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Keep Calm and [No] Carry On · The Promote Podcast

• Hiten Samtani (00:05) You grind nights, weekends, and holidays. Will Krasne (00:08) You respond to emails within three minutes. Hiten Samtani (00:10) You miss dates, friends' birthdays, kids' soccer games, and so many other moments that make up a life. Will Krasne (00:16) You do it, you endure it. Hell, you even take pride in it. Because you know there's a pot of gold at the end of the rainbow. Or more precisely, there's a pot of gold at the end of the fun life. Hiten Samtani (00:33) But then the day arrives and the pot does not manifest. Will Krasne (00:37) And you remember the wise words of Anton Chigurh Hiten Samtani (00:40) If the rule you followed. Is what's the rule. Welcome back to the promote podcast, your insider guide to the money and mania of the CRE markets. I'm Hiten Samtani. Will Krasne (00:59) And I'm Will Krasne Hiten Samtani (01:03) A shout out to our sponsors, Bravo Capital, a leading HUD and Bridgelander. Will Krasne (01:07) Loan Boss AI, our favorite CRE debt management software, is now supercharged by AI. Hiten Samtani (01:13) You'll also hear during this episode from our friends at Gibson Dunn, top attorneys of the firm take us inside the cap stack in a series of conversations. This week, it's time to address the unrealized elephant in the room that is the biggest pain point in institutional CRE. Carry or more precisely, the lack of it. Thousands of the smartest guys and girls in the business have spent the last few years preparing for an outcome that never came. And grappling with that reality is shaping everything from talent moves to firm restructurings. Will Krasne (01:40) That I was promised that we would survive until twenty five. Hiten Samtani (01:43) Yeah, that did not work out, my man. Will Krasne (01:45) Nothing light about today's main segment. But let's kick off things with the punch list, our signature rundown of the newsiest news and CRE. This week's punch list is powered by HEquities. If you're a mid-market sponsor, hello, stuck on either side of the capsack, Elliot Horowitz's team can help. Hiten Samtani (02:05) Need a bridge loan of up to 50 million? Elliot's her guy. Need an experienced co-GP to come in with that last 20% of equity? The most crucial slice? He's got you covered there too. Will Krasne (02:14) Find him at hequities.com That's hequities.com Also, Elliot, for my 30th birthday, I went to a YJP event that he was the moderator for. He did a great job. Hiten Samtani (02:24) Hey small world. Will Krasne (02:26) So one of the pod's favorite stories, potentially hiten's favorite story of all time, maybe reaching its denouement. Hiten Samtani (02:33) Well done. Floyd Mayweather has dropped a civil lawsuit, which is a $175 million lawsuit, by the way, against Jonah Rechnitz, his one-time conciliary, main man, guide to the From World. Remember, he had alleged that this was a long con. He had called Jonah a thief, a snake, a rat, the worst person in the world, and said that he had misappropriated everything from his cash to his CRE equity stakes to his jewelry and even an aircraft. Will Krasne (03:00) Resputin, except he there's not like a great dance that everyone plays at weddings. It's funny because if you lost $175 million and you think you really had the goods on somebody, you don't drop the lawsuit. Honestly, I think what happened is Joan Rechnitz who for all of his flaws is incredibly savvy when it comes to utilizing the legal system. I'm pretty sure he made sure he had the receipts where he needed to. There was some sort of power of attorney because he saw this comment. Jonah Recknitz knows that all roads lead to litigation. Yes. Yes. You gotta make sure you prepare yourself. Hiten Samtani (03:31) Floyd Mayweather's never lost a fight in the ring, but he's been walloped several times in CRE so far. And remember, this is probably not over because there's a couple things. One, it was dismissed without prejudice, which means Will Krasne (03:43) You can file again. Hiten Samtani (03:43) and two, there's some side element to this with Black Spruce and Josh Gottlieb and that whole thing. Mayweather had alleged that the distributions had been misappropriated. Will Krasne (03:52) Once the litigation started and Josh didn't know where it was supposed to go to, he just funded it to escrow because he's like, this isn't for me. Hiten Samtani (04:00) Rechnitz is demanding a full accounting of that distribution and alleging that Black Spruce kept paying out the split. Okay, next one, our guy. Will Krasne (04:08) Gary, what a fall for this guy. You think after a busy summer, it's time to kick back, go apple picking. But no, he he's actually going bigger. Hiten Samtani (04:18) He is. The ABC campus on the Upper West Side, which Gary had secured some time ago, he is now looking for a three point eight billion dollar financing package for his condo development project. The word is that JP Morgan is prepping to lead that financing. Will Krasne (04:34) Now, we know Gary. Uhhuh. There's going to be meds, there's going to be structure, there's going to be Hiten Samtani (04:39) Source. Will Krasne (04:41) Let us not forget that his existing loan on this property, which by the way has been ticking for four years, is nine hundred million dollars. And the acquisition