Latest / The Promote Podcast / Crowd Comes for CrowdStreet & LifeCo Lenders Roar
Transcript
- Hiten Samtani (00:00.46) Will, you're the CEO of a public read whose stock is in the toilet. What's your go-to nepotism play? Probably hiring my wife to interior decorate the offices for way above market. Hiten Samtani (00:14.607) Hello and welcome back to the Promote Podcast, your insider guide to the money and mania of the CRE market. I'm Hiten Simtani, here again with Will Krasny. Always. Today we're diving into CRE's biggest ever crowdfunding scam, perpetrated by Ellie Schwartz. Specifically though, we explore the question of Crowdstreet. Does it share responsibility here? Is it victim, villain, or a bit of both? Also, CNBS is spreading its wings, flying into development deals. Lifecoast 2 are having a moment, they're all over the place. What gives with that? Will, you ready to cook? Absolutely. Hiten Samtani (00:52.29) Let's start with Crowdstreet. So how complicit is a platform and the crimes of its users? We've heard a lot about Facebook, if you remember, where a platform, not a publisher, et cetera, et cetera, during the election. Now though, this question has come up in CRE. So what happened here was Ellie Schwartz used the platform Crowdstreet to raise tens of millions of dollars for two purchases, one in Miami Beach, one in Atlanta, big office complex in Atlanta, and a boutique office in Miami Beach. He raised about 56 million or so through Crowdstreet. The problem is instead of buying the buildings with the money, which is what he was supposed to do, he used the money to buy luxury watches, most memorably a handmade Groenfeld Dutch luxury timepiece. He used some of the money for First Republic options and he just basically lived the life, bought penthouses, et cetera. So all the money that was supposed to be used to buy this real estate went to basically enrich Ellie Schwartz. Proud Street, now they're painting themselves as kind of a victim of this crime as well. but investors are having none of it. They're suing them class action lawsuits, a billion dollars. They're trying to shut them down for FINRA violations. Give us your take on what's going on. I mean, you asked in theory, you know, is a platform responsible for the users? I mean, that's an interesting question, but like in practice, this platform is absolutely responsible for the behavior of its users. I mean, what they basically did is it'd be like a Patek Philippe. you know, set up shop on a cart on Canal Street and walked away for two hours and then goes, my God, we got robbed. Like, give me a break. This is insane. How did they not have the money in escrow? That part, and they changed it right after, a couple months after this came to light, they added the escrow stipulation. So clearly there was like this massive loophole just sitting there. Yeah, I mean, when I first heard the story, I just assumed, they accidentally forwarded the money because... they were gonna close and they sent the money out of escrow. I didn't realize there was no escrow. I still can't believe it 18 months later. It's ludicrous and frankly, like I think we can stop on this topic right there. Like that's it, we're done. No, no, no, no, we can't stop because there's a couple of beautiful things in there. what is your favorite detail outside of the escrow, which we both agree is absolutely ridiculous. I mean, probably just the first Republic options. It's just, it's so good because so he took. Hiten Samtani (03:17.809) whatever, how many millions of dollars and then. Yeah, 12 millionish. Yeah, 12 million and was buying options on First Republic during the First Republic meltdown, you know, two years ago. And the thing I think is so great about that is that he definitely was a First Republic client. was just thinking the service is so great. Like, obviously this bank's going to exist. And they know what coffee I drank when I walk in. So this is going to this is going to work out. Yeah, I love that one. I think it's up there. It's definitely Hall of Fame for me, because in the OMS and the operating agreement, which was if there's any dispute, it needs to be solved by rabbinical court. That's the one for me. That's really good. That's amazing. But let's talk about Crowdstreet now. So they were facing multiple legal actions. The CEO left a couple months after the scam was first discovered. The CIO left a few weeks ago. So we're seeing a lot of the heads of this company just bounce, but that's probably not going to be enough for investors. No, definitely not. mean, I'm not a lawyer, but seems like pretty clear cut case of wire fraud and negligence. So I don't think this platform needs to exist anymore after this. It's just ludicrous. We talked about last week, you you had one job which was, you not get arrested if you're Nate Archibald's dad or not blow up if you're Charles Cohen. Like you had one job if you're a crowd street. was don't give the guy the money until it's time to close. You taught us you had one job to do. Yeah, but how much legal coverage does a platform like this get in a case like this? Because obviously