Latest / The Promote Podcast / Bad Boy Carveouts & Skyscraper Ransoms

Transcript

Bad Boy Carveouts & Skyscraper Ransoms · The Promote Podcast

• 0:02
  Hiten Samtani: Commercial real estate is the gift that keeps on giving. I really do believe. I really believe this. It has more characters per capita than any other industry on earth. And do we have quite the docket today?
• 0:12
  Bad boy guarantees, Manhattan ransoms, and a loss of mojo. Let's do this. This is the promote podcast from ten thirty one Media. I'm Hiten Samtani, founder of ten thirty one.
• 0:25
  Will Krasne: And I'm Will Krasne, who you've never heard of.
• 0:27
  Hiten Samtani: Well, that's gonna change very soon. Listen, guys. Will is an experienced investor who cut his teeth at Carlyle and Starwood, and he's kinda become my go to for no bullshit color on the market. Each week, Will and I are gonna break down three of the most interesting and consequential stories in CRE, taking you well beyond the headlines and into the heart of the action. Look.
• 0:47
  Every other industry pot, they're gonna tell you what the industry wants you to believe. We tell you what's actually going on. This week, we've got bad boy guarantees, which are suddenly everywhere. We have a classic Manhattan phallic skyscraper battle pitting Titan against Titan, and then we look at the loss of mojo at mighty investment manager PIMCO. Okay, Will.
• 1:10
  So on our first story, we're discussing bad boy guarantees, which I think personally is probably the coolest sounding term in CRE right now.
• 1:17
  Will Krasne: It's definitely up there.
• 1:18
  Hiten Samtani: So, Will, something kinda broke, I feel like, in the middle of last year. When I started the promote, I remember being told about this kind of uneasy stalemate between naughty sponsors and their debt fund lenders. They were trying everything they could to pretend things were fine, extending, modifying, pleading, pretty much anything to avoid foreclosing. I wanna say sometime last year, that all changed. So now they're getting nasty.
• 1:40
  They're coming after borrowers for everything from springing recourse guarantees to bad boy carve outs.
• 1:46
  Will Krasne: Yeah. I remember an older real estate guy who's a mentor of mine told me once that he's never read a loan doc in his life because he says he just pays the interest on time and pays the loan back. Yeah. And now that's really not good enough anymore because when the environment's this bad, especially for certain asset classes and certain geographies, lenders are looking at their books and they're trying to figure out, a, what is liquid and that they can get out of, and b, what they don't want on those books at all. So what does that mean?
• 2:14
  So if there's any excuse to get off of it, that's what they're gonna do. So what that means practically is that if you've signed a personal guarantee, a net worth guarantee, a completion guarantee, you can technically be in default even if you're current. Let's say if a big chunk of your net worth was office portfolio, even if you're current on one office deal, your net worth has been halved. And if you're below your covenant, you're in default. And in good times, people don't care.
• 2:42
  They'll work with you. They get it. But when times aren't so good, they want it off their books.
• 2:49
  Hiten Samtani: So everyone is basically going back to the the loan agreements, seeing what they sign. The lawyers are looking at what they can kind of go after. Correct? That seems to be the the state of play at this point.
• 2:59
  Will Krasne: Yeah. I mean, I think people are remembering that they're in the moving business, not the storage business, and they don't want these things on their books. And the thing is to remember is that all docs can be amended, but the environment dictates how willing people are gonna be to amend the docs. And so in some cases, you can kick it the can down the road or they'll work with you if you have a really good asset that they know there's equity value even if today is a little bit challenged. Or if you're a really strong sponsor, they'll work with you.
• 3:26
  But if you've got a property type that's not in the zeitgeist, like, you may just be SOL, and they're gonna say, alright, you're in default. You're paying, you know, default interest. And even with that, you need to sell this thing, while we walk you down the plank.
• 3:40
  Hiten Samtani: And so the idea is not that they just wanna foreclose or take back the property. The idea is they feel like they need to recoup some funds directly from the sponsors?