financing is from a firm that has been in the news. Guggenheim and also Aquarian Holdings, who also have been very active and yes, they're gonna be taken out by a loan four times the size. Hiten Samtani (05:02) A couple of things to note here. One is that for Nordstrom Tower, which was his last big condo moonshot on Billionaires Row, the construction loan was just nine hundred million dollars. And at that time that seemed mammoth. Will Krasne (05:13) Well, Nordstrom had a couple things going for it too. One, Nordstrom bought the to the base of the tower, which made the whole thing Hiten Samtani (05:19) Risk automatically. Will Krasne (05:20) And two, Gary also went vertical without a construction loan. Hiten Samtani (05:23) That that he did. Will Krasne (05:24) Which is one of the most insane things I've ever heard in my life. Yeah. So at least at this point it sounds like he's he's you know, and it he's calming down a little bit in the seventies. He's waiting to get the capsac finalized. Hiten Samtani (05:32) Well, there's a lot of pref involved here. I don't know the exact structure, but my understanding is JVP is somewhere in the mix here, potentially cluttery money is somewhere in the mix here. So it's gonna be a good time, as it always is with Gary Barnett. This is on the heels of what securing one point two five billion dollars for the torch. Will Krasne (05:50) And I love that there's something bigger than the torch. Hiten Samtani (05:53) God bless him. You need people like this to keep it as exciting for us. Indeed. Okay, next one. Los Angeles, things are going from bad to worse. Will Krasne (06:03) Not talking about the paramount. Hiten Samtani (06:05) There's a pretty amazing new statistics. Will Krasne (06:08) So this is from Colliers. They said 50% of all LA metro. So this isn't just downtown LA, which I think when people think of distressed LA office, you think downtown, but half of LA metro area office sales in last 12 months were done at a loss. Hiten Samtani (06:23) Interesting quote here from Newmarks Kevin Shannon that really explains why this is happening. He says, We're still at a stage where a lot of your sales are lender driven. So it's not surprising that so many of them are at a loss. It feels like in the last year and change, there's been some kind of come to Jesus moment in the lending side of the business. And you're seeing them accept, take the L and move on. And that has served as a a laxative of sorts for the investment sales market. Will Krasne (06:49) You've taken the four things of metamusle and you're just felt the first little movement. But we're not all the way there yet. Anecdotally, I am feeling like the first bit of capitulation on the multifamily side. Really, it was the treasury move in the last two, three weeks. I think where people just said, okay, this isn't happening. We're gonna be doing this for another couple of years. So let's just cut it now. Hiten Samtani (07:12) Okay, next one. My guy, Barry Diller, people think he had a play going, an $18 billion play to acquire MGM Resorts. Huge hospitality empire. He already owned, what, about 27% of MGM, and he just made a play for the rest. He couldn't make it happen. He couldn't fucking sell it. Will Krasne (07:31) guy who really made his fortune on the internet and he pivoted 180 degrees and acquired a huge stake in MGM during the pandemic because his thesis was that the in-person event can't be disintermediated by AI, which is a bet that a lot of people are making. Ari raised Hiten Samtani (07:48) Are Emmanuel, yeah. Will Krasne (07:49) two billion dollars for Mari between Barry Diller's autobiography and which I read earlier this year and you just read as well. Hiten Samtani (07:56) I did and I just ordered roll the calls. Will Krasne (07:59) I was gonna say I just started roll calls. Hiten Samtani (08:01) So Will Krasne (08:02) We're seeing a lot of experiential businesses by guys releasing memoirs this year. But anyway, this sounds to me so people ink I think the market cap is less than three billion dollars. And so this would have been a minnow swallowing the whale situation. And you would have thought that a guy like Diller, who has legendary track record, Hiten Samtani (08:19) Connected. Will Krasne (08:19) may not have the balance sheet personally to do this, but certainly Hiten Samtani (08:24) Park his boat at any slip in the world and hit up anyone he wanted. Will Krasne (08:28) can put together a consortium. Sounds like he couldn't get the financing, honestly, like reading between the lines. Hiten Samtani (08:32) And it's interesting because looks like Gm might be turning the tables on him. Well Will Krasne (08:36) Yeah, I'm sure they don't like having a shareholder like this. You have a loud guy who owns such a big stake of this, and he's done very well on this stake. So they may say, All right, we'll get this back, we'll give you some premium and we'll get the rest of your publishing assets. Hiten Samtani (08:50) The important thing here is MGM, the real estate specifically is not in play here. The brick is not in play. Will Krasne (08:55) Yes. During the whole Apollo ownership of Caesars, they ended up spinning up OpkoPropco and created this net lease rate essentially with all the gaming. Yeah. It's called Vici. Vici bought MGM's real estate in a massive deal for eighteen billion