December 5, 2024 • 35 mins
Explore the evolving dynamics of debt and financing in real estate investment with insights from Brad Andrus, Founding Partner of Bridge Investment Group, and Lauro Garcia, Senior Vice President / Managing Director for Stern Brothers. Andrus shares lessons from navigating multiple recessions, emphasizing how downturns can reset markets and create prime buying opportunities for agile investors; particularly through alternative financing methods. Garcia brings a fresh perspective, explaining his innovative use of taxable bonds for construction and acquisition financing. By leveraging traditional banks for letters of credit and issuing fully assumable bonds, he offers a strategic win-win approach for borrowers and lenders. Tune in for expert strategies to thrive in today’s shifting real estate investment market.
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Episode Transcript
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Speaker 1 (00:04):
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, everyone, welcome back toPeaks and Portfolios high up
here in the Mountain West.
Back to Peaks and Portfolioshigh up here in the Mountain
(00:48):
West.
Today, we're so honored to havenot one, but two guests joining
us, and we're going to betalking about debt and financing
, which is such a crucial partof any commercial real estate
investment.
We know it's quite challenged.
You know you've got costs thathave increased, you've got the
interest rates.
We don't know what the Fed isdoing half the time, and yet you
(01:08):
know business must go on,things must happen, and so we're
so fortunate to have two veryseasoned and experienced real
estate professionals,specifically around structured
finance, that we're going to betapping into a bit today.
So I wanted to introduce themboth, our good friend and
partner to pet companies, bradAndrus, who is the founding
(01:31):
partner and right now emeritusstatus of Bridge Investment
Group, which has now a $50billion plus AUM real estate
fund manager.
And we also have joining ustoday Laura Garcia, senior Vice
President and Managing Directorat Stern Brothers.
He is a veteran investmentbanker and a nationally
recognized expert in tax-exemptand taxable multifamily housing
(01:54):
and bond financing.
That is a mouthful right there.
So, gentlemen, welcome to Peaksand Portfolios today.
Speaker 2 (02:00):
Thanks, rachel, good to be here.
Speaker 1 (02:01):
So, brad, let's start with you.
You've been through a fewdifferent market cycles, you
know.
Since launching Bridge in the90s, you've seen a lot of ups
and downs.
I am just curious if youwouldn't mind sharing, you know,
your analysis of today's marketand how it's different than
maybe what we have experiencedhistorically.
Speaker 2 (02:21):
Well, you know, after going through maybe five
recessions, I found thateveryone is completely different
and yet you think the sky isfalling on every occasion.
But with respect to bridge, youknow, the good thing about
setbacks or when the marketresets itself, is that that's
(02:43):
usually when the best buyingopportunities are and even
though it's kind of a dark time,when you're going through that
recessionary pullback, those arethe best buys.
This one is very unique.
Obviously, what happened in2008, 2009, and 2010 was brutal,
but that's when, really, bridgelaunched into the fund
(03:07):
management world, so thatpresented a great opportunity.
But those were some dark days,which is why I really wanted
Laurel to participate with us,because he was one of the best
sources of financing out thereduring the GFC.
But I'll take it to what's goingon right now.
(03:28):
Interestingly, the COVIDchanged so much, and everybody
knows that I have found that thehardest time that we have seen
(03:50):
in the real estate industry is22, 23, post-covid, because the
raising capital became sodifficult and everybody's kind
of in a position where theydon't know if prices have truly
reset itself or if the priceshave found a bottom.
But I'm happy to say now we'restarting to see green shoots and
it looks like we're on the mendright now.
Speaker 1 (04:04):
Yeah, I would agree.
At least that's the samesentiment that we're having here
.
And thank you for pointing outthat 2022, 2023 was a hard
equity raising year, becausethat's my role here at PEG and I
have never seen anything likeit.
But conversations are changingand there is definitely.
You know, pencils are back upand I mean things aren't
(04:27):
penciling exactly the same, butI think people are approaching
it differently, which I thinkhaving Loro on today, you know,
to help kind of steer us throughthis.
So that would be great.
You know, I would love to, ifyou wouldn't mind, loro maybe
giving us kind of a primer onjust real estate debt in general
.
So meaning, we have a lot ofdifferent listeners here on our
podcast, but would you mind justkind of peeling it back to kind
(04:49):
of like you know, what doestraditional debt look like in a
deal?
Speaker 4 (04:54):
Well, traditional debt is your conventional
construction loan, where a bankgoes and gets deposits back out
to a developer or an owner andcharges you a spread.
The difference between thatapproach and what I do and I've
(05:16):
been doing it since my 41st yearis that instead of the bank
going to their vault for themoney, we utilized their letter
of credit and I raised the moneyfrom the capital market.
So on a conventional deal, we'dgo to the taxable bond market,
which is well over $4 trilliondeep, and on a tax-exempt deal,
(05:41):
we go to the tax exempt market.
So the difference is you knowprimarily that where the money
comes from, everything else isthe same.
On these development deals thatyou know the developers are
accustomed to, the appraisal,construction cost review, you
(06:01):
know equity partner all of thatis the same.
Speaker 1 (06:05):
Yeah, no, that's super helpful.
So, Brad, I know that you'vestructured a lot of deals in
your lifetime, and obviouslyespecially at Bridge.
Tell me how you kind of I don'tknow if you've transformed from
doing the traditional debtapproach and leveraging more of
what Laurel has to offer, or didyou continue to do both?
(06:27):
Or tell me a little bit aboutthat genesis.
Speaker 2 (06:39):
Yeah, happy to, and Bridge and all of the primary
sources would tap into.
On development loans usingbanks and bank deposits, as
Laurel mentioned, where we havefound to be where Laurel's
program really has itsadvantages, from my perspective,
is when the market pulls back,banks become concerned about
(07:03):
lending, and what's presenteditself right now is that you
know the banks are holding ondeposits for dear life and so if
they're not having runoff ontheir portfolio of refinances,
you know they can't churn theirbalance sheet, and so then
deposits become very, veryprecious and, as you guys have
(07:24):
seen, anytime you want to borrowfrom a bank more so now than
ever before they require you topark a tremendous amount of
deposits.
