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Texas Chainsaw Massacre & The Man Who Knew · The Promote Podcast

• Hiten Samtani (00:00) I got two months till forty, so I have a hot by forty program I'm starting. Will Krasne (00:05) You look like thirty two. You look great. Hiten Samtani (00:08) I'm cute, but I'm not always fit. Will Krasne (00:10) It's all upside though, it's value add story. Hiten Samtani (00:12) Yeah. Will Krasne (00:20) If you're in Kansas City and you're a fancy guy, you might find yourself in a box next to Taylor Swift at a Chiefs game. Hiten Samtani (00:25) In New York you could get Chalamet Spring champagne with the Nova Nix. Will Krasne (00:28) But in DC, if you're a young lad at a Redskins game, you might find yourself walking out of a game hearing the crowd chant, Lower Interest Rates, this Alan Greenspan walks to his car. True story that happened. Hiten Samtani (00:48) Welcome back to the Promote Podcast, your insider guide to the money and mania of the CRE markets. I'm Hiten Samtani Will Krasne (00:53) And I'm Will Krasne Hiten Samtani (00:57) A shout out to our sponsors, Real Property Captive, they're the first group captive insurance for mid-market owners. Will Krasne (01:02) Bravo Capital, a leading HUD and Bridgelender with extensive experience in the multifamily and SNF world. Hiten Samtani (01:07) And Loan Boss, the best-in-class CRE debt management software. This week, we take stock of the legacy of Alan Greenspan, the long-serving Fed chair who died last week at the ripe old age of 100. Greenspan's moves, for better and for worse, have shaped the CRE market as we know it today. Next, we visit the rapidly gentrifying swamp that is guanis, where Sam Charney is remaking the neighborhood with a little help from his friends. And finally, we dive back into one of the promotes' pet topics: the fallout from the end of the traveling HFC. But Will Krasne (01:39) But before all that, let's get started with the punch list, our signature rundown of the News East News and C R E. So, co host of ten was on the road for the World Cup. He was like f Hiten Samtani (01:50) I had a break. It was fantastic. Will Krasne (01:52) Soaking up the culture. First of all, where did you go? And then ⁓ any big takeaways? Hiten Samtani (01:56) I was in Dallas, Houston, and Kansas City. Got to see Argentina play, Portugal play. Messi's a lot better than Ronaldo, which I confirmed in real life. And then I went to Kansas City to watch the Dutch play. My takeaways is this is an amazing country. You really feel patriotic when you're on the road. The World Cup, the vibes are unbeatable. Everyone's randomly hugging each other. And listen, Dallas, Dallas is the frickin' future. I know we've taken some shots at Dallas in this pod. Will Krasne (02:22) Do I have to eat some crow? Hiten Samtani (02:24) The way that they put on a show, I was at the Cowboys Stadium for the Argentina Austria game. The scale of stuff there is kind of inspiring. They just have this sensational, spectacular showmanship built into everything. What I liked about this World Cup is they're putting in the best of America with the best of what world soccer has to offer. So for example, in this much derided hydration break that they have in the games, in Dallas, you get the Dallas Cowboys cheerleaders going at it. Will Krasne (02:50) We do have a wonderful country here. We have been accusing this podcast of being a little bit too New York and LA centric, but the middle of the country, the heartland, that's what it's all about. Hiten Samtani (02:59) Shout out to our listeners. There were some very, very kind notes we got. I'll take you to barbecue. I'll show you around, etc. Couldn't end up doing most of that just because we were in World Cup mode and had very tight windows. But whoever reached out, Ben, John, Mo, cool to see the pod spreading, getting a lot of love from the heartland. Will Krasne (03:16) And next World Cup, hopefully it's gonna be people who are playing in the World Cup who are like, Come to my box. Hiten Samtani (03:21) From your lips to God's ears. Okay, next one. The Road to Housing Act, which had that specific BTR killer bill that we've discussed in depth here. There's some new drama on that front. Will Krasne (03:30) We have indeed. Went through the Senate, the version that they put together took out the BTR killer provision, which was the forced sale after seven years. Everyone's happy. Actually, bipartisan bill goes to Trump's desk. And what does old Chaos Donnie do? Says he's not gonna sign it unless we get a voter ID bill passed. It's like holding a gun to your own head and saying, Stop or I'll shoot, because this is such a win for him. It's a bill that both parties like. It actually helps create more housing. And now that we have clarity on the force sale provision, it's actually pretty good. The bigger thing is that the Pandora's box is open. Capital is already worried about this sector. And it's gonna take a long time for those memories to go away. The longer this stays out there, just the more the capital markets for new development are gonna be frozen. I don't Hiten Samtani (04:21) If you caught Mike Johnson's statement, he said, I certainly want him to take the biggest, boldest marker that he has and do that big Trump signature proudly on the legislation because we're delivering for the people. They know