• 3:49
  Will Krasne: They're not they don't wanna take it back. They wanna sell it. Uh-huh. You know, at Upper Manhattan, rent stabilized, they all traded at $9,000 a unit.
• 3:57
  Hiten Samtani: Like Yeah. It's
• 3:58
  Will Krasne: crazy. Don't care. They just want it gone. I mean, it's such a small loan. Like, they just want it gone.
• 4:03
  Hiten Samtani: And so what is the nuclear scenario for sponsors here? I am a syndicator who came in really hot in 2021, bought a couple hundred million dollars worth of property, and now lenders are coming after me for bad boy carve outs, spring and recourse guarantees, all that stuff. What is kind of are we gonna see a lot of bankruptcies?
• 4:23
  Will Krasne: I think you're just gonna see a lot of dead money. I mean, there's a lot of these deals where it's in everyone's best interest to pretend there's still some equity there and kinda hope. I mean, hope's a little bit running out because we are sort of in a higher for longer scenario, it would seem. And I hate even saying that because anyone who sort of tells you what they their take on interest rates is, like, kind of an idiot, like, because no one ever knows. Right.
• 4:43
  Just go bet on the bond market, I guess. Exactly. Uh-huh. And, you know but what you have though is this specific niche within credit. It's not the bulk of credit because that's, you know, that's how banks operate.
• 4:54
  Right? You know, borrow at three, lend at five on the golf course by three. Like, that's the majority of the universe, with more debt funds, which you've run about extensively, more private credit Mhmm. There's more loan to own. There's more people who actually have a little bit of the capability to take the asset back.
• 5:07
  And those are the folks who are gonna come after you if you're blowing a covenant somewhere in the docks. You'll see like what Rialto is doing like Midtown Equities and, you know, where they're trying to get an extension, which they're like, oh, well, if we don't receive the extension, it's not formally you didn't formally notify us. It's like we, you know, closed our eyes and didn't read the email, and they're trying to default them. I mean, that's that's what you end up with Mhmm. In this type of situation.
• 5:30
  Whereas in other ones, you know, people waive it off, they'll refi you, what have you. But, you know, now it's again, they're not in the storage business. They're the moving business.
• 5:38
  Hiten Samtani: Yeah. And I feel like this is a little bit mimetic as well. I you know, I see one dead fund go after a sponsor. Couple weeks later, I see a bunch of actions. And the the last few weeks, we've just seen a flood of actions related to bad boy carve outs.
• 5:51
  It seems like it's picking up a lot of momentum.
• 5:54
  Will Krasne: Yeah. It is. And, you know, Sean and Ryan are having to deal with this.
• 6:00
  Hiten Samtani: Sean and Ryan, that's, principles of Tide's equities and one of the poster, I guess, poster kids of this whole Sunbelt multifamily boom.
• 6:07
  Will Krasne: Was it Sean made a great personal trade on his home in California.
• 6:11
  Hiten Samtani: Oh, Brentwood. Yeah. It was 15 I think it went for 15,000,000. He did pretty well.
• 6:15
  Will Krasne: Yeah. Good for him. Well, he
• 6:16
  Hiten Samtani: bought it for 15. I think he sold it for 22. So Yeah. You know, kudos to him.
• 6:19
  Will Krasne: Yeah. Even after paying Mauricio Umansky, you
• 6:22
  Hiten Samtani: know, it still
• 6:22
  Will Krasne: it still works out okay. But look, generally speaking, multifamily loans from the agencies are pretty much anywhere, for institutional quality properties are nonrecourse. And what that means is if you're in default, the lender can only take back the property no matter how much they the they're owed on the loan.
• 6:38
  Hiten Samtani: Yeah. And I should say it to that point. Right? A lot of these people have kind of relatively little skin in the game. Right?
• 6:44
  They've pulled funds from feeder funds, from LPs, whatnot. So if the property goes back, it's not the end of the world for them.