raising money, syndicating money is as old as real estate, basically. How much responsibility does whatever mechanism have? guess outside of online crowdfunding, there's other ways that people raise money, feeder funds, et cetera. Sure. But again, not a lawyer take all this with a grain of salt, but this is a raising capital in this way is highly, highly, highly regulated. There's a ton of things in the OM which you mentioned. that would have caused red flags regardless of what happened with the actual transaction being effectuated. So they were misleading at best about the track record. There was misleading at best about the sponsor's size and skill. They have no responsibility for the performance of the actual investments. What they do have responsibility for is for telling the truth about the sponsor and then to actually get the money to close the deal. Hiten Samtani (05:37.41) And so they failed on both of those things. get the money there, to make sure the money gets there. 100%. And I think that this platform doesn't need to exist after this. Yeah, it's pretty crazy that you want to take credit for when things go well and collect fees and all of that and tout your experience in raising tens of millions of dollars for sponsors. But when things go wrong, you want to say you're not complicit at all and you're a victim as well. I find that pretty funny. What about other platforms? mean, does a case like this so dramatic headline case, prison time, et cetera, have a chilling effect on CRE crowdfunding in general, which I feel like was a big thing for many years and then I haven't really heard much of recently. Yeah, I mean, I think that this is no different than if you're putting money into a hedge fund, like that you don't wire it to the hedge fund guy's private bank account. You send it to the prime broker, the custodian. This is not even making layups. This is like putting on basketball shoes before you get on the court. And this stuff has been coming up quite a bit in many different walks of real estate. The missing escrow millions is at the center of the Mark Nussbaum case, which we've talked about as well. Mitch Kosoff, a real estate attorney in New York is I think currently serving time. Yep. He can't teach a soul cycle class anymore for a bit. This has been happening quite a bit. the idea that there is who is the honest middleman, whether it's a person or a platform, you know, what consequences do they face when things go wrong is a big story here. Yeah, and I think it just needs to be more regulated. And I know that's sort of anathema to a lot of the real estate folks out there. Free markets, baby. Yeah, but it has to be regulated. The money just can't go to people. It has to go to large enterprises, I think, because it's the only way to make sure that the money is safe. Because you can be the most upstanding title agent in the world. to quote, Val Kilmer Hiten Samtani (07:41.028) Grad Street's been talking about how justice is finally being served, etc. Let's see if that rhetoric can save them. This is a question that's coming up a lot. When things go wrong in a CRE deal, besides the sort of central perpetrator, who else is responsible and what consequences do they face? Hiten Samtani (08:04.634) CNBS used to be how you would fund a stabilized deal. If you were going to go buy an office building or buy a bunch of apartment complexes, you could go get a commercial mortgage back financing to get it done. And what we've seen over the last couple of weeks is folks using the CNBS market for development deals, which is a little bit of a new thing. Yeah. And so last week in Commercial Mortgage Alert, I read about a data center redevelopment project where Goldman is prepping a CNBS SASB, that's single asset, single borrower. And the loan, the issue would be, okay, it couldn't really understand what the hell is going on. Collateralized by the funded portion of the floating rate acquisition loan that's already in place. I have no idea what this means. So basically, but can I just talk about it for one second? Yeah. There is this floating rate acquisition loan that's already in place that Goldman made. So like for a land loan, basically? Yeah, yeah. Okay, so. So it's just like a CDO squared. We're just like collateral by the debt on the line. That's right. That's right. That's what it is. And I guess the broader question is worth talking about, which is CNBS is now being used in construction. And I wonder why that's happening suddenly. Well, because banks have pulled back so much. mean, so, you know, we talked a little bit about First Republic collapsing with the only shorts and the broader regional banking collapse as well. There's been so many. Right. that's where a lot of construction financing was done. So those banks are obviously now more highly regulated. They have to reserve more dollars for every dollar of construction lending that they do. And so they've really pulled back. things still have to get built, particularly things where you have the secular flow of capital coming into the space. And so the overwhelming demand for data center space, for