how to appeal to this guy's lizard brain instincts. Will Krasne (04:34) People have finally figured out, other than Mom Donnie, how to do it. I wonder though, did Mike Johnson say this before or after Trump said to his face, Nobody cares about housing? Hiten Samtani (04:42) Okay, next one. Speaking of Mamdanny, he got it done. The thing the industry's been terrified of for a while. He got the rent freeze on about a million rent stabilized apartments in New York. This was one of the cornerstones of his campaign, if you remember. Will Krasne (04:58) You can't. It was a very, very catchy part of I think why you caught fire. Hiten Samtani (05:04) Now that this has happened, how do we feel about investing in the rent stabilized market? Our guy Triple G had a very apt way of putting it as always. He said that buying into the rent stabilized market in an environment like this is essentially like options trading. Will Krasne (05:17) I think that's totally right. One of the owners who voted for the rent freeze actually said we are better off having no rent increases and getting some sort of subsidy or help from the city and the state on operating expenses. Like that's actually kind of genius. They're right, because the investment it would take to fix up a lot of these units and bring them to the market is so massive. And then you're taking all of the bad debt risk, even if they increase the rent five percent. how much incremental bad debt is there? How many people don't pay? Whereas if they just cut your property taxes or they give you a massive utility bill break, there's no leakage. This is obviously stupid policy. Obviously the free market needs to be involved here to renovate these units and bring them to market so that more people can live in New York, which is a good thing, which everyone wants. And ironically, of course, at this time New York median rents are at all time highs for market rate units. Yeah. Everyone's sort of talking past each other. Everyone Hiten Samtani (06:11) And in going anywhere but up. Will Krasne (06:15) ultimately wants the same thing, which is a more affordable New York, if we just let our own political views and dogmas get in the way of achieving that. Hiten Samtani (06:25) Think about some of these acquisitions that have happened recently. The summit acquisition of the pinnacle portfolio. We've talked about our guy, Peter Hungerford, buying into all of these things on the cheap. I wonder what the conversations look like right now in those boardrooms. Will Krasne (06:38) Those were always longer term bets though. No one was doing this betting that within a year or two that the rent law of twenty nineteen would be repealed or there would be a ten percent rent increase. This was a longer term play. I think on the episode I said something like, You're underwriting maybe a mid to high teens return where all of the return is in year fourteen of a 15-year-old or something like that. So I don't think it really changes the calculus from that perspective. But if there's all of a sudden a big property tax break that makes the yield on these more real, then It's the same difference because rent going up is great, but if operating expenses go up faster, that's bad. And the whole game is getting NOI to go up. Hiten Samtani (07:15) There is the possibility of a Supreme Court challenge to this. They're gonna attack this for being unconstitutional for being essentially a taking. Will Krasne (07:22) What's the John Gersham we need the Pelican brief? We need Julia Roberts and Denzel Washington, like with the case to get to the Supreme Court to to make this change. Hiten Samtani (07:30) Okay, next one. Favorite son of the promote, Charles Cohen, billionaire Charles Cohen, has paid off his debts to Fortress. There was a $187 million PG, one of the largest I've ever seen, that Fortress was coming hard after this guy. It looks like he's sold a couple big things and made good on his debts. Will Krasne (07:48) I remember Fortress being upset at the prices he was getting and at the level of detail they were receiving from him. They just kept saying, We don't understand where this money's coming from and we haven't gotten the details. Hiten Samtani (07:58) accused him of like moving assets over to his wife and shielding them from him and all that. Will Krasne (08:02) Of course. What got this done for him is that he ended up doing a ground lease sale on two assets he owned to Empire State Realty Trust for $110 million. Hiten Samtani (08:09) You mean he sold a fee, is that what you mean, right? Will Krasne (08:12) Yeah, he's all the food. Yeah. Yeah. So he's all the dirt underneath it. Hiten Samtani (08:14) He's also sold a bunch of things to Vornado and other people as well. I love the statement that he filed. It was something to the effect of the payoff is consistent with Mr. Cohen's integrity and confirms his character as an honorable businessman. It just sounds so godfather to me. All right, next one. The read hard times continue. This is Elm Communities, if you remember them. They sold a big chunk of their holdings to Cortland. They're on the way out of the game entirely. Will Krasne (08:29) Take care everything. Hiten Samtani (08:42) But there's been a snag in a pretty important deal here. Will Krasne (08:45) The artist formerly known as Wall Street. They were in the process of liquidating their whole