• 6:51
  Will Krasne: Yeah. They can't come after the rest of the of your assets to make them whole. And the other thing too to bear in mind is that your net worth and liquidity covenants for these loans, which are whatever entity or warm bodies behind the loan, nonrecourse, has to have net worth equal to the loan amount and liquidity of 10% of the loan amount. And that's not cumulative. So if you're worth $15,000,000, you could go get $3,010,000,000 dollar loans.
• 7:15
  Hiten Samtani: Mhmm.
• 7:16
  Will Krasne: And it's it's almost just like you're, you know, creating a bunch of copies of your PFS. And so what happens though is that you have these people who think, oh, they're they have all these properties. They're, you know, clearly have a balance sheet. Like, kinda not. And, like, most of their net worth is, like, tied up in the properties.
• 7:32
  And so it's sort of you end up with a, you know, a doom loop, so to speak.
• 7:37
  Hiten Samtani: Yeah. This reminds me of, back in the day in Dubai before there was, like, a unified credit history. I knew this guy who would basically get a credit card, max out that credit card, go back, get another credit card, and just kinda repeat the cycle over and over. And then once he had racked up about a half million dollars in debt, he just fucked off. He just left.
• 7:55
  But he had a four or five year party. Now, obviously, like anywhere else, the second time you go back for that loan or the credit card, it's not gonna happen. But this feels a little bit like that.
• 8:05
  Will Krasne: Yeah. Yeah. I mean, Don Draper can steal a guy's, identity in Korea, you know, but you can't do it twice.
• 8:14
  Hiten Samtani: What is your name? Dick Whitman. Let's talk about one of the more sensational cases of bad boy guarantees, The GVA case where Benefit Street Partners, which is one of the debt funds that's quite active in this mix, came after the principal, Alan Stalcup, for, I believe, was $285,000,000, which they said that he's personally liable for. One of the more interesting allegations that they make is there was a fire, an actual fire at one of these properties that they loaned on, and he didn't report it to his lenders for eighteen months.
• 8:47
  Will Krasne: Yeah. That's a that's a bad boy. That's a that's a very That's
• 8:50
  Hiten Samtani: a really bad boy.
• 8:51
  Will Krasne: That's a naughty boy. And, you know, you're gonna have to be made whole there. And I can tell you personally, because I had a building get hit by a tornado in August, and I'm dealing with this exact thing right now. And I would tell you that my lender is being way more chill because I told them within three hours of it happening and, you know, got the insurance proceeds, deposited it in this bank. And I had lunch with the guy last week, and he's like, thank you for all you've done for the bank.
• 9:17
  I'm like, I've done nothing other than have a building get hit by And, you know, if you're transparent and you're working with your lender and, like, just saying, hey, here's the reality of the situation, like, more often than not, if you can show a clear path, they're gonna give you the benefit of the doubt.
• 9:34
  Hiten Samtani: Is the bar for good behavior that low?
• 9:36
  Will Krasne: This is real estate, man. Yeah. I mean and it's hard because you have to have these uncomfortable conversations, and it it means your business plan's kinda shot. It means it doesn't mean you can't make money. It doesn't mean you can't come back, but it's really difficult.
• 9:48
  It requires a ton of work, and, you know, it's not hashtag, passive income like you'd see on LinkedIn. It's not gonna set you financially free from your nine to five, and it requires actual work and expertise.
• 10:01
  Hiten Samtani: I guess this is a more obviously dramatic headline, warranted case where you've got a one of the biggest syndicators out there, one of the bigger debt funds. But what is the vanilla everyday version of a bad boy dispute?
• 10:13
  Will Krasne: I mean, a lot of it is just not having the infrastructure to properly do reporting. I mean, you can just be tripping a technical default by, you know, if your lender requires monthly financials, not quarterly, and you're not doing that. Mhmm. If you're not, you know, escrowing enough for property taxes or insurance, I mean, any one of these things can trigger something like that. And frankly, now where you have folks so much money are raised by people who are so inexperienced.
• 10:38
  I mean, it's hard to buy a deal. It's not just, you know, telling the broker you'll pay the most. I mean, you need to set up, you know, five bank accounts for each property. Each one of them has to have a different function. And if you're not if the funds don't flow appropriately through that or if you signed the org chart incorrectly, like, you can be in default.
