like this, hey, I have basically wiped out four hundred million dollars of capital, doesn't that impact your ability to do business going forward for the next fund, for the next raise, for the next deal? Will Krasne (22:07) Yes, but he just raised it. So you wanna book the next movie before the reviews for the last one come out. We learned that early on in Entourage. That's sort of what he's done here. And if these deals perform, which who knows, but if he makes two X on the Chicago deal in three and a half years, this is gonna be forgotten. And it sounds crazy to say, but all of these things get memory hold. There are some big private equity funds, like real brand names. Hiten Samtani (22:32) When I think about a lot is Savannah. They took a bath after bath after bath on office deals. But again, they're in the first round of calls for any big office deals in New York right now. Will Krasne (22:40) Same with Van Barton, same with RFR we talked about. They torched a lot of money, they gave buildings back. A B and his sons are still going at it. Again, let's not minimize the loss here. There are a lot of people who lost a lot of money in this. Hiten Samtani (22:52) Let's zoom in a little bit and look at what happened. What is the state of this portfolio that the fund controlled? Will Krasne (22:59) The numbers are staggering. This is a twenty property portfolio that the fund bought. Expenses went up sixteen percent, not great. Debt went up fifty percent, really bad. Hiten Samtani (23:09) But remember, Will, fixed rate is for sucker. Will Krasne (23:11) Yeah. So that's the other part of this too, is that he really kind of brought him on on himself in the public sphere. Maybe posting, you know, about your vacation two days after this letter goes out. It's like maybe not, but ⁓ 50% increase in debt costs, really bad. But most importantly, the rent, the whole thing about this whole business plan. When Alan Stalkop was on this podcast and he was saying, you just renovate, increase the rent 25%, sell at the same cap rate, and bob Zero. The rent went down twenty-four percent. So that's the real problem, is that They spent all this money on CapEx. It's not just that rent goes down, expenses go up. It's that you're continuing to pour more money into these assets with the variable rate debt through your unit capex plans common capex plans. Your basis is getting bigger every single day. Yeah. You don't need rent to go up five percent. You don't need a little bit of organic rent growth. You need rent to go up Hiten Samtani (23:57) Double digit growth consistently for the foreseeable future. Will Krasne (24:01) This was business plan that worked for a long time. Folks who did this did it for a reason. This is not something born out of whole cloth. Hiten Samtani (24:07) And we should say folks who did it did her for a reason and LPs who invested with them also invested for a reason. A lot of people made a lot of money for a long time. Will Krasne (24:15) Right. There's this misnomer that real estate is a appreciation game return comes more from residual value increases than from the cash flow that it provides. That's what this business plan was really based off of. There's no interim distributions on a S two or a GDA value ideal. Like that's just not how it worked. It's on exits. It's not bad. There's nothing wrong with this business plan. Like that's something I wanna Hiten Samtani (24:33) It's on exits. Will Krasne (24:39) also touch on is that there are folks who say you can only renovate to the studs and do it all cash and refi it out or you know buy a low growth. That's one way to do it. This was another way and it worked for a long time until it didn't. George Sorov says When I see a bubble forming, a rushing to buy adding fuel to the fire. You know, you don't want to avoid it necessarily because you can make a lot of money in the run-up. Hiten Samtani (25:02) As the news of this fund dissolving came out, there has been a ton of Schadenfreude out there from real estate GPs, many of whom use the same strategies. There have been others who are like, I would never take money from retail. There's been a lot of moral superiority and all of that crap coming out too. So I thought that was interesting. Will Krasne (25:18) Now, I think I caveat it enough here by saying that a lot of other people have lost money. He's continuing to raise money. S2 is not gonna fold because of this loss. But this is a disaster. Let's not sugarcoat it. A value add strategy is not supposed to be so risk-on that you lose all of the money. And pref. And press. It's really something. And multifamily historically has been one of the safer returns because you have. Hiten Samtani (25:38) Pref. Pref investors wibe too. Will Krasne (25:47) year-long leases, you can actually increase them year over year for to adjust for inflation on like an office or retail. Hiten Samtani (25:53) And no single tenant has incredible leverage on you, all of that, right? Will Krasne (25:57) Definitely not. So what that means is like there's risk in everything, right? But if you buy fixed rate debt, low leverage, the risk is pretty low as long as you can cover the debt service. If you know what your debt service is going to be. This last cycle post 2020 made multifamily something it wasn't. Multifamily is not really a double your money in three year business. That's not what it is. It's really not. For a time, that's what worked. Tides, S2, they made tons of money. But Hiten Samtani (26:17) It's not supposed to be a cowboy game. Will Krasne (26:25) You know, on a dollar weighted basis, $400 million going to zero, like really reduces those returns. But what you need to make these things work was crazy, but for a while that happened. Hiten Samtani (26:36) I guess if everyone's walking on the high wire then you just look like you're walking on ground. Will Krasne (26:41) Exactly. That's very well put from the writer here. It just boils down to something which I always want to talk about and I don't