portfolio, paying out shareholders. They had a deal with a buyer called the Bytel Group. They terminated an agreement to buy Riverside Apartments, which was the largest asset that Elmstill owned. It was a 1200 unit community in Oxyandria. And they were going to pay 280 million bucks. So quite a big transaction. And the contract had been extended without shareholders knowing and without hard money. The terminated contract is a problem because they have a five hundred twenty million dollar term loan from Goldman Sachs with quite a bit sold outstanding. They don't know when that's gonna get paid off, when shareholders are gonna get distributions. Stock is down thirty five percent on the news. Everyone's merging to try to get lower cost of capital. Even the people who are trying to do the right thing and liquidate and sell can't do that. Hiten Samtani (09:32) That's it for the punch list. When we come back we'll be talking legacy. Well what if I told you insurance could become an asset instead of just an expense? Will Krasne (09:49) But I'd say you're trying to sell me something, but also I'm interested. Hiten Samtani (09:53) Fair. Here's the math. You spend $2 million on insurance annually, loss ratio is well under 30%. Over five years, that's about 10 million out the door, zero return. Will Krasne (10:03) Painful, but accurate. Hiten Samtani (10:05) What if 7 million of that built up in reserves that you actually owned? Real property captive built specifically for scattered site GPs. Top carriers issue policies for lender compliance, reserves stay in your account, and after a few clean years, you're converting spend into equity. Will Krasne (10:08) Pretty interesting. Tell me more. I like this because that's what the big boys do. Hiten Samtani (10:23) Exactly, and now it's accessible for mid-market drivers like yourselves too. Check out the platform at rpcaptive.com. That's rpcaptive.com, and tell them the promote sent you. Will Krasne (10:40) I think it's certainly fair to say that the overall performance of the American economy has continued to surpass most forecast expectations. The current cyclical upswing is now approaching six years in duration, and the economy has retained considerable vigor. Hiten Samtani (10:48) Does that Vaccinerable, vicitorable, vicitorable, vicitorable. Here's where I want to start with Alan Greenspan. As an outsider to America who came here, this was the first banker who acquired a status that was a little bit more of a pop culture figure almost. He wasn't just a banker. So let's talk about why that is. Let's talk about how he shaped CRE. Will Krasne (11:18) I have to jump in on behalf of the worst people in finance and say, well, actually it was Paul Volcker, you know, who saved America by hiking rates and if only Jay Powell had the courage. So just getting that out of the way. But yeah, y you're totally right. So Greenspan was fed chair for twenty years and oversaw one of the most interesting periods of finance in US history. He took over right before the stock market crash, nineteen eighty-seven. oversaw the SNL crisis, the tech bubble, and then dipped out right before the GFC. And some people would argue he was one of the creators. The soft power of the Fed, which everyone now is, you know, talking about Fed speak, that really started with Greenspan. He was a guy who got recognized at Redskins games and people demanded lower interest rates. Part of it I think is because he was so active and I think he was seen really as one of the first activist Fed shares and his actions right after Hiten Samtani (11:53) Architects unknowingly. Will Krasne (12:15) Black Monday, I think we're seen to really stabilize the market. And that was not something that had really happened before. Hiten Samtani (12:21) He gained a reputation as someone who was not shy of using his considerable power in the event of a shock, right? He would act very decisively to get something done. The effect known as the Greenspan put, which was like, No matter what happens, the Fed's gonna step in and handle this. And it created kind of a false sense of security in the market. Will Krasne (12:40) I think that's exactly right. And he was someone who looked at data and relied on data. But at the end of the day, his biography is called The Man Who Knew. We talk a lot about the Capital G great man. This is the perfect example of it where I can look at all the reams of data, but me sitting in my office, I shall determine the fate of the economy. And you take the good with the bad. He was widely credited with helping preserve the market in nineteen eighty seven, went through the SNL crisis. Hiten Samtani (12:47) Excellent book, by the way. His overall approach to governing the markets, how did it shape CRE as we know it? What did it spawn or repress? Will Krasne (13:16) He really would let things run hot. And that is what the CRE guys that's what we want. And we just call it letter rip. He's as responsible for the growth of the modern CMBS market as anyone. And he was really sort of deregulatory, or not free credit, but the freely available credit, because that's what drives asset pricing. If you have more debt available, there is more demand for assets. And that's really what happened here is we had bubbles across every part of the economy and real estate, of course, chief among them with two thousand seven, two thousand