• 10:56
  And that's not even necessarily something people do, you know, out of malice. It's just hard. I mean, I can tell you right now, I'm buying a deal with pref. I mean, they literally call for signature block the waterfall because of how many entities there are. So it's really, really hard, and so much money got raised by so many people so easily who didn't have the background or the infrastructure to support it.
• 11:21
  Hiten Samtani: Yeah. There was a lot of babe in the woods sort of action at least in the Zurpy area, that zero interest rate policy between 2020 and 2022. One of the things that generally for me is a good sign of what's happening in the market is which kind of middlemen are active. So is there, like, a cleanup crew that's coming in now and saying, alright. We will help you properly structure deals so that you're not gonna get dinged by your lenders?
• 11:43
  Because I think about, you know, the some EB five, for example. During the EB five era, the regional centers became absolute main characters in the CRE drama.
• 11:52
  Will Krasne: It's actually on a smaller scale, but I think it's growing and it's gonna become really important. And, you know, when you start in an investment firm, you know, you're in asset management generally or acquisitions. And asset management is less glamorous, generally get paid less, and it's not as sexy, but it is so important. And it's the little stuff about just how you run a property correctly. Like, how do you negotiate with your lenders if you need an extension?
• 12:16
  How do you make sure that the leads that show up on your property website are getting called back? Basic blocking and tackling of actually running these things. Uh-huh. And so there's the rise of these fee based third party asset management firms.
• 12:29
  Hiten Samtani: Yeah. Who's who does what's Keitel's character's name in Pulp Fiction? The Wolf. The wolf. Yeah.
• 12:34
  So you're looking at basically the wolf of
• 12:36
  Will Krasne: why was he at a funeral at, like, six in the morning?
• 12:40
  Hiten Samtani: It's Harvey Keitel. Are you really gonna question his moves? It's a
• 12:43
  Will Krasne: great point.
• 12:44
  Hiten Samtani: It's thirty minutes away. I'll be there in ten. It stands to reason that one of the most spectacular rises of this, let's call it the Sunbelt syndicator boom, where tens of billions of dollars of product traded in a matter of a couple years to very, very inexperienced sponsors, Stands to reason it would all kinda come down in equally spectacular fashion. Have you seen this kind of thing play out in in other eras of the market?
• 13:11
  Will Krasne: It happens every cycle. You think back to when the tax laws changed in 1986, you know, and that's what brought about the S and L crisis. I mean, there are people who went from being worth 200,000,000 to negative 200,000,000 in, like, seven months. And the exact mechanics of it differ, but people finding a loophole or finding sort of where you're able to raise money, and then that's just the way it goes. I mean, it's the way human behavior works.
• 13:34
  We're gonna overflood it with capital, and then you're gonna have to pay too much for stuff. Fundamentals won't support it, and then it'll come back the other way.
• 13:41
  Hiten Samtani: And then downstream of all of that, you end up with, you know, Style Cup not telling his lenders that a building burned down, allegedly. Not telling his lenders. So to sum up, lenders are now looking for any edge they can get in their battle to recoup funds from underwater sponsors, and bad boy carve outs, which many sponsors probably agreed to without knowing enough about them, are giving off serious main character energy at this stage of the cycle. Alright. This next one hits all our sweet spots.
• 14:18
  High stakes New York deal making, mighty REITs, weird partnerships, checkered fast, botched deals. It's kinda crack for the promote. So, Will, what the hell happened at Worldwide Plaza?
• 14:28
  Will Krasne: So, basically, what happened is New York REIT was liquidating, and they were selling all their properties because the value of the properties themselves were much higher than the stock price implied the value of the company was. So he just sold everything. And again, you know, it's basically a Benjamin Graham net net for lack of a better term. And so this was part of the Nicholas Schorz complex.
• 14:51
  Hiten Samtani: Oh, that name that that name always gets me such an operatic character.