In fact, it feels like they'rebasically lending us our own
money.
Right, that upside down.
That's where the taxable bondstructure works.
(07:46):
Great, because, as Laurelmentioned, we're not utilizing
deposits.
It's really the leverage offthe federal home loan bank, that
advantage for us.
On the developments, I think,laurel, we've probably done
maybe eight or nine developmentdeals through our opportunity
zone, primarily because that'swhere we're doing most of the
development at Bridge, and theadvantage was that, you know,
(08:10):
number one, we don't have to gopark all those deposits because
everyone wants them and so youcan't pull from one bank and go
to another.
So that was a real advantage.
Where there wasn't kind of ahandout for deposits, the
guarantee structure is muchlighter.
But the real advantage, wherethere wasn't kind of the handout
for deposits, the guaranteestructure is much lighter.
But the real advantage is youcan get full proceeds.
(08:32):
So right now in theconventional market lenders,
banks will want to go 50, 55percent loan costs and that's
pretty hard to make deals workat leverage point, especially
where interest rates are.
And so Laurel's program hasgenerally gotten us to 70%, 75%
(08:52):
loan-to-cost.
And the other advantage is,rather than having to go out and
retire a construction loan,move into a refinance with
another lending source, we justkeep the bonds in place, and so
it's basically what we wouldcall in the old days, you know,
a combination financing for permor for construction and perm.
Speaker 1 (09:13):
Yeah, yeah, well, hey , it sounds like a home run to
me.
Is this something, then, that'squite prevalent in the
marketplace?
I'll be honest, I don't play inthe debt market as much.
I focus on the equity.
Obviously, the debt is huge andit plays into how the returns
pan out and everything.
But is this something reallyreally common, because this is
(09:34):
the first I'm hearing about it?
But, again, I don't play in thedebt as much.
Speaker 2 (09:38):
Well, I'll turn it over to Laurel in a minute
because he thinks he's got thebest program out there and
everybody should be doing it.
But from my perspective that'sthe conventional market.
He is what I would call anonconventional source of
financing and so it's not reallyprevalent and out there.
But you know, laurel hasamassed multiple banks that have
(10:00):
come into this program and oneof your dear banks and friends
of Peg's, which is BrentBeardall.
Speaker 1 (10:06):
Oh yes.
Speaker 2 (10:07):
You know right, brent he was.
We did the first deal togetherwhere I introduced Brent to
Laurel and I'll let Laurel tellthe story about how quick.
Brent figured this out, thatthis is a real advantage.
And then we did one of ourdevelopments in downtown San
Francisco using WashingtonFederal Bank and East West Bank
(10:28):
and it was a great combinationplay, but maybe, Laurel, you can
kind of just.
That was a good example of howyou introduced a bank to this
program.
Speaker 4 (10:38):
Yeah, I've been doing the bond structure since 1984,
and I'm just going to go backhistorically because it's kind
of relevant.
In those days there wereactually believe it or not
AAA-rated banks in the UnitedStates.
So we would take the banks thatare of credit, issue bonds and
(11:00):
then the bank would lend themoney to the developer, but then
the credit ratings changed, themarket changed, and then the
bank would lend the money to thedeveloper, but then the credit
ratings changed, the marketchanged and we had domestic
banks, like Bank of America,that were AAA.
They were Japanese and Germanbanks.
I don't know of a AAA bank thatstill exists, but that's
probably because I haven't donemy research.
Right, right right.
(11:21):
In the early 90s and what wasreally important and this is
really relevant to regionalbanks- Yep.
Regional banks, you know, wereat kind of a disadvantage in
their access to capital.
So I took a regional bankletter of credit which is what
secures the bond where the moneycomes from.
Okay.
(11:42):
And I wrapped that letter ofcredit which is not rated.
But strong banks, multi-dollarbanks, wrapped their letter of
credit with the Federal HomeLoan Bank letter of credit.
Every regional bank in thecountry has a line with their
Federal Home Loan Bank withAtlanta.
New.
York, San Francisco, Dallasthey all have these lines and
(12:06):
the ability to do this structure.
The real challenge is findingthe person at the bank that
isn't square pegs for a hole andwants to swap bonds and their
eyes don't glaze over.
I've taken and one of theleaders in the industry is East
(12:28):
West Bank.
They've done more than anybodyelse with this structure and
we've done hundreds now andthey've been really, really good
at modeling and showing bankshow this is done, and sometimes
it takes me, you know, two yearsto get all the way through the,
where the, the folks at thebank and the executive
(12:49):
committees and loan committeesall understand this.
One thing I'll say is BrentBeardall was a very good friend
of mine too.
He got it in about seven and ahalf minutes.
He said wait a minute, he'sbrilliant.
It's a contention liability andit's free income.
Speaker 1 (13:08):
Sign me up.
Yeah, no, I mean Brent.
Listen, we've had him on ourpodcast.
He's quick to make decisions.
He's not afraid of to yourpoint square peg, maybe in a
round hole, and is able toquickly decipher and analyze.
So I am not at all surprisedthat it took him only seven and
a half minutes to parrot toother folks.
am not at all surprised that ittook him only seven and a half
minutes to parrot to other folks.
So tell me if you guys wouldn'tmind walk me through.
(13:30):
I know you just described, Ibelieve, the San Francisco deal,
but walk me through somethingthat really pinpoints and
describes how this was asolution to a conventional loan
not working out and where itstands today.
Speaker 4 (13:47):
What Brad touched upon earlier was, you know, the
deposits and all, and recently,what happened with Silicon
Valley Bank.
Speaker 1 (13:54):
Signature and other banks.
Speaker 4 (13:56):
First Republic was that.