eight. And we're still dealing with the effects of that today. Hiten Samtani (13:52) torrent of capital available, which obviously increased prices, and that kept going and kept going and kept going until that burst. Will Krasne (13:58) Yeah, and he's also shifted everything the other way now because you can look at Dodd Frank, you can look at Basil Three and people saying this is a response to Greenspan not hitting the break at all. I mean, he is all gas. Hiten Samtani (14:11) That's the big asterisk on his career. His inability to understand human nature. He thought that the system would be the best cop of itself. And that turned out to be completely wrong. That turned out to be so wrong that it might have contributed quite heavily to the GFC and everything that followed. Will Krasne (14:27) He's even quoted as saying I was shocked at how poorly the banks police themselves. Hiten Samtani (14:32) It reminded me of that scene in Casablanca. Will Krasne (14:37) We're all capitalists here. We believe in the free market, but it's not perfect, and there needs to be intervention at certain times. And that's what's made America great. Looking back at like busting trusts from John Rockefeller all the way down. If you let people do whatever they want, you end up with Don Jr.' crypto scams or Jared Kushner buying an island in Albania. Or traveling HFCs, exactly. So we need a little bit of intervention. And Korean span seemed to think otherwise and Hiten Samtani (15:15) So, Will, you violate any debt covenants recently? Will Krasne (15:19) So funny you should ask, I have been in technical default recently. I mean who among us? Right. But not since Q4. Ooh. And that's not because I paid off a loan. It's because that's when I started using loan boss. Hiten Samtani (15:31) I can't believe how old school some of our listeners are. They're still crunching DSCRs in Excel and all that. Will Krasne (15:37) Total waste of time, risky business to boot. Loan Boss runs the entire process for me. One click covenant testing, incredible, instant cash flow forecasting, impeccable. And my favorite nerdy delight, the live forward curve. So I hate having to go download the forward curve and then it's always vertical and you gotta alt HVT to have it go horizontal, make sure the index match works, like ridiculous. Hiten Samtani (16:00) They've just got it sorted here for Will Krasne (16:02) Much better. So thank you, Loan Boss. Hiten Samtani (16:05) Listeners, check them out at loneboss.com, that's loneboss.com, and tell them the promote sent you. A few episodes ago, Will, we talked about a two trees alum, Asher Abacera, who's now overseeing Kushner's weird frickin' semi-grifty project in Albania. Today we're gonna talk about another two trees alum who's doing something perhaps a little bit closer to home, a little more institutional, and ⁓ equally fascinating. So let's talk Sam Charney of Charney Companies. Will Krasne (16:39) Sam Charney is everywhere right now. Hiten Samtani (16:43) Right now. Seriously, every third article in CO or TRD, you see Charney companies. He's all over the branded content space. He's cooking in the real deal's kitchen. He's going and accepting bogus awards in Romania. The man is everywhere. Let's talk origin story. Let's talk what he's up to now. And there's so many interesting capital relationships. They've developed quite a machine here. Will Krasne (17:05) He was senior at Two Trees and he was really a bricks and sticks guy. He co-founded their in-house GC team. I think they self-perform quite a lot of work and that was really his baby. Hiten Samtani (17:14) People unfamiliar. Two Trees is responsible for creating this neighborhood out of nothing. Dumbo. And it became one of the most fancy neighborhoods in New York City in the process. David Wallentis, who founded Two Trees and apparently sold a pint of his own blood to get things started when he ran out of money. He became a billionaire off the back of this incredible neighborhood shaping project that he had. And then they repeated it again in Williamsburg. Will Krasne (17:38) You talk about entrepreneurs. This guy, I think there's an article, it's called On the Waterfront. It's in New York magazine from gotta be nineteen eighty si w one of my favorite articles Hiten Samtani (17:50) Ever and the oral history is wonderful as well. But we'll put in the show notes. Will Krasne (17:53) Oral histories where I think Jane, his wife, at one point says, you were in your Stalingrad phase, where he was saying, I didn't pay property taxes for three years because I didn't have any money and I knew it took him five years to foreclose. And he just bare-knuckled this thing into existence. And his son Jed, who worked for Donald Trump after college, came in, developed one of the condo buildings on Water Street just to generate some cash that they really had no money, and ended up going building by building and creating the modern Dumbo with super high-end residential. Creative retail. Hiten Samtani (18:24) The basis was basically zero. Will Krasne (18:27) They sold a condo at the Main Street building for more than they paid for the whole neighborhood. The thing is, for these master plans to work, you need the land value to compound at a crazy rate. And that's what happened here. It wasn't the buildings. The buildings were dog shit and got rebuilt. The land got insanely