• 14:56
  Will Krasne: I love it. Tremendous tremendous Google rabbit hole that I recommend you waste a couple hours on. It's it's it's excellent.
• 15:02
  Hiten Samtani: Yeah. Listeners, we're gonna in the show notes, we're gonna put in a couple of reads for Nick Shorsch. Definitely, definitely recommend spending the time.
• 15:10
  Will Krasne: So, essentially, the company was just gonna sell all its assets. And this building in particular, it's enormous, you know, well over a million square feet. And the problem is that a third of it was leased to Cravath, which is, like, the whitest of white shoe law firms.
• 15:23
  Hiten Samtani: Absolute whitest.
• 15:24
  Will Krasne: Yeah. I mean, it's in billions when Chuck pretends in season one to leave the Southern District, he goes he gets an offer from Horvath, like, it's that kind of firm. And so their lease was up in 2024, so seven, eight years out. And given that this is kind of a crap building in a weird location, everyone knew they were gonna leave.
• 15:43
  Hiten Samtani: This is 2,000,000 square feet and it's in Midtown, but it's kind of a shitty part of Midtown?
• 15:48
  Will Krasne: Yeah. It's it's too far west where you wanna be in the not west enough. So just sort of middle of nowhere. Mhmm. And everyone knows that we're they're gonna leave.
• 15:56
  And so looking ahead, you have a massive hole in the rent roll. And the issue isn't just that that rent's going away, it's that it's gonna cost you tens and tens of millions of dollars to fill between leasing commissions, tenant improvements, vacancy costs. And so two big landlords in New York, RXR and SL Green, bought a stake in the building because they think, hey. We've got all the leverage. You've got an undercapitalized landlord.
• 16:20
  We can beat up New York REIT, force them to, you know, keep some of the purchase price in escrow to pay for the vacancy.
• 16:26
  Hiten Samtani: Yeah. And just to I mean, New York REIT is a vehicle that was essentially trying to go away. So they're not necessarily suited up for battle in the way that SL Green and RXR. This is their game. Like, they're used to living and operating in this market.
• 16:39
  New York REIT was just trying to go away.
• 16:41
  Will Krasne: Yeah. A %. And, you know, New York REIT maybe not aptly named because they weren't really prepared for the fight, I guess. But the great thing though about this structure is that so essentially, they were gonna keep a big chunk of the purchase price held in escrow to help cover those costs. And so SL Green and RXR think they're making a little bit of a coup, and they're gonna basically, you know, get the seller to pay for this.
• 17:04
  Hiten Samtani: Yeah. So is that how it's structured? You basically take a chunk of the money that you provided and say, hey. This money can only be used for this specific purpose and cannot be removed and put into any account. Is that kind of a simplified way of thinking about the situation?
• 17:17
  Will Krasne: Yeah. But, I mean, the great thing about commercial real estate is that you can do whatever you want if someone's gonna agree to it. And that's what happened here. You know? RXR and SL Green think they have them by the shorthairs and say, we're paying you, you know, $460,000,000.
• 17:31
  You gotta keep 90 of it in escrow to pay for this. And, you know, we know this vacancy is coming. You know it's coming. You don't have any leverage, and the building's gonna be worth less every day. And so New York REIT thinks, okay.
• 17:43
  Well, it's a way for us to get an optically higher price. You know, maybe we don't spend all that money. Hey. Maybe Kravath stays. I don't know.
• 17:50
  And, basically, it's just a hope note on all that money.
• 17:53
  Hiten Samtani: So just to put some numbers on it, $460,000,000 odd purchase price, SL Green and RXR who frequent partners and sometimes antagonists, they came into the building. 90,000,000 of that money was put into escrow account to fund whatever improvements or whatever had to happen with Cravath leaving the building. Correct?
• 18:10
  Will Krasne: Exactly right. And so I'm sure our sharp listeners are thinking, well, this is happening in seven years. How long did this money have to be in escrow for? It's a great question. Mhmm.