power, for compute, capital will find a way. you say capital, we're talking about massive gobs of capital, right? These are projects that on the low end are $900 million. On the high end, they could be $10, $12 billion. Yeah, mean, CoreWeave went public this past week, and the FT had an article about them over the weekend. They have like $12 billion of borrowing capacity for what is like ostensibly like we work for data centers. It's actually incredible the numbers here. And it sort of dwarfs so many other asset classes that we talk about. Hiten Samtani (10:26.832) which is when people bring up data centers, compute the loans on some of these projects, as soon as Newmark is running point on a $5 billion loan for one of these projects in Texas, it's like, where are you getting, these are sty town type numbers happening all the time. Well, the thing is, is that the best part about data centers is that you can put a ton of money into it. think about it broadly, we've lost, used to able to write a half a billion dollar check for debt or equity into midtown office. Can't do that anymore. You used to be able to write big checks into some A plus malls. Can't do that anymore. So where is all this capital going to have to go? Because it's still there on the sidelines. And then with equity markets ripping, people have to rebalance. They have to buy more real estate to hit their target allocations. Where can they do it? The dry powder is going to get a little wet, right? Which is what you need. Yeah. Are you going to go buy 50 million square feet Amazon office deals? You can't do that. It's so hard. It's so much work. So go do... three of these things. Kind of on a related topic, life insurance companies, Lifeco deals are suddenly everywhere. you're kind of used to seeing 150, $200 million Lifeco deals, but now they're going neck and neck. I've been hearing about industrial deals, which normally your go-to would be CMBS on some of these deals. Now Lifeco's are kind of jockeying for position. I've actually stolen some of that business from CMBS. Yeah, no, that's it. It's actually really, really top of mind. I was talking to a mortgage broker. at one of the big shops last week. And he quoted me spreads for sort of class A prime industrial and like low one hundreds over, which is incredibly tight for a class A industrial. Cause right now that's about as prime as you can get. And I mean, even for, you know, class B smaller stuff, you know, you're still in the high one hundreds maybe. And again, I think it comes back to where do people feel like there's a secular tailwind where they're not making a contrarian play. They're not investing against the flow of capital and it's really industrial. And. So it's really interesting to see this. And I think it's gonna be, if you're an industrial developer, an industrial acquisitions guy, like debt is not a problem. That is not a problem. We saw that EQT Exeter deal, $570 million life insurance company. I think it was New York Life. There's this interplay between Lifeco's and private equity. Is there a broader reason why life insurance companies are able to write bigger and bigger checks that I think is worth breaking down a little bit? Our friend Hunter. Hiten Samtani (12:55.034) did a great job on what, in the American Affairs Journal? American Affairs, yeah. Yeah, and I think his broader point that as more of the world gets sort of financialized and, you but you see Apollo has a theme, Blackstone has a life insurance company. KKR, Global Atlantic, all of these guys are doing stuff like this, Yeah, Todd Bolley did this with Security Benefit. You know, there's been a cottage industry and the point Hunter makes, which is I think a really, really astute one. is that the issue now isn't raising the money to go buy real estate assets or lend on real estate assets. It's finding enough assets to actually lend on or to buy. so, Paulo, he's talked about specifically is focused on creating new platforms for origination. And so, if you can find these folks who are bundling together industrial deals, multifamily, data center, what have you, that's another way to originate. And so, there's been more velocity for these firms. that own these life codes or have affiliations with these insurance companies to put that money out into real estate. Speaking of financialized, did you see that you can buy stuff on DoorDash and finance it? I did. That's pretty good. You can get your burrito paid over time, which is kind of like this. Yeah, I know. mean, it stays with you for as long as you can finance it in your stomach. So are we going to see a lot of the biggest fund managers, let's call it more Blackstones of the world? make bigger plays for insurance companies so that they have this perpetual source of capital to fund deals of this manner? Well, I think they're looking for perpetual capital of whatever sort they can find. That was kind of the idea of the non-traded REITs is that you have this sort of captive equity that you can use and recycle it and get off of the raising a fund every two to three years treadmill. So whether it's insurance companies, whether