more valuable. Hiten Samtani (18:43) The best parallel for what Will just talked about is the Aventura story with Don Sofer. That's exactly what happened there. So why do we bring up two trees? Because, in my opinion, that was probably the best place for a would-be developer like Sam Charney to be at the time that he was at that firm. It is a combination of a cowboy. Someone who had this incredible vision, someone who wanted to city shape, combined with a firm that was getting increasingly institutional. So the capital relationships. Will Krasne (19:12) Well, to be very clear, the capital relationships are between Jed and David. That's it. They're all internally funded. It's just their family. So that provides a level of freedom and ability to scale as a your career that isn't there anywhere else. You're working on super complicated public-private partnerships, but it's with folks who are writing the checks themselves. It's not you don't have that l layer between the allocator and and you. You're playing with like the livest ammo that you got. So there's a freedom there too, because they wouldn't have allowed a I don't know, late twenties, early thirties person to sort of lead that's not happening at related. You've got to really earn your stripe. Hiten Samtani (19:52) What you're saying the mom and pop nature of a shop like that helped Sam create opportunity. Will Krasne (19:57) Absolutely, because you're not just going like associate two years, VP two years, senior VP. He he co founded the in house G C. They gave him that moniker, which is a big deal. You could do the most complicated things and then you have quite a portfolio to look at when you're going out on your own. Hiten Samtani (20:13) So Sam goes out in twenty thirteen. He wasn't really on my radar until maybe two, three years ago, but now he's everywhere. So what's the Will Krasne (20:20) Pipeline. It's massive. It's basically all of Gowanas. But it's got three million square feet owned or under development. Hiten Samtani (20:27) Nearly two thousand residential units under construction. Will Krasne (20:29) Which is in New York, that is so much money. That's billions of dollars worth of construction projects. Hiten Samtani (20:35) This is what I was saying was if you look at what Willantis is did from up close and you're like, controlling a neighborhood gives me opportunities that compound exponentially. That's what he's trying to do here. So one of the sites I wanted to talk about was 175 Third Street in Gowanis. This is a very interesting backstory. It was formerly owned by RFR, AB Rosen, Aby to Will, and they were in distress on this one. And then they sold the site to Charney for one sixty million odd. And then he has just landed pretty significant. Financing package there. Will Krasne (21:05) my gosh, yeah. I mean seven hundred and eighty five million in debt and equity to build this thing. I think it's the fifth building that he's got going on there too. So this is not a speculative pioneers get arrows in their back type thing. This is building off of an existing portfolio. Hiten Samtani (21:21) They've also branded it, right? They were calling it the Gowanus Wharf campus. Yeah. When you could throw the word campus in, you know, something's Will Krasne (21:27) When you can have the Guanas Canal as a wharf, that's another way of doing things. Hiten Samtani (21:31) Super fun contaminated side, but I love it. Will Krasne (21:33) Interesting here too. We throw out these massive numbers, but not all dollars in a capital stack are created equal as we well know. Good point. And of the ⁓ seven hundred and eighty five million, a big chunk of that is, I think, prep from RXR. Hiten Samtani (21:47) It smells like pref to me. Yeah. It's an RXR deal. We've talked about RXRs coming in really hot nowadays. They lost a bunch of buildings. They wiped out a bunch of equity, but they're now ready to deploy with new partners. And they're injecting 185 million in here. It seems like pref, but we'll find out. And then there's 600 million from Athenius, which has been all over the construction lawn market, and our boys at a Will Krasne (22:09) Apollo, we talked about someone who's competed with Apollo and compared them to the T shirt cannon at an NBA game of the NYC commercial debt market. They are again everywhere. But this is not the only thing he's got going on. He has a massive project out in Queens as well. Hiten Samtani (22:24) They've done a bunch of projects in collaboration with Tavros Capital, Dove Barnett and Nick Silvers on a bunch of projects. Their backer is a company called Incoco Capital, and Incoco is founded by someone called Fah Park, who is best known as the inventor of the dry nail polish. Will Krasne (22:39) Incredible. Just yes. ⁓ Hiten Samtani (22:45) This is how you gotta go. You gotta find someone who did something incredible for their money and just latch on. Will Krasne (22:50) It's interesting because you look at the commercial development, you look at the articles, you look at the public profile, and all of these things, there's a lot of the iceberg underneath the ground here. It seems to me that Tavros and Charney are sort of co-GPs here. How much of the economics do they have? What is the split? Like how much of the GP are they putting up? This is my surmise. I have no inside info. I would bet that Tavros puts up most of the GP