dollars. And MGM now I think pays it's like a quarter or a third of Vici's gross rent. They pay a billion dollars a year. Hiten Samtani (09:19) That's amazing. Vici is also randomly the meslender on one Beverly Hills, which we've talked about in detail. All right, next one. Nanobank has gone under. California regulators seized this bank, and they said there was a kind of a history of mismanagement, and there was a lot of concern for many years from the Fed and others about its concentration of CRE assets. Now, Nanobank is befitting the name, it's quite nano. Perfect. Will Krasne (09:44) Perfectly miniature. Hiten Samtani (09:45) This is only 700 million of AUM, but I think what it lacks in size, it's more than made up in being a giant pain in the ass for the CRE capital markets. If you remember, Will, we talked some months ago about the almost made for HBO CRE Fugazi first position scheme, allegedly orchestrated by a guy called Mahinder Makijani. And Nanobank, which was formed by affiliates of Makijani, had this random loan. That sat on top of the loans that Zions and Western Alliance had. You know, the scandal led to $160 million in losses for these banks. And when Zions announced that this happened, they shed a billion dollars in market. Will Krasne (10:28) Let just say one thing. With all of the private credit Sturm and Drong, particularly around Guggenheim, Todd Boley, Mark Walter, all the insurance subseries, this is essentially what they're doing. Like, you know, you may think an asset is conservatively levered if you are the senior lender, because you may say, All right, this guy's got seventy percent LTV, he's got thirty percent of the equity. But then what you don't realize is that ninety percent of that's the LP money. Yeah. The LPs are borrowing against their stakes to fund this. The GP ten percent. They're borrowing against their stakes to fund this. So in reality, if you look at the whole consortium, it's a hundred percent levered essentially. Hiten Samtani (11:09) I'm not sure if those guys had armed guards show up at the property and season. Will Krasne (11:13) Correct. All I'm saying is that one side of the street, you know, you may have armed guards, the other side of the street you may be like, God, I gotta sell the Lakers, but I get to keep the Dodgers. Hiten Samtani (11:23) Alright, that's it for the punch list. When we come back, we're gonna carry you through a pretty tough story. Will Krasne (11:28) Or not. Hiten Samtani (11:29) Or not. Okay, let's go inside the cap stack with Gibson Dunn's Jen Yashar Will Krasne (11:35) Mm. Hiten Samtani (11:37) Jen Yashar from Gibson Dunn, thank you so much for being with the promote. Jen Yashar (11:40) Thank you for having me. Hiten Samtani (11:42) There's no such thing as a spec office tower anymore. If a tenant is coming in on essentially a blank sheet of paper or just a rendering, from a structuring perspective, what does that look like? Are tenants also having conversations with characters within the Capitals text? Jen Yashar (11:57) Yeah, obviously is a lot more uncertainty when you're leasing a building that's not built yet. In many of these deals, the developer has not yet obtained their construction financing. They're at different stages of raising the equity. Depending on where they are in that process, a tenant is looking for different things, guarantees both from a creditworthy party of the landlord, and then Certain rights that you want a lender obviously to recognize your tenant improvement allowance, what happens if the building is late, if it doesn't get built, you're gonna wanna make sure you're still protected, even if the lender were to step in and things didn't go according to plan. The landlord needs flexibility to deliver the product that they're promising. So making sure there's enough flexibility on both ends. Hiten Samtani (12:50) Jen Yashar from Gibson Dunn, thank you so much for being with the promote. Hey multifamily folks, I want to tell you about the promote's upcoming HUD webinar on October 14th. Aaron Krawitz and Matthew Fisher of Bravo Capital will join me to break down why HUD belongs in every multifamily market rate financing conversation. They're gonna go through an actual deal in detail. If you've ever had questions about HUD and Bridge to HUD, I really recommend joining us. Wednesday, October 14th at 2 p.m. Eastern. More deeds and sign up at thepromote.com slash HUD webinar. That's thepromote.com slash HUD webinar. Okay, back to the show. Will Krasne (13:36) When you join a private equity firm, a big private equity firm, the base salary, it's just okay. One firm famously had, I think, the highest base salary anyone could make for a while, including the co-founders of the company, who are, you know, on the Forbes list, I think was $250,000 a year. But, you know, the base salary is just one piece. You also get the bonus. And the bonuses range from I quit the bad I quit, like you didn't pay me enough, to south of the highway, but not on the water. Hiten Samtani (14:05) So pretty good. Enough to make a living, but not the thing that gets the juices flowing and that causes you to put in the seventy hours a week. Will Krasne (14:12) Exactly. But what did do that was the carry. The carry was supposed to be the pot of gold. And frankly there just hasn't been any recently. Hiten Samtani (14:22) For quite a long