You know the market seized upbecause they you know the people
were worried about theirdeposits.
You know what was were worriedabout their deposits and you
know what was going to happen todeposits In our.
You know, in our case we keptdoing business because we didn't
have to access deposits.
I accessed the commercial papermarket and the buyers of these
(14:19):
bonds are very largeinstitutions, mutual funds,
banks and insurance companiesthat want to park their money
get a return but want security.
When you take a bank and wraptheir letter of credit, which is
a security for the bond issue,with the federal home loan bank
letter of credit, then they havean A1 plus rated.
You know security and theydon't worry about.
(14:44):
you know about getting theirmoney back.
So, just fundamentally, thestructure and everything going
into the structure is the sameas any conventional loan
developer for a construction,refinance, permanent loan.
Anything in the apartment spacebecause I specialize in the
(15:05):
apartment space comes to thebank, they do an appraisal, they
do a construction cost reviewreview of financials and then
issue clearly the term sheetwhich gives me the dollar amount
of the bonds.
Once that's established, I pullmy team together which is a team
that you know very, verywell-known law firms like Oric
(15:29):
Harrington, and we pull togetherand structure the bond issue
which closes concurrently withand it really is the
construction loan, and thenthose funds are available for
construction.
The way that the cost of fundsis priced is off of the rate of
(15:56):
the bonds.
But if you look at the interestrate history, you'll look at
today's SOFR and earlier LIBORthat our cost of funds is right
on top of that, those costs offunds, that our cost of funds is
right on top of that, thosecosts of funds, so what?
Is just the reality today isthat our spread on these deals
on a construction deal, it'sgenerally $250 to $275 over the
(16:20):
bond rate, which is really yourSOFR rate for apples and apples.
And it's $200 to $225 over on apermanent loan.
Speaker 1 (16:31):
Okay and I feel like Brad had mentioned it was like
you kind of wrap theconstruction, the PERM loan,
into the same loan.
Is that the same way?
Is it one loan?
Is it kind of a long-term loan?
Or do you do what the banks doand kind of do a short-term
construction and then we move toa PERM?
Is it one loan then for alonger period of time?
Speaker 4 (16:50):
Yes, the Federal Home Loan Bank will actually give us
a 15-year wraps.
Okay, so we offer that.
So on a construction deal yes,it's a construction to PERM loan
and there's really no timeline.
You know, you really kind ofanticipate where the
construction and stabilizationperiod will be and that's more
(17:11):
relevant with regard toguarantees and to the rate
generally drops by a quarter ofa percent once you're in the
permanent phase.
But most of our deals are10-year deals construction to
permanent financing.
Speaker 1 (17:26):
Which is why Opportunity Zone worked right,
brad.
Speaker 2 (17:29):
Yeah, yeah, I'll tell you, rachel.
The real advantage to the bondstructure is that when you go to
convert to the perm, youre-appraise it.
You're obviously at this pointyou know you've increased value
and now you've got the property,is now cash flowing, so what we
(17:50):
can do is then what we calltopping it off, which is the
real advantage.
When you go to expand to theloan, you get the new appraisal
and based upon that 75%loan-to-value and wherever the
debt coverage ratios are.
Laurel, remind me, is it 125that you're looking for on the?
Speaker 4 (18:12):
coverage.
Right Well, it's generally 120to 125, depending on.
Obviously, not all deals arecreated equal, depending on the
size of the project, thestrength of the developer and
the location.
Speaker 1 (18:25):
Sorry, what is that?
100 to 125 again, tell me whatthat is.
Speaker 4 (18:28):
It's usually the debt coverage ratio that the bank
uses to size the loan.
Speaker 1 (18:34):
Got it, got it, got it, got it.
Speaker 2 (18:38):
I mean without getting it, because it can get
quite technical.
Speaker 1 (18:44):
Yeah, don't get too technical on us.
Speaker 2 (18:48):
From a high level, from having done a myriad of
these compared to theconventional loans.
Yeah, the structure.
The reason we love thestructure is because you just
know where you're going to be onthe debt.
And you can expand that debt,and so that's the real advantage
for us is that it's really hard, as you guys know, is when you
(19:11):
go from a bank loan and you wantto roll it into a Fannie or
Freddie perm.
You know the underwritingstarts all over again and you
know there are times where maybeyour rents are flat for a
little bit or you can't evenretire the construction loan,
which is what's happened, youknow, in the last couple of
years, given the higher interestrates.
(19:31):
So that's a it's a real.
For us, it's a safety programbecause it's not like the bank
is going to come back to you andsay, well, you got to pay this
down.
Yeah.
And that's happening with a lotof traditional construction
loans.
You got to go slap leather.
Speaker 1 (19:46):
Yeah, no, it's been challenging for a lot of groups.
Obviously, asset class as well.
I mean, in our own situation wehave a minimal office, some
hospitality, but depending onkind of when it was built, and
with COVID and et cetera, I mean, fortunately PEG has always
(20:07):
been very low leverage.
We don't.
You know, we're very try to bequite conservative in that
regard.
So things have, you know, we'vebeen pretty fortunate in that
way.
But I will say there were, youknow, there's an office and a
hotel that's had some challengesand so we're trying to figure
that out.
But that being said so itdefinitely does not sound like,
(20:27):
then, a program for a merchantbuilder, more of a long-term
hold developer, which obviouslythen Bridge was able to really
maximize this during all,because you've done what $2.5
billion-ish or more inOpportunity.
Speaker 2 (20:41):
Zone projects.
Is that right?
Well, they were the majority ofour financing for our
Opportunity Zone developmentdeals.
So yeah, and I will tell you acouple of things.
You know, one.
We've actually used Laurel'sprogram on an acquisition of an
existing apartment complex.
There are times where thatmakes sense.
(21:02):
Yeah.
You know, I would say the onlydownside is if you're doing
smaller transactions I thinkwe've said anything less than
$30 to maybe $40 million there'sbond costs and just the
underwriting costs that you haveto absorb.