co-invest. Charney is the face, helps raise the money, and is the construction guy. And they sort of are marketing around him, because he's got a great story and the track record with two trees. Just let's back of the envelope this, right? Let's assume that this project's seven hundred and eighty-five million of debt, right? So it's 185 of prep. So let's just let's just assume that's prep. So it's really debt. Okay. You probably need four hundred million of equity to do this deal. And a ten percent GP code is forty million dollars. I can guarantee you Sam Fardy's not at forty million dollars. If you're the developer, you gotta go find not only the debt to give you the money, you need someone else to give you the money for the GP co invest that you don't have. Yeah. So finding a partner like that is huge because he's spread so thin across all of these projects that even the most well capitalized GP, it's a huge balance sheet that you need to put these things up. And someone's also got to be the warm bodies behind this too. Which again, don't know if that's Tauros, don't know if that's somebody else, but those are all factors into getting these things. Hiten Samtani (24:11) There's another project that has a fascinating cap stack. So this is a skyscraper that's planned for Long Island City. They got a roughly $500 million financing package. The equity is Tavros, Incoco and Charney. The senior lender is Madison Realty Capital, kicking in about $400 million. And then the PrEF is coming from Kushner Companies and 1 IM. ⁓ Now 1 IM is the fascinating vehicle. It is the former SouthBank bigwig Rajiv Misra. The promote recently described him as the most eccentric investor in CRE. Is that saying something? This guy has amazing juice or what we call Wasta in the Middle East. The lore with his new fund for one I am is he went to Albadou a couple times, talked to the royal family because he's connected there and came back with like seven billion dollars in commitments. It's just amazing. And he's putting that money to work with several people. They've got a JV with RXR. They're putting pref into a lot of developments that we're talking about. Will Krasne (25:05) Pref in development is sort of a new phenomenon, which is always really fascinating to me because again, the whole point of pref is that you can take it out and it's cheaper than equity, but it's also a lot more expensive than debt. There's been a lot of private credit, strum and drong, and pick interest in particular, has people were really fascinated that you can pay interest on debt with more debt. And that is pref because especially in a dev, there's no cash flow. So all of this is just pick. The whole thing is picking. So the whole time RXR's 185 million is compounding it, I don't know, twelve, thirteen, fourteen, fifteen percent, whatever the number is. And by the way, they also have a minimum multiple there. I would wager there's a one three ish pref here. Not that they're gonna get taken out early, but that one eighty five could very easily be two hundred and fifty million to take them out when it's time to take out. Hiten Samtani (25:59) These are stomach-turning numbers, but we should remind listeners that Gary Barnett currently has a billion two in pref on that slate of development project. So there are levels to this game. Will Krasne (26:07) But my point being that the whole game of development is you to create a value spread to your bases. And if you have senior debt, you just need to be one dollar above that senior debt and you're fine. That is not the case here. You have to do quite well to outrun the pref here. Hiten Samtani (26:22) This is a fascinating hypothesis. It jives with something that I've been thinking about a little bit is why is a developer suddenly so out there? I mean, it's basically Zoran Mamdani and then Sam Charney. He's doing interviews everywhere. He's doing sponsored content placements everywhere. He just went to Romania to accept one of those bizarro red awards, that crazy gala that we've talked about. He went to Romania and accepted an award in front of Romanian dignitaries, and investors from the Republic of Moldova were also present. Will Krasne (26:50) Did like Tristan Tate give it to him? What's going on here? Hiten Samtani (26:54) I narrative management is such a big part of real estate development. There's something going on here that bears more examination. Will Krasne (27:01) Club of building projects like this is a really hard one to join from scratch. And again, he had background, but like I don't think Jed Wellentis is writing him a big check. And to break in in this way so fast, 12 years is a long time, but to build these types of projects in a relatively short period time is really something. And it takes kismet's the wrong word, but juz that it was worth examining. Hiten Samtani (27:32) Okay, I'm here with Aaron Krowitz from Bravo Capital. Aaron, you've done two and a half billion dollars or so of deals so far. How are you thinking about scale going forward? Will Krasne (27:40) There's a divergence between optimizing for scale and optimizing for quality. And when you're running a debt fund, you have to pick. You have to say, Am I really fee driven and do I want to maximize how much I could put out? And the other business model is what we've chosen is slow and steady. Do we want the reputation to proceed