it's, you know, creating a retail platform, I always thought it made more sense for one of these firms with a big non-traded REITs go buy a brokerage house and own the distribution. We haven't seen too much of that play out, right? I don't know if it's happened in previous cycles. No, not yet. But I think with owning access to capital that is not fund based, that's really how these, that's where everyone is trying to go at sort of this mega fund level. Yeah. And another point Hunter made, was like real estate is kind of the perfect vehicle for some of this money because it's asset backed debt. Hiten Samtani (15:16.11) which meets the investment grade criteria. So it's a perfect place for you to pump a lot of this money into. Whether or not it actually is good debt is a different question, but it can definitely get rated a certain way. Hiten Samtani (15:31.898) You know, at The Promote, we're thinking a lot about this issue, which is why I want to talk about this story, which is you have these life insurance companies that are moving into the market, writing bigger and bigger checks. And the underlying reason is that the way they're owned and structured now to create a perpetual source of capital for these PEs. Hiten Samtani (15:56.752) Like Albert Baylor, my regret is I didn't move to the US earlier. Here, entrepreneurial spirit gets recognized. So this is some elite stuff here from a major office read, a read I should add whose stock is in the toilet. Albert Baylor was the CEO of Paramount Group and controls 13 million square feet audit in SF in Manhattan. The firm just disclosed it made millions of dollars in payments to outside firms controlled by Baylor. So you want to run through a couple of the highlights here? This is all just... elite stuff. really love it. Paid $3 million to an aviation company half owned by him. I will say this is not that irregular for this type of firm. That one's kind of par for the course. obviously, mean, let's just be, he obviously uses a jet from the firm as well for power mount business. So that 1.6 million to a consulting firm that he owns, again, that's kind of- You got to get the consulting in. I mean, there's a lot of hairy problems out there. Yeah. 200,000 to a design firm owned by his wife. So yeah, he took my idea. This one is the one, it's a small amount of money, all things considered, 200,000, whatever, but this is the one where I feel like a little radar or an alarm bell would go off in my head if I were him saying, ah, this one, know, if it ever comes out, it seems a little off. Yeah. But maybe I'm not built like these guys, which is why we're doing podcasts. Well, also we didn't do the research, perhaps, that this is actually like not her only client. We'll see. But the other one that really stuck out is 12,000 for wine from a vineyard that he owns in Germany. How do we feel about German wines in general? It's not pleasant, is it? Isn't that what Tom Wamsgan said to Siobhan about their vineyard? We're talking to each other on the poop deck of a majestic schooner. Problem is Paramount isn't doing very well. No, they aren't. Stocks in the toilet 70 % down from pre-COVID. They own a bunch of shitty office and good office in Manhattan and SF, both. cities that you really need to put a lot of work and love into your stock to make it work. Correct. And I can think that, $4.6 million pays for a decent amount of TI work on a couple of floors at one of their buildings in New York. And I'm sure they'd rather spend it there than on a Baylor's consulting firm and his jet company. Yeah. And I was thinking, you know, like all this kind of stuff, 4 million here, whatever, if the company's doing well, I mean, if you're Jane street or XTX or Citadel, you know, no one's going to give a shit about this. Hiten Samtani (18:20.612) But if you're paramount and office read, you probably want to be a little more careful. definitely think so. It's about reading the room and you got to realize you're the redheaded stepchild of the read world right now. And you probably want to not give people a lot of reasons to come after you. Hiten Samtani (18:39.684) That's it for the Promote Podcast this week. was lots to chew on again. Crowdstreet playing the victim card in the industry's biggest ever crowdfunding scam. Shut them down. Shut them down, Will says. CNBS evolving to become an option for construction as well. And Lifeco's, because of the way they're funded by private equity, suddenly popping up in bigger and bigger deals. So next week, guys, we have a really special episode for you. We're going to be diving deep into the singular career of Gary Barnett, a developer's developer. A total mad lad. There's only one Gary Barnett. Will and I discuss his origin story and two of his most iconic deals. Stay tuned for that one. I promise it'll be worth it. Well, anything to add? Please like, share, subscribe, follow. All the things. I'm a narcissist and I need the validation. It helps us in our lonely nights. Write in with your feedback as well at podcast at 1031 media. That's podcast at TEN31.media. Thanks, dude. See you next week. Ciao.