So it really doesn't make sense.
(21:22):
On smaller transactions and Ithink Laurel's the sweet spot
for us has always been in that$50 to $75 million range.
Speaker 1 (21:32):
No, it's a good range .
It's a good range.
Speaker 4 (21:34):
Yeah, and I just wanted to follow up with what
Brad said about the size of thedebt.
It's really tied to not so muchto loan-to-value but to your
debt coverage ratio and what themetrics are for that specific
bank with regard to theconstruction debt and the
permanent debt.
(21:54):
So we are hitting really,really good numbers, but the
rate environment we're inclearly affects all of that and
where the lender ultimately endsup.
Speaker 1 (22:07):
Yeah, so you know we've had.
Obviously the market has swungquite drastically or, you know,
quite significantly.
Development is down.
I think everyone is looking andswirling around for blood,
although I don't think the bloodis there in terms of like
(22:28):
acquisitions, and certainly thatvaries by asset class.
Laura, from where your vantagepoint is and where you're
sitting, where are you the mostactive?
Who is reaching out to you andwho is taking the most advantage
of today's market and whatyou're able to offer?
Speaker 4 (22:45):
We're all over the country.
To tell you the truth, I'mbusier than I've ever been.
It's all the Western.
It really depends on thelender's footprint.
So I do have over a dozenlenders and different ones are
based in different parts of thecountry and they have a
different footprint.
(23:05):
But I've done deals recently inFlorida and Atlanta, lots in
California, Oregon, Washington,Arizona, actually up in Park
City.
So we're not constrained.
The program is not handcuffedby where we can go.
(23:27):
The governor there is wherethat specific bank is willing to
make a loan and some of themfollow their customers, you know
, to different places that theywouldn't normally go to.
But I will also say that thereare some merchant builders that
we do do this, you know, prettyeffectively with.
Speaker 1 (23:51):
Oh, okay.
So it doesn't like a long-termhorizon is not required then?
No, oh, okay, it's an option,it's an option.
Speaker 4 (23:57):
So it's an option of construction to perm.
But if you don't want to takethe perm, you know the developer
has the option of paying it offbecause the bonds trade at par.
Yeah, so there's trade at paryeah.
So there's no payment penalty.
Okay, and it really isdependent on what the lender
(24:18):
puts in place with regard to,you know, any prepays or whatnot
, but the bonds are payable atpar because they're seven-day
bonds.
Okay, no, it's so interesting,because they're seven-day bonds.
Speaker 1 (24:27):
Oh, okay, no, that's so interesting.
I, you know again, I don't dealas much in the debt space.
My colleague, who also is anAndrus, has been.
But I'm just curious are youthe only player in this, Laura?
Are there other folks andlisten?
In my bio notes about you, youare referred to as the godfather
(24:50):
of this program.
So tell me, who are yourcompetitors?
Are there any, and why is?
Speaker 4 (24:56):
this not more prevalent.
I did the first one with theguy John McCormick of the
Federal Home Loan Bank back inthe early 90s and as far as I
know I'm the most active person.
As far as I know I'm the mostactive person, because people
have to, and there are otherpeople that are doing some
volume of this, but not as muchas I don't think as much as we
(25:17):
are at Stern, but it's reallybecause you have to take the
time to teach the bank.
The real starting point is thebank and getting them
comfortable with the structure.
Once they find out about thestructure, they love it.
Like I say, one took me twoyears to get through and they've
(25:39):
already given me a billiondollars worth of bandwidth to go
play with.
But it's a contingent liability, it's fee income and it's not
dependent on deposits.
So those are the three factorsthat you know a bank you know
really, really likes about thisprogram.
Speaker 1 (25:55):
Yeah, you know, with all the upheaval, especially you
know, the regional banks asyou've mentioned out, mentioned
earlier about Silicon Valley andFirst Republic, where do you
see sort of the landscape forregional banks and the larger
banks moving forward?
Speaker 4 (26:14):
Well, right now we're busier than we've ever been
because our spreads are betterthan we're seeing on
conventional loans.
I have lenders that haveconstruction loans in their
(26:37):
portfolio that are offeringtheir clients a bond execution
for permanent, and they canoffer that at a better spread
than they can their conventionalloans.
So in my small world, that'swhat I see.
Speaker 1 (27:04):
That's what I see.
I see this as an option foreither banks that have another
portfolio or developers that arecoming out of and need to pay,
you know, get their constructionloan again.
I love hearing about, you know,good spreads and anything
that's accretive to the investor.
So, brad, you then tapped intoLoro.
You were able to find Loro andI know that you're on emeritus
status, but, kind of from yourvantage point, where do you see
(27:27):
debt financing moving forward,especially with sort of these?
You know changes in the marketand you know, I think, interest
rates are going to and they'renot going to be, where they were
, you know, in the last 15 years.
So just curious how you see thedebt markets moving forward.
Speaker 2 (27:43):
Like I said at the beginning, I'm starting to see
things moving again where thereare now loan payoffs and I think
that's what's frozen theregional banks.
You just can't make more loansuntil you get the other ones
paid off.
And what's happening now isthat now there are payoffs and
(28:05):
now the banks haven't made.
In general they have madeprobably maybe 20 percent of
their normal volume.
So now they're going to begearing up.
We're starting to hear thatbanks are increasing their
exposure limits, which is a goodthing.
So that engine may be goingagain.
(28:27):
But I see the agencies may begetting going again.
But I see you know the agencies, um, having you know, put out I
don't know what, maybe eight,$10 billion of agency financing.
Over the years it has reallychanged drastically and I think
one of the reasons there it'snot that, it's it's it's frozen,
it's just they are they.
(28:47):
They were always the-all right,they were the lender of last
resort and that was the FHFA putthem into that position.
So there was always financingfor housing there.
But I think right now they havebecome far more conservative
and they've been really focusedon affordable housing.
(29:09):
So that's their mandate.