time. Will Krasne (14:24) It'll be Hiten Samtani (14:25) useful to have this definition. Why don't we just describe in very simple terms what carry is? Will Krasne (14:31) So let's just take a quick step back. So private equity real estate, and frankly, most of the real estate investment firms in general, they make money in just a handful of ways. So you get upfront fees, acquisition fees, or any dev Hiten Samtani (14:46) Construction management fees. Will Krasne (14:48) fees. And in some instances those are very justified. If you're a Litech developer or something, the developer fee is part of the deal. Hiten Samtani (14:54) The other side is like in some cases we saw in the multifamily syndicator boom, the fees were the whole entralada. It didn't really matter if your deal was in the money or not. Will Krasne (15:02) Exactly. You see a lot of people on LinkedIn say, I run a real estate private equity firm. You run a real estate private equity firm if you have a blind pool of capital to go buy deals. Full stop. Like that's it. You know, no offense to anybody else. You run a real estate investment firm, that's great. I run a real estate investment firm. It's great. But real estate private equity firms generally don't charge acquisition fees. They make money in really two ways. So asset management fees, which are in most cases charged on equity. So committed capital. Even if you haven't invested all of it. And then that changes over the life cycle of the fund. And then you get the carried interest, which is the split of the profits once the investors have received back their capital plus whatever preferred return. Yeah. And of course, there's differences in European waterfalls, American waterfalls, compounding versus non-compounding preference. We can get into that over beers, no problem. But just for the sake of this argument, it's the split of profits once the investors have received their capital back plus their preferred. Hiten Samtani (16:00) So I have returned my money to my LPs and I have done a really good job for them. I have made them the extra money that I promised I would make them. As my reward, I get this cherry on top. And that cherry on top has been the draw of this career. The reason that people get up and schlep into 345 Park or into any of those offices of the big firms is for that cherry on top. It can be millions of dollars for the right executives who've put in the time and the effort. Will Krasne (16:26) And one thing too is that all these firms that used to pay so much promote, they're on their mid to late cycle of funds. The rule of thumb kind of fund one, you don't really make any money. You kind of pay to work pay to work there. Fund two, you maybe like break even. But then fund three, as you get bigger, that's when you start making real money because the head count doesn't really skew linearly with your fund size. We can just run the math on this. If you have a billion dollar fund, you maybe be able to invest that with. Ten people? Yes. But you return a double and let's assume you have a catch up. So there's a billion dollars of profits. There's two hundred million dollars of promote uh-huh to split up among ten people. So this can go pretty fast. Imagine you have five funds that are being invested over series of time. This can really add up. Hiten Samtani (17:14) Let's say a couple of them hit, you can be making some serious buying sports team money eventually. Exactly Will Krasne (17:20) Yes you can. That's exactly. Hiten Samtani (17:21) right. And that has not been the case in a very long time for a combination of reasons. Things have turned quite violently in the office market. Interest rates are obviously a big part of this as well. Things have not worked out so well for the Blackstone Opportunity Fund series, all the big flagship funds of so many of the household name firms. Will Krasne (17:39) I'm going to tell you one reason why there hasn't been as much promote. And it's in a word you said there, but it's not the one you think. The word is big. Big. And a lot of the promote was made by firms when their fund sizes were much smaller. Yep. And that's what made it easier. And why are these funds so big now? And the the reality is because they went public. And Wall Street really values consistency of earnings, which promote is anything but consistent. It's lumpy. You may not get it. Wall Street doesn't really give you the credit for it. So what they valued above all was F R E, F P A U And that's what really matters, not you have on the balance sheet. Well Hiten Samtani (18:15) kind of why we're seeing it when the MA is happening, it's happening in that kind of predictable net lease, for example. Will Krasne (18:21) Exactly. That's what they want. You're not making a 25 hour Net Lease deal. Like you're just not. Hiten Samtani (18:26) You've talked about this before that often the fund you make your reputation on, you absolutely crush it on that fund. And then with that reputation you can go raise more and more money. But when you get to a certain scale, the game is not to go and crush it then. It's just to keep the game going. Will Krasne (18:42) Right, because we say returns don't matter, and that's really not true. I mean, they kind of don't, but they really do. What? Because what we've seen is a lot of the funds, unless you made it to where you're so big that you