think it's hit on enough, which is the model doesn't mean anything. If you're an LP, the GP will say the model looks great. That means fucking nothing. The model is for one thing. And all it does is tell you what you need to believe to hit the level of returns shown in it. That's the only thing it's for. A model being a 25 IRR or a 17 IR doesn't mean anything. All it means is you need to believe X. And to hit the returns they showed here, which I'm sure were 15, 17, what have you, all you had to do is zoom out for a minute and say, I need to believe in how much rent growth? I need to believe in how much exit cap compression, how much residual value K. Hiten Samtani (27:30) Even when things got really bad, Will, when they were looking for a rescue prep for a lot of these deals, the IRR they were projecting was thirty-four percent if you were participating in. Will Krasne (27:39) And we talked about this the first time, like that's complete nonsense. What it shows too is like every dollar put in after this, right? After the initial capital was just completely wasted. And so it's something that folks who are doing capital calls, there's a right way and a wrong way to do capital calls. The wrong way is to show people that they're gonna make 34% on them. And the right way is to say, look, we think if you invest this capital, it will help save the value of this investment. And on these forward dollars, you can make a certain level of return. There's no really bad deals. There's only bad bases and bad cap stacks. There are assets in here, I'm sure, like I haven't gone through property to buy property that I'm sure you'd want to own at the right number. Hiten Samtani (28:14) I'm glad you bring that up because in fact in this letter, Everett says that there is a bunch of assets that he wants to raise about a hundred million dollars of new capital so that he can go and buy the debt and put those assets into a new vehicle. So he has identified ostensibly some gold in this muck. Will Krasne (28:32) Why I'm sort of not quite maybe coming down as hard as I'm sure some people want me to on this, is Blackstone when they bought Hilton, they were marked to mark it down ninety at one point, right? Yes. And they bought their own debt back. And I'm not comparing this to Hilton. It's not the same thing. And so Hiten Samtani (28:45) Funny you say that though. I tweeted about the situation a few weeks prior and I said, Scott is doing what everyone on here is doing, just a little bit bigger and a little bit louder. And he replied and he said something like, Marks aren't permanent in either direction. Will Krasne (28:58) He's right. Now, we can all debate the value of the underwriting getting away from everybody on the $400 million fund, not to minimize this by any stretch of the imagination, but this is just the microcosm of what happened. I'll tell you for a fact, there are big brand name real estate private equity funds with 2020, 2021, 2022 vintages that are sitting on not much better than this. And they haven't realized Hiten Samtani (29:20) I mean, we talked about Naveen the other day. Go into any pension funds disclosures and you will see some of these guys who are doing panels about successful investing on their deep, deep, deep red. Will Krasne (29:31) At scale, it's really hard to put out 400 million of equity and generate returns. Star Wars just raised 10.2 billion. How are you going to go make a 15 at that scale? It's really, really hard. You can find good deals left or right. And I think what's so interesting about this crisis is that it's been just like a slow-moving morass. There's not been like a single point of failure. You can point to Lehman failing or you can point to a certain thing that happened. It's just been nothing for years. Hiten Samtani (29:59) months ago we were talking about tides every other day. Then it was Alenstahl could be GVA every other day. Now it's S2. What Scott did that was differentiated was this private REIT vehicle that essentially acted as a lifeline or a stave execution. Will Krasne (30:13) It was almost like Voldemort putting his soul in different horcruxes to extend his li lifeline. But at the same time, all the money you raised to go do that, gone. Hiten Samtani (30:27) Get a little personal here because real estate investing is also an emotional exercise. And a lot of people who put in money with Scott who have been wiped are pissed at the at the lifestyle. He lives like a rich guy. And people are allowed to live how they want. But if you're torching capital, the dissonance there is something that has come up a bun. Will Krasne (30:45) And look, if you run a firm at this scale, you're gonna make X amount of money. I don't think people necessarily begrudge that, but it's like a little bit of let them eat cake, right? Yeah. And it's just PR one one that it's probably not the best look to be posting through it two days after you you send out this letter. Hiten Samtani (31:05) The other thing is the postmortem is finding a bunch of things that you could have found in the pre-mortem as well. So for example, people putting up the org chart of S2 and saying, look at how many Everetts there are. I'm like, well, all those Everetts were there when you invested as well. Will Krasne (31:17) That's exactly right. And we talked about it with Monty Bennett. You knew he had this contract. If you bought the Hiten Samtani (31:22) Stock. Yeah. If you have created a business in which you are getting rewarded up front just for raising the money or doing the deal as opposed to executing and realizing a profit, what does that tell you? And is that going to change after we've seen so many of these back to back? Will Krasne (31:40) Show me the incentives, I'll show you the outcome. In a lot of these cases, the incentive was to raise the money and do the deal. I just want people to remember though. I think it gets memory hold a bit. The stuff that was going on in 2021, in early 2022, it was unbelievable. Everyone had so much