So when it gets into theconventional financing, their
job is incentivized as if it's aworkforce housing deal.
So I think that's more thereason where you can see
Laurel's program really kind ofpicking up the slack there.
Yeah, I think a high level.
You know the debt funds havebeen so active.
(29:29):
They are still going to beactive.
There is a concern about whatoffice will do to some of these
debt funds that have massiveexposure, because if they start
having to take those back, thenthat really breaks the CLO and
if that happens it's a house ofcards.
But that's not the borrower'sproblem, that's the debt funds
(29:51):
issue.
But they're still a very activesource and I think that the
money is starting to come backagain.
I think we'll look at 25 as aphenomenal year.
Speaker 1 (30:00):
I would concur, I think we've had enough of kind
of figuring things out.
Concur, I think we've hadenough of kind of figuring
things out and I think thingsare settling and I think the
opportunities are becoming moreand more apparent and I do think
2025 year will be a great year,a good vintage.
I think we're heading into agood vintage year.
Brad, again, you've mentionedfive market cycles that you've
(30:21):
been through.
I always ask my guests this iskind of a parting when do you
see the current real estateinvestment opportunities and
what are you most interested inright now?
Where are you most active?
Speaker 2 (30:34):
Well, I tell you what .
The one thing that I wouldalways say lenders in general
will always favor thoseborrowers, like Peg, you know,
like the Bridges, that reallyhave a history of strong
performance.
You know, the weekend warriors,which are the groups that kind
(30:55):
of spawn out of the biggercompanies and try to do it on
their own.
That'd be really tough becausethey just don't have that
bandwidth, they don't have thehistory.
So I think that that's one ofthe things where the cream just
rises to the top and I thinkthat's where the best
opportunities are.
And I will tell you one otheradvantage for Peg, you know,
(31:17):
with with Laurel's program,because he and I made a phone
call to a lender as we'restrolling down the 14th fairway
at Torrey Pines saying would youdo a hotel loan on a
development deal?
Now, laurel, you haven't done ahotel development deal yet,
have you?
Speaker 4 (31:35):
No, we've done them.
Speaker 2 (31:36):
Sure, okay, but lenders generally are not in
favor of doing development dealson hotels.
But we're happy to say and Ican't release the name, but you
guys know them well that theyare interested in doing the
taxable bond financing for hoteldevelopments.
But it'll be case by case withsomebody who really knows what
(31:59):
they're doing.
So that bodes well for Peg.
Speaker 1 (32:01):
Yeah, no, no, listen, we think that as we're heading
into a vintage year for hoteldevelopment, you know, with the
with pandemic kind of slow,having slowed things down, uh,
and you know tourism back up andpeople starting to travel I
mean not starting to, they'vebeen traveling like crazy and
hotels are full and occupanciesand etc.
We definitely think that'sgoing to be a banner cut next
(32:23):
couple of years for hotels.
Uh, lauro, where you sit, youknow you've got a nationwide
program, you're dealing with allsorts of asset classes and all
sorts of borrowers and et cetera.
Tell me where you, you know,from your vantage point, where
do you see the real estateopportunities?
Speaker 4 (32:41):
Well, I focus on apartments and I think
apartments will continue to be avery strong sector, first of
all because, with rates wherethey were where they are today,
the single family market's notas big a competition and
actually forcing people intoapartments.
We're really bullish on theapartment space and we're doing
(33:07):
new development.
We're refinancing deals, so wehave done some hotels and that's
up to the bank any bank thatwants to do it.
The Federal Home Loan Bank hasa mandate and this is how I got
this thing started with theFederal Home Loan Bank.
They were getting beat up byCongress in testimony back in
the 90s for not creatingaffordable housing.
(33:30):
Well, the Federal Bank lovedthis.
I mean they actually come to theclosing dinners and
groundbreaking because they canshow where they've been they've
assisted in getting housing done.
So that's a really big positiveAgain and the one thing that is
working, because we are makingnew construction deals work and
(33:54):
I wanted to touch on this as aforward trend because of the
inversion and the forward curvewe're able to act to do swaps
during the construction andstabilization period, which will
give you a 100 basis pointadvantage over the current rate
on your underwriting.
So that helps your debt servicecoverage going in and helps with
(34:17):
the sizing of your loan andgetting you closer to 65% loan
to cost than the 50 to 55 thatBrad talked about.
Speaker 1 (34:27):
Yeah, no, we've seen a lot of the 50, 55.
So I would love to see more inthe 60s Kind of back when I, you
know, I've been at Peg now forsix years and it's been a bit of
a ride, so but it's good tohear.
I just think things arestabilizing.
I feel like there's just a lotmore activity.
People are no longer as nervousas they were, I think, where
we're just really trying to be,you know, prudent, wise, and you
(34:51):
know reading through the tealeaves a bit, but also just
moving forward and focusing onthe right asset classes, the
right geographies.
You know all the fundamentals.
So appreciate you two gentlemensharing your knowledge and your
experience, and, and, and Laura,I know, I know that you're
working on some things with PEG,so really excited to see some
of those things come through.
So, uh, gentlemen, thank you somuch for joining.
(35:14):
You guys can go back to golfingor lounging or whatever it is
that you were doing from thepeaks of the mountain West.
Thank you everyone for joiningus on peaks and portfolios by
PEG companies until next time.
Welcome to Peaks and Portfolios presented by PEG
Companies, your go-to podcastfor all things commercial real
estate investment.
I'm Rachel oh, and togetherwe're diving into current events
, trends, issues andopportunities impacting the CRE
investment space, fromdissecting the latest market
moves to sharing insights ontoday's commercial real estate
(00:25):
landscape.
It's time to maximizeportfolios here in the peaks of
the Mountain West and beyond.
Okay, everyone, welcome back toPeaks and Portfolios high up
here in the Mountain West.
Back to Peaks and Portfolioshigh up here in the Mountain
(00:48):
West.