are inevitable, it's really hard to raise money right now. And there have been articles everywhere about how a lot of these sort of mid market firms where the fund sizes are two billion, three billion, have not been able to raise, not just in real estate across the board. Madison Dearborn, when I was in college, that was a As good as it gets place to go. And not like calling anybody out. These are just the names that are sort of mentioned in a lot of these articles, like Bloomberg had one today. It's really, really, really difficult if you're not returning capital. And if you are a big firm and you're public, you can pay your people through the stock. Yes. So you don't need as much carry. If you have five million of restricted stock over three years and that stock pays a dividend, you're getting taxed at half the ordinary income rate, plus you get cap gains tax if you sell that on your shares. You don't have to worry about the carry as much. But if you don't have that and you're in a tough environment, you're just getting that base and a bonus, it can be really difficult. And if you're living in a coastal city, in the old days, you could go launch a fund and have a balance sheet personally to go do this. And now it's really difficult. Hiten Samtani (19:58) Well, the capital's all flowing to the biggest boys, right? So that doesn't leave very much for the rest. And then that's part of why we've seen so much AUM gobbling. We've heard of companies that set out to raise and they're the market gave them a rude awakening. So ten months later they're running a process. A year and a half later they've been assumed by another company and all the assets just left. Will Krasne (20:18) We're in 40 year bond bull market. So rates came down, which obviously pushes people out the risk spectrum. And that just made things easier at scale. A broader thesis that I've kind of been thinking about is that if you look in real estate specifically, like a lot of the great real estate fortunes, the great businesses that were made by individual people, they were made in times of high interest rates because the financialization is so difficult. You cannot reasonably underwrite a multifamily deal right now to a 20 IRR. You just can't. Hiten Samtani (20:48) Our listeners sort of nodding with us as you say this. Will Krasne (20:51) It just doesn't exist. And the only people who can buy it are the people who don't need to be able to show a 20 IRR. Who knows what may happen? But if you think that rates may come down in five years, or you may think that your market is going to become more investable institutionally and capital is going to flow, pushing cap rates down, you can underwrite that as a private individual, raising private capital. You cannot do it as a fund. And the groups like Crow Holdings, which now of course is a big fund series, but started with Tramwell Crow. Morgan properties, who still don't have funds, but the guys in Atlanta, what's his name? We found it, Wood Properties, like all of those types of guys, like I think that's who's coming back. Hiten Samtani (21:28) Super differentiated thesis, small enough to keep overhead at a decent level and just go. Will Krasne (21:33) Exactly. That's what it's gonna be the next however long. And yes, like we can look at big thematic bets. And that's really how people have made their money in private equity. Because if you have a big fund, you can't go s sharpshoot a bunch of really high alpha deals. You have to look back in the boardroom. And I I give Blackstone a ton of credit for this for being the absolute best at this, figuring out a macro thesis, investing top down, and then putting a ton of capital behind it. They did it in industrial, they've done it in office. Hiten Samtani (22:00) Hotels, yeah. Hotels Will Krasne (22:02) multifamily and Hiten Samtani (22:03) and now data centers. Will Krasne (22:05) now data centers. But I don't know if you can do that anymore. Yeah. Hiten Samtani (22:09) So let's think about a private equity executive at l pick one of the big firms we just mentioned. You're going in every day, you're grinding for years, and these are brutal jobs. A job that takes a very severe personal toll on your life, your health, all kinds of things. Will Krasne (22:22) twenty five pounds heavier when I work in private equity. Hiten Samtani (22:24) People really lose a lot of Euros to these jobs and you do it because of that outsized reward that's supposed to come. The thing about those rewards though, they take a lot of Euros to bake. You can't say, All right, I'm gonna stick around another year and I'll see the money. It could be, I'm gonna stick around another six years because the new fund is kicking off. You really have to make a conscious bet that you're gonna put in that kind of lifestyle for another long stretch. Will Krasne (22:49) Well, here's the other thing. One, like people aren't retiring. We've seen a lot of senior folks go at Blackstone as we've talked about, but people aren't retiring. Like they're staying around and they're taking a huge disproportionate share of the economics and that makes it a lot harder to come up. Hiten Samtani (23:02) So it's not like Brookfield where they move into the conclave of retired executives, so just like a Will Krasne (23:07) Lot of money. The other thing too about this conversation is that we could have