money, it had to go somewhere. And people were doing private deals, trading on Robin Hood. We had GameStop right at this period. Hiten Samtani (32:04) What did Alan say, Stalka? What did he say he was buying a deal every twenty days or something? Will Krasne (32:09) This isn't necessarily the hangover. This is waking up in jail after joyriding your car down the Vegas Strip. Just not a reasonable place to park. Hiten Samtani (32:16) Let's talk about where Scott can go from here. He's got the other fund and he can go and he can actually go and rescue some of these deals with that because it's a distress fund if he wanted. He's got the industrial thing going where he bought the opco. But in multifamily itself, if he doesn't have a good relationship with the agencies, Fanny and Freddie, he's gonna be in a lot of trouble. The chatter around this thing is Freddie, are they okay working with him going forward? Fanny, what are they gonna ask of him? Is there gonna be a mass sell off of the portfolio that he does still have? It's probably in the high twenties, twenty thousand, twenty eight thousand units. What happens with that portfolio if he can't make the agencies dance with him? Will Krasne (32:53) just gonna get sold off in pieces over time is what's gonna happen. But the bigger thing is the agencies are such a big liquidity provider to the multifamily market. And I think it's important to differentiate Scott was not a huge agency borrow on the acquisition. Neither was Stalkop, neither were any of these guys. Hiten Samtani (33:08) That was all bridge landing on the acquisition. Will Krasne (33:10) The goal was to either get sell and pay up the virtual one or get to an agency takeout. Everyone wants to get to an agency takeout because the terms are the best. Yeah. You get the best spread, you get the best rate, you get I.O., not recourse, all these things. And if you can't do that, that's a huge arrow in the quiver that's taken away. And the agencies will put people in the penalty box, which means that you can't be on the org chart. Same. And it's not even necessarily with defaults, but Hiten Samtani (33:35) To the box, you know, you feel Will Krasne (33:40) If you've ever behaved in ways that are sort of not becoming, I guess, for lack of a better term. And it takes that away. So you have to do life coat, you have to do debt funds, you have to do bridge loans. And all of that adds risks or different profiles to your deals. So this business plan of renovating class B 80s, 90s, that's done. So you got to figure out something else. And maybe it's buying higher quality core stuff at lower leverage points. You don't have to go home, but you can't stay here. Hiten Samtani (34:08) Another point just about the narrative management in a time like this. One of the things we think about a lot nowadays is the fractured media landscape and what you can kind of get away with even as this was going down. The private read stuff had just happened. He was on the cusp of announcing that this was going to be a total loss. He went and had an interview with Co-Star last month, and it's like a splashy interview. S2 Capital Founder opens his own wallet to reclaim 12 apartment properties. And you know, we've been through the worst of it, everything's fine. You can kind of do this in today's environment. You can go on a podcast, talk about your book, and completely be oblivious to any of the problems that are happening in a way that you probably couldn't do 20 years ago, where if you were in the journal or in the New York Times and there was an article about you that was tough, you were kind of screwed. Everyone would look at that. There was one point of reference. And now he could go on podcast next week and just do this all over again. Will Krasne (35:00) Absolutely. That's just how the game is played. And he's played it really well. He has in a way gotten to the other side because he's raised more money. The game's gonna be different. It's gonna be industrial. It's gonna be a different business plan and multifamily if he does that. But we're gonna look back on this era, all the scoring records in the NBA from the eighties when they were playing at crazy pace and you're like, How did Elvin Hayes average thirty-seven points a game? We're kinda gonna look back on it like that. Hiten Samtani (35:29) That's it for the Promote podcast this week. Billion dollar underbellies that show you exactly how big deals get done in this market. And one of the most prominent syndicators flames out, but is he done? Probably not quite. Will Krasne (35:42) It is really not the straightforward time in real estate. We're dealing as 10 put it so eloquently at the top, the nether regions of the cap stacks here. Whether it be in New York City office or buying back debt on Sunbelt Multi, this is what we're gonna be dealing with for the next couple years because I got some bad news. There's not gonna be rent growth for a long time. There's so Hiten Samtani (36:04) And good news and all that, the pod's gonna be a lot of fun to do each week with you dude. Will Krasne (36:08) well it's already a lot of fun, so thank you very much. Hiten Samtani (36:10) It's just gonna get more and more interesting. So many crazy things happening. A shout out again to our sponsors, Bravo Capital. They're a leading HUD and Bridgelender. You can find them at BravoCapital.com. Will Krasne (36:14) Indeed And Loan Boss, a best in class CRE debt management software, you can find them at LoneBoss.com. Hiten Samtani (36:25) Will Krasne needs some questions, so hit him up on the mailbag at podcast at the promote doc. Will Krasne (36:30) I get to do one or two a year, so this is very special for me. So please, for no other reason than my own joy, write me some crazy questions. Hiten Samtani (36:39) Remember for feedback on this podcast, podcast at thepromote.com. And if you want to advertise with us, we're at partnerships at thepromote.com. All right, Will, that was a fun one. I'll see you next week. Thanks. Ciao.