Today, we're so honored to havenot one, but two guests joining
us, and we're going to betalking about debt and financing
, which is such a crucial partof any commercial real estate
investment.
We know it's quite challenged.
You know you've got costs thathave increased, you've got the
interest rates.
We don't know what the Fed isdoing half the time, and yet you
(01:08):
know business must go on,things must happen, and so we're
so fortunate to have two veryseasoned and experienced real
estate professionals,specifically around structured
finance, that we're going to betapping into a bit today.
So I wanted to introduce themboth, our good friend and
partner to pet companies, bradAndrus, who is the founding
(01:31):
partner and right now emeritusstatus of Bridge Investment
Group, which has now a $50billion plus AUM real estate
fund manager.
And we also have joining ustoday Laura Garcia, senior Vice
President and Managing Directorat Stern Brothers.
He is a veteran investmentbanker and a nationally
recognized expert in tax-exemptand taxable multifamily housing
(01:54):
and bond financing.
That is a mouthful right there.
So, gentlemen, welcome to Peaksand Portfolios today.
Speaker 2 (02:00):
Thanks, rachel, good to be here.
Speaker 1 (02:01):
So, brad, let's start with you.
You've been through a fewdifferent market cycles, you
know.
Since launching Bridge in the90s, you've seen a lot of ups
and downs.
I am just curious if youwouldn't mind sharing, you know,
your analysis of today's marketand how it's different than
maybe what we have experiencedhistorically.
Speaker 2 (02:21):
Well, you know, after going through maybe five
recessions, I found thateveryone is completely different
and yet you think the sky isfalling on every occasion.
But with respect to bridge, youknow, the good thing about
setbacks or when the marketresets itself, is that that's
(02:43):
usually when the best buyingopportunities are and even
though it's kind of a dark time,when you're going through that
recessionary pullback, those arethe best buys.
This one is very unique.
Obviously, what happened in2008, 2009, and 2010 was brutal,
but that's when, really, bridgelaunched into the fund
(03:07):
management world, so thatpresented a great opportunity.
But those were some dark days,which is why I really wanted
Laurel to participate with us,because he was one of the best
sources of financing out thereduring the GFC.
But I'll take it to what's goingon right now.
(03:28):
Interestingly, the COVIDchanged so much, and everybody
knows that I have found that thehardest time that we have seen
(03:50):
in the real estate industry is22, 23, post-covid, because the
raising capital became sodifficult and everybody's kind
of in a position where theydon't know if prices have truly
reset itself or if the priceshave found a bottom.
But I'm happy to say now we'restarting to see green shoots and
it looks like we're on the mendright now.
Speaker 1 (04:04):
Yeah, I would agree.
At least that's the samesentiment that we're having here
.
And thank you for pointing outthat 2022, 2023 was a hard
equity raising year, becausethat's my role here at PEG and I
have never seen anything likeit.
But conversations are changingand there is definitely.
You know, pencils are back upand I mean things aren't
(04:27):
penciling exactly the same, butI think people are approaching
it differently, which I thinkhaving Loro on today, you know,
to help kind of steer us throughthis.
So that would be great.
You know, I would love to, ifyou wouldn't mind, loro maybe
giving us kind of a primer onjust real estate debt in general
.
So meaning, we have a lot ofdifferent listeners here on our
podcast, but would you mind justkind of peeling it back to kind
(04:49):
of like you know, what doestraditional debt look like in a
deal?
Speaker 4 (04:54):
Well, traditional debt is your conventional
construction loan, where a bankgoes and gets deposits back out
to a developer or an owner andcharges you a spread.
The difference between thatapproach and what I do and I've
(05:16):
been doing it since my 41st yearis that instead of the bank
going to their vault for themoney, we utilized their letter
of credit and I raised the moneyfrom the capital market.
So on a conventional deal, we'dgo to the taxable bond market,
which is well over $4 trilliondeep, and on a tax-exempt deal,
(05:41):
we go to the tax exempt market.
So the difference is you knowprimarily that where the money
comes from, everything else isthe same.
On these development deals thatyou know the developers are
accustomed to, the appraisal,construction cost review, you
(06:01):
know equity partner all of thatis the same.
Speaker 1 (06:05):
Yeah, no, that's super helpful.
So, Brad, I know that you'vestructured a lot of deals in
your lifetime, and obviouslyespecially at Bridge.
Tell me how you kind of I don'tknow if you've transformed from
doing the traditional debtapproach and leveraging more of
what Laurel has to offer, or didyou continue to do both?
(06:27):
Or tell me a little bit aboutthat genesis.
Speaker 2 (06:39):
Yeah, happy to, and Bridge and all of the primary
sources would tap into.
On development loans usingbanks and bank deposits, as
Laurel mentioned, where we havefound to be where Laurel's
program really has itsadvantages, from my perspective,
is when the market pulls back,banks become concerned about
(07:03):
lending, and what's presenteditself right now is that you
know the banks are holding ondeposits for dear life and so if
they're not having runoff ontheir portfolio of refinances,
you know they can't churn theirbalance sheet, and so then
deposits become very, veryprecious and, as you guys have
(07:24):
seen, anytime you want to borrowfrom a bank more so now than
ever before they require you topark a tremendous amount of
deposits.
In fact, it feels like they'rebasically lending us our own
money.
Right, that upside down.
That's where the taxable bondstructure works.
(07:46):
Great, because, as Laurelmentioned, we're not utilizing
deposits.
It's really the leverage offthe federal home loan bank, that
advantage for us.
On the developments, I think,laurel, we've probably done
maybe eight or nine developmentdeals through our opportunity
zone, primarily because that'swhere we're doing most of the
development at Bridge, and theadvantage was that, you know,
(08:10):
number one, we don't have to gopark all those deposits because
everyone wants them and so youcan't pull from one bank and go
to another.
So that was a real advantage.
Where there wasn't kind of ahandout for deposits, the
guarantee structure is muchlighter.