• 18:18
  And New York REIT had filed their liquidating plan in, like, 2016 or something. And so this money just couldn't stay out forever because, again, they earn liquidation. They have to distribute that money to their shareholders. There had to be some sort of term. And New York REIT is alleging that the sale doc said you had to keep this money in escrow for a year.
• 18:36
  If we find a tenant, you've gotta use it to pay for that. But if not, we can get it back. And the judge is agreeing with him saying basically, SL Green and RXR, even though you're saying that money is yours, it's been up forever, and you've never leased the space. So, you know, we should get it back. And the judge is saying, no sophisticated investor would require $90,000,000 to be put away forever without a way to get to it, you know, which is a good point.
• 18:58
  Hiten Samtani: I guess the way to think about it, there's a statute of limitations on escrow money in this case. Exactly.
• 19:03
  Will Krasne: You know? And so a little bit of egg on their face for RXR and SL Green and, you know, score one for little guys.
• 19:09
  Hiten Samtani: Little guys as in New Green. I also wanna say on this one, I absolutely love that New York Reed was looking at Joel Moynian of all people to get themselves out of this mess.
• 19:18
  Will Krasne: Yeah. You know, it's like, you know, John DiCerro's character in to live and die in LA. You know, the three lies people tell. I love you. The check is in the mail, and then the third one that I can't repeat.
• 19:28
  But that's, like, relying on Joe Moynian. Nice Corey
• 19:30
  Hiten Samtani: callback there. And then this building on top of all the partnership squabbles that they have, it has nearly a billion dollars of distressed CMBS. So they're trying to work things out with their lenders, trying to get an extension. But I guess if you had to handicap this building's chances, what do you think?
• 19:46
  Will Krasne: I mean, it's a crap building with a bad cap stack, and Scott Reckler can, like, write more white papers, but it's not gonna change that.
• 19:53
  Hiten Samtani: Look. We're gonna get on to our next story, but I wanna say this Manhattan titan battle, SL Green, RXR, New York REIT, ninety million sitting in an escrow account in a skyscraper that no one wants to be part of, that's a perfect story for the promote. I just wanna say a very, very quick aside. This Marc Nussbaum stuff, it just keeps getting crazier and crazier. We're gonna have to do a proper dive on this soon, and I promise you we will.
• 20:22
  But real quick for now, Nussbaum, who's a go to CRE attorney for the Lakewood, 5 Towns, Brooklyn Dealmakers, is now being accused of taking $15,000,000 out of an escrow account that he controlled and paying it as sort of Stormy Daniels type hush money. And someone else apparently was about to report him to the authorities, so he coughed this money up. This is just one of the pieces of illegal firestorm that's been rained down upon Nussbaum in the last couple months, and it's gotten really, really, really crazy. One of his close associates, Mandy Steiner, killed himself at the Amman about a month ago. So this is a really big case.
• 20:55
  We don't really have time for it right now, but I just wanted to state it for the record because we are gonna come back to it. Any thoughts on that one?
• 21:02
  Will Krasne: I mean, that's not the craziest thing I've ever heard out of coming out of Lakewood. I mean, I know of a guy who put a mezuzah in an office building that was being foreclosed on and tried to claim it was his temple, they had religious protections from his lender.
• 21:15
  Hiten Samtani: It's such a different world out there, man, and some proper yarn. I swear we'll get to it soon. Let's get into our final story for the week. Alright. You know what?
• 21:22
  I'm just gonna let you cook here because this is such a Will story. It's about great men of business history. It's about the loss of juice. It is, of course, about PIMCO, which has been hemorrhaging talent in its CRE and debt ranks. Now some of the departures were apparently triggered by its RTO mandate, return to office, but I don't quite buy that.
• 21:40
  What I think happened here according to Bloomberg is there's a sense within and without the firm that PIMCO is no longer as aggressive as it once was. And that is a wild place for a company that's most associated with a guy called Bill Gross to be. So maybe, Will, thirty seconds on Bill Gross
• 21:57
  Will Krasne: to start. Look. I mean, Bill Gross, obviously a legend. I don't work in fixed income, so I'm sure people can talk about how he had these, you know, genius laddering strategies and created a bunch of alpha. I mean, I just look at it and would say, well, you know, his career sort of overlapped with a thirty year bond bull market.