been having it in twenty sixteen. Because I remember having this conversation in twenty sixteen with the senior folks at some firms I worked at who hadn't seen a carry check in seven years. And you think about it and it makes sense. If you raised a fund in 2007, 2008, no carry. The top desktop funds, I think, made like a 10 in private equity. And so what it means is there's no carry. So it's 2012, you know, because it's really hard to fundraise before you make the next fund. And most private equity funds have a European waterfall versus an American waterfall. European means you have to return the entire fund before you can see carry, whereas American is you can get it on an individual deal, but there's clawbacks. So if you have a European fund, what that means is you have to sell most of your assets because a fund is in a lot of cases, it's like a New York City condo deal where the profits are just on the last 10 years. Yeah. Hiten Samtani (24:02) The very end. Will Krasne (24:03) Yeah. And that's the case here because you got to return all that capital. All that prep and then you're into it. Hiten Samtani (24:09) So what you're saying is you could have a couple of deals that went great, but you still don't know if you're gonna be making that reward until a couple of years down the line and something along the way could derail the entire shebang. Will Krasne (24:22) Exactly. And as time goes on, the IRR math works against you. So what you'll see a lot of times is and you can go look at Pencers, Calsters, all of the pension funds that have to report what I'll say is though is that if you're investing a new fund, it'll say like a vintage from a year ago, for instance. Now I'm not saying twenty twenty-five, but whenever you're looking at this from the previous year, it'll say w the gross IRR is a thirty-eight. And you know, total value paid in is a one nine. And DPI is a 0.05. And so over time, the DPI number goes up, T VPI comes down, and IRR comes down. And that's just how time math works. So from a private equity firm, the ideal you really want is you want to sell a bunch of big wins early because you want to get above the prep on the whole fund. And then you want to play for the long dollars. It creates this incentive structure where you want to sell your best deals early. Because you wanna put those points on the board from just a math perspective and return that capital. Hiten Samtani (25:22) Even though you could see those deals doing even better over time, you wanna get off, you wanna bank some gains right away. Yeah. Will Krasne (25:28) It's like what you're incentivized to do. And so what ends up happening is you sell the great deals up front and then you've got sort of the more troubled ones, which you try to like, all right, maybe we can work our way out of this and you keep those. Hiten Samtani (25:39) That's great point because then an employee can't really control where they come into the company, right? Will Krasne (25:45) That's where I was gonna go next. More on that right after this. Hiten Samtani (25:56) JP Conklin, welcome back to the promote. There's almost a running gag on the show now where Will can recite the Loan Boss tagline for memory, but the product itself has changed quite dramatically in the last year or so. You've started to incorporate AI in some pretty surprising ways. JP Conklin (26:12) I am an AI fanboy and have been from day one. We have just successfully launched all of our AI capabilities. No longer will a vendor and a customer have a discussion around here are the features that you want us to build, let's talk about how we're gonna build them. Instead, it is just simply we are structured data with real estate expertise and the rules and governance to go around that. And then you just plug in your imagination and you can make your data do whatever you want. We were able to ask Loan Boss AI various questions about covenant testing or stress scenarios, create a map of all of my deals, and I wanted bubbles to look a certain way. And then we would pivot to can we do a mortgage statement reconciliation? And it could do all that stuff because we've got this good old-fashioned software company that is being paired with really powerful AI. And then it's just, what do you guys want to do with your data? And they're off to the races. Hiten Samtani (27:07) JP Conklin from Penceford and Loan Boss, thank you so much for being with the promote. Aaron Krawitz from Bravo Capital, welcome back to the promote. What do you Aaron Krawitz (27:16) Hi Hitan, good to be here. Hiten Samtani (27:18) think about SNFs as a category? Broadly, 101. Aaron Krawitz (27:21) They're more similar to hotels than they are to multifamily. Both for an owner and for a lender, what should be top of mind is you're in a life safety category. If a hotel changes hands in a bankruptcy and all the lights go off and people might not get room service on time, that might be slightly unfortunate. In skilled nursing, you're entrusted with the lives of the elderly who are reliant on specialized equipment. If there's any bump in the road, you really have to make sure these people are prioritized and that it's more than an asset. Hiten Samtani (27:59) Distress in a capital stack can actually translate quite directly into distress in a person's life. And that's a pretty big responsibility as both an operator and