But the real advantage, wherethere wasn't kind of the handout
for deposits, the guaranteestructure is much lighter.
But the real advantage is youcan get full proceeds.
(08:32):
So right now in theconventional market lenders,
banks will want to go 50, 55percent loan costs and that's
pretty hard to make deals workat leverage point, especially
where interest rates are.
And so Laurel's program hasgenerally gotten us to 70%, 75%
(08:52):
loan-to-cost.
And the other advantage is,rather than having to go out and
retire a construction loan,move into a refinance with
another lending source, we justkeep the bonds in place, and so
it's basically what we wouldcall in the old days, you know,
a combination financing for permor for construction and perm.
Speaker 1 (09:13):
Yeah, yeah, well, hey , it sounds like a home run to
me.
Is this something, then, that'squite prevalent in the
marketplace?
I'll be honest, I don't play inthe debt market as much.
I focus on the equity.
Obviously, the debt is huge andit plays into how the returns
pan out and everything.
But is this something reallyreally common, because this is
(09:34):
the first I'm hearing about it?
But, again, I don't play in thedebt as much.
Speaker 2 (09:38):
Well, I'll turn it over to Laurel in a minute
because he thinks he's got thebest program out there and
everybody should be doing it.
But from my perspective that'sthe conventional market.
He is what I would call anonconventional source of
financing and so it's not reallyprevalent and out there.
But you know, laurel hasamassed multiple banks that have
(10:00):
come into this program and oneof your dear banks and friends
of Peg's, which is BrentBeardall.
Speaker 1 (10:06):
Oh yes.
Speaker 2 (10:07):
You know right, brent he was.
We did the first deal togetherwhere I introduced Brent to
Laurel and I'll let Laurel tellthe story about how quick.
Brent figured this out, thatthis is a real advantage.
And then we did one of ourdevelopments in downtown San
Francisco using WashingtonFederal Bank and East West Bank
(10:28):
and it was a great combinationplay, but maybe, Laurel, you can
kind of just.
That was a good example of howyou introduced a bank to this
program.
Speaker 4 (10:38):
Yeah, I've been doing the bond structure since 1984,
and I'm just going to go backhistorically because it's kind
of relevant.
In those days there wereactually believe it or not
AAA-rated banks in the UnitedStates.
So we would take the banks thatare of credit, issue bonds and
(11:00):
then the bank would lend themoney to the developer, but then
the credit ratings changed, themarket changed, and then the
bank would lend the money to thedeveloper, but then the credit
ratings changed, the marketchanged and we had domestic
banks, like Bank of America,that were AAA.
They were Japanese and Germanbanks.
I don't know of a AAA bank thatstill exists, but that's
probably because I haven't donemy research.
Right, right right.
(11:21):
In the early 90s and what wasreally important and this is
really relevant to regionalbanks- Yep.
Regional banks, you know, wereat kind of a disadvantage in
their access to capital.
So I took a regional bankletter of credit which is what
secures the bond where the moneycomes from.
Okay.
(11:42):
And I wrapped that letter ofcredit which is not rated.
But strong banks, multi-dollarbanks, wrapped their letter of
credit with the Federal HomeLoan Bank letter of credit.
Every regional bank in thecountry has a line with their
Federal Home Loan Bank withAtlanta.
New.
York, San Francisco, Dallasthey all have these lines and
(12:06):
the ability to do this structure.
The real challenge is findingthe person at the bank that
isn't square pegs for a hole andwants to swap bonds and their
eyes don't glaze over.
I've taken and one of theleaders in the industry is East
(12:28):
West Bank.
They've done more than anybodyelse with this structure and
we've done hundreds now andthey've been really, really good
at modeling and showing bankshow this is done, and sometimes
it takes me, you know, two yearsto get all the way through the,
where the, the folks at thebank and the executive
(12:49):
committees and loan committeesall understand this.
One thing I'll say is BrentBeardall was a very good friend
of mine too.
He got it in about seven and ahalf minutes.
He said wait a minute, he'sbrilliant.
It's a contention liability andit's free income.
Speaker 1 (13:08):
Sign me up.
Yeah, no, I mean Brent.
Listen, we've had him on ourpodcast.
He's quick to make decisions.
He's not afraid of to yourpoint square peg, maybe in a
round hole, and is able toquickly decipher and analyze.
So I am not at all surprisedthat it took him only seven and
a half minutes to parrot toother folks.
am not at all surprised that ittook him only seven and a half
minutes to parrot to other folks.
So tell me if you guys wouldn'tmind walk me through.
(13:30):
I know you just described, Ibelieve, the San Francisco deal,
but walk me through somethingthat really pinpoints and
describes how this was asolution to a conventional loan
not working out and where itstands today.
Speaker 4 (13:47):
What Brad touched upon earlier was, you know, the
deposits and all, and recently,what happened with Silicon
Valley Bank.
Speaker 1 (13:54):
Signature and other banks.
Speaker 4 (13:56):
First Republic was that.
You know the market seized upbecause they you know the people
were worried about theirdeposits.
You know what was were worriedabout their deposits and you
know what was going to happen todeposits In our.
You know, in our case we keptdoing business because we didn't
have to access deposits.
I accessed the commercial papermarket and the buyers of these
(14:19):
bonds are very largeinstitutions, mutual funds,
banks and insurance companiesthat want to park their money
get a return but want security.
When you take a bank and wraptheir letter of credit, which is
a security for the bond issue,with the federal home loan bank
letter of credit, then they havean A1 plus rated.
You know security and theydon't worry about.
(14:44):
you know about getting theirmoney back.
So, just fundamentally, thestructure and everything going
into the structure is the sameas any conventional loan
developer for a construction,refinance, permanent loan.
Anything in the apartment spacebecause I specialize in the
(15:05):
apartment space comes to thebank, they do an appraisal, they
do a construction cost reviewreview of financials and then
issue clearly the term sheetwhich gives me the dollar amount
of the bonds.