ourselves? Investor returns, that's more important for us than volume. If you look at some of the REITs, they were forced to deploy in the realm of two to eight billion a month. First they AUM gobbled, right, as your sweatshirt says, but then they were forced to like regurgitate that AUM more rapidly than they really could. And it forced them to pick terrible deals. Their returns are negative to just go for scale, for scale's sake. That's a short lived business model. Hiten Samtani (28:29) Thank you, Aaron, and where can people find you? Will Krasne (28:31) Pool could find us at Bravo Capital dot com. Hiten Samtani (28:43) stories that I love more on an individual basis, like the gypsy private credit king that we talked about, gave me a lot of joy. But on an ongoing basis, pound for pound, this might be my favorite story that we've ever done at the promote the traveling HFC saga. It's just exciting Will Krasne (28:59) It really is. I was talking to a friend of mine about a business and he works in private credit and he was saying, is is this a business or a scheme? And he goes, The scheme is fine, but just let's be let's call a spade a space. Just Just tell me what it is so I can underwrite appropriately. And so there's something about a scheme. Hiten Samtani (29:10) Tell me what it There's something about a scheme. So for those who came in late, the traveling HFC program was this property tax abatement program in Texas. And the whole idea was if you could commit to keeping rents affordable, so basically below a certain AMI threshold, in exchange, you would get a property tax break in perpetuity. And the property tax break could be issued by a jurisdiction that was far away, in in many cases, hundreds of miles away from the jurisdiction that you own the property in. Now This all sounds okay. You're creating more affordability in exchange. You get something. That's fine. The clincher was that in most cases, the delta between the market rent and the affordable rent was non existent. Yeah. In fact, the market rent was sometimes lower than the AMI threshold rent. So in a nutshell, developers were giving away nothing and in exchange getting a property tax abatement, which in Texas, I'll remind you, is the single biggest line item. It changes the economics completely of a deal. And so this went on for years. There were billions and billions of dollars of property taxes that were wiped off the tax rolls permanently. Last year, the Texas legislature finally put the kibosh on this and it went away. All good. You know, sometimes parties are meant to end. However, this one came with incredibly punitive retroactive regulation where they're like, listen, those deals that got the r the property tax break, if they're not a kosher, we want that back. And so predictably that set off a wave of distress. Will Krasne (30:42) There was a deadline and it's what, early next year, I think? Yeah. If you had the HFC from a jurisdiction far, far away. Yeah, and you're you're in Tarrant County, you had until this upcoming deadline to get your own taxing authority to let you keep the break. And you had to show that I think what, fifty percent of the tax savings were being used to keep rents under market. So essentially you weren't just dividending that out or paying down debt with it. Hiten Samtani (31:07) Obviously, you have far less sympathetic audience locally because you actually have to prove that you're creating a public benefit. Whereas if you're going to Picos County and paying them a few hundred thousand dollars to set up this traveling HFC, they don't care if your rent in Dallas meets a certain they're just making money hand over fist. We had done a special episode, which I'll put in the show notes about this. And this was about a year or so ago. We had Barrett Lindbergh on to break it down with us. Then the nuclear version of this bill passed, the one that the industry was most afraid of. So Now we've checked in on a bunch of these projects and it ain't pretty. What is the latest? None of them none of them are gonna meet this new part. Will Krasne (31:40) Almost none of them are good. Gosh, like just putting numbers to this, it's something like 340 properties, over a hundred thousand units. Wow. And the tax authorities value them collectively at twelve and a half billion dollars. And you sort of have a couple of options. The first is try to build up reserves, raise equity, and just deal with your NOI going down tremendously and work out something with your lender. The second is try to sell it and just try to get ahead of it. Speaking of we talked about the New York rent civilization laws. This is like in 2019. A lot of times your first loss is your best loss. The guys who sold in 2019 did much better than the guys who waited and said, let's figure out what's going on here. So right now, people are trying to shop these deals. I will just say if there's uncertainty around your property tax calculation, the buyers are going to assume the most punitive, like the absolute most punitive. Yeah. And that does not do a lot for values. So people are taking on the chin. S2, Polaris, Tides, the whole kit and caboodle. Hiten Samtani (32:41) In many cases these were the same deals that multifamily syndicators had put together with the expectation that there was going to be perpetual rent growth. They loaded up, they made their money on the