I'd imagine as a lender. Aaron Krawitz (28:09) A hundred percent. That's why reputational risk is so important in general, but especially in the healthcare space where you want to be aligned with people who have been trusted fiduciaries for decades. Hiten Samtani (28:23) Aaron Krawitz from Bravo Capital, thanks for being with the promote. Will Krasne (28:29) way I think we might have learned that the promote is better with me off it because you just did an excellent interview with Cyrus from Presidio Bay. I thought that was great. Really, Hiten Samtani (28:38) Thanks, man. Will Krasne (28:39) really great. So kudos to you. Everyone go listen to it. Hiten Samtani (28:42) Well, kudos to Cyrus, 'cause it really helps when the person on the other side of the mic wants to talk shop in detail. And I think he did a great job breaking down not only his business, but more broadly the development dynamics in San Francisco. You kind of don't appreciate until you talk to a developer how important politics is. It's front and center in his mind, it's front and center in the way that he structured his firm. Will Krasne (29:04) Quick things that I really took away. One of the few real estate people I've heard reflect and say we screwed up by not being as politically involved prior to 2020. Yeah. Hiten Samtani (29:13) Imagine that someone with a little bit of self reflection. Yeah, it doesn't Will Krasne (29:15) I thought that was a great point. And the second was talking about how why they actually killed a deal. And walking through that on the on the mall, I thought was fantastic. Hiten Samtani (29:25) The special servicer shot the bondholders in the four Will Krasne (29:28) Face. Hiten Samtani (29:29) quite a line. Will Krasne (29:34) When the Great Recession happened and private equity real estate was dead, real companies were going under. And what happened is if you were a super senior guy and had a tracker, whatever, you were okay. If you were a super junior guy who and you were completely inexpensive, you were okay. Yeah. If you were in that middle, you got fucking waxed. There's this entire like missing generation of people who Hiten Samtani (30:00) Yeah. Will Krasne (30:00) are at senior levels now. And it's like guys who would have been senior associates and VPs and senior VPs from like 2008 to 2012, they don't exist. Yeah. Hiten Samtani (30:11) The lost generation. Will Krasne (30:13) It's guys who are analsen associates pre GFC or guys who are super senior who are still around. It's that middle is gone. And you can't control that. You could have been the best investor on God's green earth, but if the first time you got carry in a fund was a 2008 vintage, you weren't getting carry for a decade. Hiten Samtani (30:28) Yeah. It's been really bad. I was talking with someone at a formerly at a household New York development firm. And they were basically saying, My generation, the guy was in his mid forties. He said, My generation should technically be the most financeable because we've seen it all. We've worked through multiple cycles by now. But because we haven't realized any significant carry, our balance sheets aren't big enough to go take down that first second big deal that we need to kind of set ourselves up for the future. And so it's a tragic limbo situation where these guys they're not gonna get what they need at the company they're at. But what are they gonna go do? Consult. They can't run their own deals. They can't really beat GPs with that track record or with the balance sheet that they Will Krasne (31:10) Speaking of the balance sheet, like I can just tell you firsthand, it is scary. Hiten Samtani (31:13) You have been staring down doom more than once since we started this thing. Will Krasne (31:17) If you're a GP, it's really expensive to do anything. Every time you leave your house, it's like you're fucking Mario getting hit and coins fly out of you. Your lawyer costs money to have a conversation about a deal. Your tax consultant costs money. I'll tell you what, you fucking hate Easy Pass because every time you drive through one of those goddamn things, you're like, it it cost me sixty dollars to drive from New York to Jersey. Hiten Samtani (31:41) The other thing, the kind of deals that you can take down with your balance sheet are not the kind of deals you have subject matter expertise in. Because you've worked on four hundred million dollar deals, five hundred million dollar. Yeah, great point. But if you go out on your own, what's available to you is like a seven million dollar multifamily acquisition. Will Krasne (31:57) Well, and here's the thing on a seven million dollar multifamily acquisition, you gotta throw up a hundred and fifty thousand dollar deposit. Yeah. That's a lot of liquid cash to have around that you just need to have. Think of it this way. If you don't have a dedicated fund, you can have, and I hear this all the time. I've got good relationships with all these firms. Like I'm telling you, you can't go bid a deal and get a term sheet before. You can have a programmatic, that's different. But if you're just looking for a deal and be like, good deals always find capital, bullshit. And so if you go tie something up, you have to tie it up because they're going to say, Do you have exclusivity? I don't want to waste time on this unless you control it. And how do you