• 22:13
  If you've read the Bond King, the wonderful book about him, he comes off as, to put it charitably, a lunatic. Mhmm. And I think, you know, all these organizations are sort of created in the image of their founder or
• 22:25
  Hiten Samtani: Founder or rainmaker. Right? The the guy, whoever the guy was. Yeah.
• 22:28
  Will Krasne: Exactly. Yeah.
• 22:29
  Hiten Samtani: Yeah.
• 22:29
  Will Krasne: Like Milken at Drexel even though he wasn't the founder. And so, you know, PIMCO also sort of pays people a gazillion dollars to do nebulous stuff with nebulous performance. I think that's sort of in the in the DNA there. I mean, they paid Muhammad Al Arian a hundred million dollars to do God knows what Listen.
• 22:48
  Hiten Samtani: The guy is very, very good at LinkedIn. You gotta give him that.
• 22:51
  Will Krasne: He is. I give him all the props. He's great at mustaches as well. And I will say they've given given us sudden Strack on Real Housewives of Beverly Hills because her husband was very senior at PIMCO, and his divorce settlement is paying for her on the show, which is excellent. So it can't be all bad.
• 23:05
  But look, it's one of these things where it shows that if you hit a vein in terms of product market fit, for lack of a better term, the upside is almost unlimited. So they had a fixed income, low volatility product when that's just as pension funds, sovereigns, and everyone else was becoming more financialized and had these fixed obligations.
• 23:22
  Hiten Samtani: That's that's what the world wanted at that time. Right? That's what the world wanted. Right?
• 23:26
  Will Krasne: Yeah. Exactly. So, you know, they got that's how you get to a trillion dollars of bond assets, you know, and even at a, you know, pretty low fee level, that's a lot of money.
• 23:34
  Hiten Samtani: And and so what happened here exactly? I think the big takeaway for me was the sense that PIMCO has lost its aura. How big a deal is aura in this business?
• 23:42
  Will Krasne: I mean, it's a huge deal. It always matters. I mean, aura is the lowest cost of capital. You have to be above the fray. You have to know what's coming around the corner.
• 23:51
  It's why Blackstone kept saying office was 2% of our portfolio or Barry Sternlicht was saying we made a small investment in malls that didn't work out. And I mean, I hate to pick on him, but it's why Scott Reckler keeps writing white papers about project Kodak or whatever. None of that adds value. None of that makes better investments. It's all marketing because, you know, at the end of the day, like, there's huge amount of risk in investing.
• 24:13
  I mean, risk is inherent in it. And, you know, you gotta go there's there's career risk allocating money to these people. And so if you're saying I'm giving money to someone with a lot of aura that people recognize, then you're able to work around that career risk.
• 24:27
  Hiten Samtani: Yeah. What's what's that old chestnut? You never get fired for buying IBM, is it?
• 24:31
  Will Krasne: Yep. Exactly. And it could just get makes it acceptable for people to give you more money, and this is what it's really all about. Any of these big organizations, and frankly, there's been a lot of consolidation in mid market, private equity in the last couple of weeks, which I think we should talk about, at a later date. But a lot of people that have built these massive machines at this point, they weren't built because the founders were exceptional investors.
• 24:54
  In some cases, they were. But in almost every case, the early investments were excellent because that's what you have to build off of. But now it's really about creating a safe place for people to allocate money to when they know they're not gonna get fired.
• 25:06
  Hiten Samtani: You never get fired for allocating the Blackstone. Right? And I think that's part of it.
• 25:09
  Will Krasne: Yeah. Exactly.
• 25:10
  Hiten Samtani: The top people at these firms tend to be exceptional, exceptional storytellers. And what they also do very well is they corral the entire firm around the messaging. So you brought up Blackstone. You know, they started off by talking about when they were taking some serious hits or black eyes on the office market. Everyone from Schwarzman on down started talking about how Blackstone's allocation to US office was less than 2% of its portfolio.