fees up front and then they ran these deals. When this loophole became available or when they learned of it, they just said, Why not? And this is the thing, Will, right? As a fiduciary, don't you kind of have to take advantage of the loophole if it exists? Wouldn't your investors say, Hey man, why aren't you taking free money? To be Will Krasne (33:05) Very clear, we don't live in an idealized world. We live in the world we have, and you gotta take advantage of the rules that are there. So yes, I don't begrudge anybody for doing a traveling HFC. What you should have done is said, what's the worst that can happen here? Maybe they try to call this back. Let's keep some reserves and buy T bills or whatever. Like we need to keep a lot of cash at the property just in case. Or we do this immediately and sell. I have zero. sympathy for people who just did this and dividended out on the trash. Yeah. Like that is not a business plan. If the deal works without the HFC and then it goes away, your deal still works. But none of these deals work. Hiten Samtani (33:44) Just to put a number on it. Greater Dallas has about a hundred and sixty properties that are on this list of properties that are probably not going to pass muster in this new standard for traveling HFC. They're collectively valued by tax assessors at north of six billion dollars, but like who knows where they actually trade at? Who knows which opportunistic investors? Like, I'm gonna take a flyer on these. It's it's gonna be really bloody for a while. We've already seen a bunch of short sales, we've seen some takebacks. So lenders are finally like, I don't have any more options. Will Krasne (34:11) I think the GPs and lenders there's a big group saying, You can't just take away this free money that you gave us. Hiten Samtani (34:17) The big argument, which is like, hey, okay, so the tax break, all right, I get it. It was a little bit unfair. I get it, but this is America argument that's being made. But there's a legal argument being put forward now. So Jason Post, who runs a company called Post Investment Group, which was one of the pioneers of using the traveling HFC structure, and then also said, Hey, if I'm using it, there's probably a market for it. So they put together a lot of these deals and very lucrative business for them. So Post Investment Group is suing the Bexar appraisal district, which is the county seat San Antonio. They were saying that HP twenty one violates existing contracts and gives municipalities, quote, incredible power to pull the rug on tax breaks. Will Krasne (34:58) I didn't go to law school and it sounds like the predicate that they're using for this is ⁓ no takesy baxies. Hiten Samtani (35:05) That's exactly right. Can someone raise a fund to go and then just buy up these deals on I don't know, cents on the dollar? Will Krasne (35:14) Doll it is. There's going to be a group that takes a view on this. You can quantify this. The problem is a lot of these markets are the ones that we've been talking about that are struggling with occupancy, struggling with rent growth. So when you have your number one expense going up massively. Exponentially. Exponentially. And you've got your top line going the other way, that makes it even harder. The short answer is somebody's going to do this. I I've heard of a couple groups looking at older properties saying, like, there's a basis for this, that let's go buy this at scale, but the basis has to be right. So that's what it comes down to is the basis has to be right. We don't know where that number is. And if you're buying something now, you really could be catching a falling knife because these things do bottom out. I remember my first multifamily properties I've ever worked on were in Dallas post-GFC. And we worked forever so hard to make like a two IRR over like a 10-year hold. And our operating partner also bought a bunch of other deals in Texas in class C apartments. I talked to one of the guys years later and he said, Yeah, our thesis was we're paying forty thousand dollars an apartment. How can that go wrong? And they paid like thirty-nine thousand dollars a unit too much. Hiten Samtani (36:31) That's it for the promote podcast this week. The mother of all property tax loopholes has died, and she's left widespread distress in her wake. There's a new contender for the Outerboro Development Crown, and the call's coming from inside the house. And the world's most famous central banker passes at par. I gotta give her all credit for the Will Krasne (36:49) I mean that was a joke that a lot of people made, so I can't really take credit for it. But with that said, thank you to our sponsors. Hiten Samtani (36:57) Bravo Capital, they're a leading HUD and bridge lender that lives and breeds cap stacks. They're at BravoCapital.com. Real Will Krasne (37:02) Property captive. They're the first group captive for mid-market owners. You can find them at rpcaptive.com. Hiten Samtani (37:07) And LoneBoss, the best-in-class CRE debt management software. Find them at loneboss.com. I'll see you next week, William. May the fourth be with you. Will Krasne (37:15) That is the wrong month for that. Beatover. May fourth is the May the fourth. These aren't the dri Hiten Samtani (37:20) ⁓ my god. Where did I steal this line from? You know what? I'm gonna leave it at. I love it. Alright, thank you. Thank you. Ciao.