control something? It's you sign a PSA and you fund the deposit. People might say, I do mid-market because it's too big for the small guys and too small for the big guys. A mid-market deal is 25 million bucks, 30 million bucks, maybe 40. And a 40 billion dollar deal, you got to put up a half a million dollar deposit minimum. Yeah. So how many guys who have been at these firms who live in high cost of living areas who haven't gotten carry and don't have public stock? or don't have lot of public stock can just go right a five hundred thousand dollar check. Hiten Samtani (32:56) It's a tough situation because you've worked basically your best year is to get to that path. So we've talked about it from the employees perspective, right? What does it look like from these funds? If the promotes not coming in, overhead's going to look a lot more daunting too. So that's why we've also seen a lot of companies cut staff proactive. Will Krasne (33:15) A lot of the firms that don't have funds. So the great thing about a fund is you could wake up on January 1 and have a real sense of what revenue you're going to make in that year. And if you're if you don't have a programmatic, if you don't have a fund, you don't. And you start Jan 1 from zero, you have to do deals in a lot of cases to cover your overhead. Think of it this way: what does an analyst cost right now? Like a good analyst if you're in New York, LA, San Francisco. Do Hiten Samtani (33:40) two fifty. Will Krasne (33:41) you? I was gonna say like 170 something, maybe all in and just in salary. What do they cost with healthcare? It's like, then it's 250. Yeah. Let's say you get 2% of asset management fees. So on equity committed. So $250,000. You need to have an incremental $10 million of equity just to pay for this guy in his healthcare. Never mind your office leave. That's how much every employee costs you. Not even in actual cost. How much do I have to raise to do this? It's really difficult. So if you're at one of these firms now and you haven't had promote, What happens is these guys, they leave either by four by force or by their own volition to go try and do deals because it can't be worse. These firms, you hit escape velocity at a certain scale. If you're Blackstone and Nadine leaves, it's a headline. It's not an existential crisis. Yeah. You know, but some of these smaller firms, a lot of the profits are generated by just a small handful of guys. And if there's no promote for a long time, Those guys leave. And what happens is the companies become stale. It's like a multifamily deal where you're like, man, we lost our really good leasing person. like revenues a little down this year. Maybe we don't do the parking lot. We cut back from power washing four times to three or whatever. And then all of a sudden you've got a shitty multifamily property that you can't push rent on. And that's sort of what happens to these firms is that guys leave for two reasons. If they don't feel fulfilled in the job and they're not making enough money. And if there's a lot of people at the top taking disproportionate economics who've made their money. And you don't have a path to go up there, people leave. And then if you don't get paid, people leave. So we're seeing both of those things at a lot of places. Hiten Samtani (35:16) For the top guys who are maybe eating up an outsized share, their lifestyles are also outsized, so they ain't giving that up anytime soon. They're gonna stick around. Will Krasne (35:23) That's one of the other things in the Bloomberg articles is that they're seeing folks borrow against their Carrie to fund either co invests or other personal liquidity. And I think the coda was that you can always sell real estate, but you can't sell carry. Hiten Samtani (35:44) That's it for the promote pod this week. How do CRA strivers keep calm and carry on when there is no carry? Sorry, how to do that. Will Krasne (35:52) I I entitled this segment No Carry On Wayward Sun, but this was much better. Thanks again to our sponsors, Bravo Capital, who you can find at BravoCapital.com. Hiten Samtani (36:01) LoanBoss whose new AI product you can find at Loanboss.com Will Krasne (36:05) In H equities. Find them at h equities dot com. Hiten Samtani (36:08) A reminder also to sign up for our upcoming HUD webinar with Bravo by going to the promote.com slash HUD webinar. I know webinars and fun don't normally go together, but this one's gonna be a lot of fun. Will Krasne (36:18) Actually didn't know Den was doing this until we started reading the docket for this podcast. So I'm gonna get involved too. Aaron, Hiten Samtani (36:25) October 14th, be there. Will Krasne (36:27) you didn't even sign up for me, but you're getting me anyway. Hiten Samtani (36:30) Thank you, man. This is not only a fascinating topic, but I think a pretty important one. And I I will tell you anecdotally, in the last fortnight or so I have met too many people who are going through this. So I'm glad we could talk about it and thank you for bringing the heat as always. Will Krasne (36:44) Maybe I'll write something about it. So write in with your comments, hopes, dreams, stories, questions about this to podcast at thepromote dot com and maybe we can have a little group vending session. Hiten Samtani (36:56) Thanks Will. See you next week. Will Krasne (36:58) Thank you. Hiten Samtani (36:59) Ciao.