• 25:35
  Guess what? They've kinda changed their mind now. They just made a big buy in Midtown Manhattan, their first in almost four years, and now everyone's talking about reacceleration. There's a bottom here. And you see the you kinda see that language manifest in every part of the business.
• 25:50
  It's actually pretty impressive.
• 25:51
  Will Krasne: To me, this is just the new assembly line. You have the, you know, associates from Deutsche Real Estate who went to Harvard or Yale or Dartmouth, and they're sitting there, and they might as well be making widgets for a car. Just the widget in this case is, you know, a 13% net IRR. And that's what this whole thing's about. I mean, there's no real special sauce other than size and scale, which does matter.
• 26:16
  Hiten Samtani: Mhmm.
• 26:17
  Will Krasne: But, you know, the real returns are made early. I mean, think about how many careers were made off of, you know, Westbrook fund one
• 26:24
  Hiten Samtani: Mhmm.
• 26:24
  Will Krasne: In the mid nineties. I mean, Rockpoint spun out of that. Westbrook has kept raising.
• 26:29
  Hiten Samtani: Or Morgan Stanley, mezz ref one and two. Right? And then it all went to shit after.
• 26:33
  Will Krasne: Yeah. Exactly. So, you know, if you can get sort of minted, that's really what matters because we can go see you can go look at a state pension fund. They have to report their returns. You can see what these people do.
• 26:45
  Yes. And I'll tell you what, there's a lot of high single digits in their net.
• 26:49
  Hiten Samtani: Well, what happens though, like, when we when we talk about PIMCO again, we saw a lot of their executives move to Blackstone, BioMed, places like that. But it seems like it's the same cast of characters that plays out. Every five years, they might move from one from a Blackstone to an Ares to a KKR, etcetera. It's the same crew.
• 27:07
  Will Krasne: It's the same in, you know, pod land. You can go work at Bali Asmith. You can get fired and go to Varition. You can go to 0.72. You can go to Millennium.
• 27:14
  You can go to Citadel. It's sort of on and on and on. I mean, I think about what, Chris and Andy say on the watch, they call everyone running a media company the Bobs because they're all white dudes named Bob. Like, it's just we got a lot of Bobs. Oh, hi, Bob.
• 27:27
  Bob.
• 27:28
  Hiten Samtani: But I think the the idea that it's all about narrative, and narrative is the thing that drives fundraising, and we've seen I think it was a pretty fantastic stat today that I was looking at from Prequin. We're in 2019, the top six firms raised about 19% of total capital. And now from q one and q three of twenty twenty four, they raised about half the total capital out there. So it's just it's this consolidation machine, and you need to spend some kind of narrative to keep that going. So I think that's where we'll end it.
• 27:58
  Will Krasne: Yeah. No. I think that's a good place to stop. I mean and, I saw today that it's actually the first it's, like, fundraising beat I'd seen, which was FPA multifamily actually hit their hard cap and were above their guide. You know, it's the first one of those I've seen in a long time.
• 28:10
  There've been a lot of hunk buns out there.
• 28:14
  Hiten Samtani: I guess, as Will said, aura is the lowest cost of capital. And if you lose your aura, you're gonna have a hard time retaining the kind of talent that you wanna have. That's it for the promote podcast this week. We chewed on a lot of stuff. Bad boy guarantees, Midtown Manhattan titans going toe to toe over a skyscraper, and we also talked about the loss of Aura at PIMCO.
• 28:37
  We'll be back next week with more CRE insider goodness. Thank you to our listeners. Write in with your
• 28:43
  Will Krasne: feedback at podcast at ten thirty one media. That's t e n three one dot media.
• 28:52
  Hiten Samtani: Will, thank you. That was a blast.
• 28:54
  Will Krasne: Real estate and gossip, how can you beat it?
• 28:56
  Hiten Samtani: Exactly. We'll see you back next week. Thanks.