Once that's established, I pullmy team together which is a team
that you know very, verywell-known law firms like Oric
(15:29):
Harrington, and we pull togetherand structure the bond issue
which closes concurrently withand it really is the
construction loan, and thenthose funds are available for
construction.
The way that the cost of fundsis priced is off of the rate of
(15:56):
the bonds.
But if you look at the interestrate history, you'll look at
today's SOFR and earlier LIBORthat our cost of funds is right
on top of that, those costs offunds, that our cost of funds is
right on top of that, thosecosts of funds, so what?
Is just the reality today isthat our spread on these deals
on a construction deal, it'sgenerally $250 to $275 over the
(16:20):
bond rate, which is really yourSOFR rate for apples and apples.
And it's $200 to $225 over on apermanent loan.
Speaker 1 (16:31):
Okay and I feel like Brad had mentioned it was like
you kind of wrap theconstruction, the PERM loan,
into the same loan.
Is that the same way?
Is it one loan?
Is it kind of a long-term loan?
Or do you do what the banks doand kind of do a short-term
construction and then we move toa PERM?
Is it one loan then for alonger period of time?
Speaker 4 (16:50):
Yes, the Federal Home Loan Bank will actually give us
a 15-year wraps.
Okay, so we offer that.
So on a construction deal yes,it's a construction to PERM loan
and there's really no timeline.
You know, you really kind ofanticipate where the
construction and stabilizationperiod will be and that's more
(17:11):
relevant with regard toguarantees and to the rate
generally drops by a quarter ofa percent once you're in the
permanent phase.
But most of our deals are10-year deals construction to
permanent financing.
Speaker 1 (17:26):
Which is why Opportunity Zone worked right,
brad.
Speaker 2 (17:29):
Yeah, yeah, I'll tell you, rachel.
The real advantage to the bondstructure is that when you go to
convert to the perm, youre-appraise it.
You're obviously at this pointyou know you've increased value
and now you've got the property,is now cash flowing, so what we
(17:50):
can do is then what we calltopping it off, which is the
real advantage.
When you go to expand to theloan, you get the new appraisal
and based upon that 75%loan-to-value and wherever the
debt coverage ratios are.
Laurel, remind me, is it 125that you're looking for on the?
Speaker 4 (18:12):
coverage.
Right Well, it's generally 120to 125, depending on.
Obviously, not all deals arecreated equal, depending on the
size of the project, thestrength of the developer and
the location.
Speaker 1 (18:25):
Sorry, what is that?
100 to 125 again, tell me whatthat is.
Speaker 4 (18:28):
It's usually the debt coverage ratio that the bank
uses to size the loan.
Speaker 1 (18:34):
Got it, got it, got it, got it.
Speaker 2 (18:38):
I mean without getting it, because it can get
quite technical.
Speaker 1 (18:44):
Yeah, don't get too technical on us.
Speaker 2 (18:48):
From a high level, from having done a myriad of
these compared to theconventional loans.
Yeah, the structure.
The reason we love thestructure is because you just
know where you're going to be onthe debt.
And you can expand that debt,and so that's the real advantage
for us is that it's really hard, as you guys know, is when you
(19:11):
go from a bank loan and you wantto roll it into a Fannie or
Freddie perm.
You know the underwritingstarts all over again and you
know there are times where maybeyour rents are flat for a
little bit or you can't evenretire the construction loan,
which is what's happened, youknow, in the last couple of
years, given the higher interestrates.
(19:31):
So that's a it's a real.
For us, it's a safety programbecause it's not like the bank
is going to come back to you andsay, well, you got to pay this
down.
Yeah.
And that's happening with a lotof traditional construction
loans.
You got to go slap leather.
Speaker 1 (19:46):
Yeah, no, it's been challenging for a lot of groups.
Obviously, asset class as well.
I mean, in our own situation wehave a minimal office, some
hospitality, but depending onkind of when it was built, and
with COVID and et cetera, I mean, fortunately PEG has always
(20:07):
been very low leverage.
We don't.
You know, we're very try to bequite conservative in that
regard.
So things have, you know, we'vebeen pretty fortunate in that
way.
But I will say there were, youknow, there's an office and a
hotel that's had some challengesand so we're trying to figure
that out.
But that being said so itdefinitely does not sound like,
(20:27):
then, a program for a merchantbuilder, more of a long-term
hold developer, which obviouslythen Bridge was able to really
maximize this during all,because you've done what $2.5
billion-ish or more inOpportunity.
Speaker 2 (20:41):
Zone projects.
Is that right?
Well, they were the majority ofour financing for our
Opportunity Zone developmentdeals.
So yeah, and I will tell you acouple of things.
You know, one.
We've actually used Laurel'sprogram on an acquisition of an
existing apartment complex.
There are times where thatmakes sense.
(21:02):
Yeah.
You know, I would say the onlydownside is if you're doing
smaller transactions I thinkwe've said anything less than
$30 to maybe $40 million there'sbond costs and just the
underwriting costs that you haveto absorb.
So it really doesn't make sense.
(21:22):
On smaller transactions and Ithink Laurel's the sweet spot
for us has always been in that$50 to $75 million range.
Speaker 1 (21:32):
No, it's a good range .
It's a good range.
Speaker 4 (21:34):
Yeah, and I just wanted to follow up with what
Brad said about the size of thedebt.
It's really tied to not so muchto loan-to-value but to your
debt coverage ratio and what themetrics are for that specific
bank with regard to theconstruction debt and the
permanent debt.
(21:54):
So we are hitting really,really good numbers, but the
rate environment we're inclearly affects all of that and
where the lender ultimately endsup.
Speaker 1 (22:07):
Yeah, so you know we've had.
Obviously the market has swungquite drastically or, you know,
quite significantly.
Development is down.
I think everyone is looking andswirling around for blood,
although I don't think the bloodis there in terms of like
(22:28):
acquisitions, and certainly thatvaries by asset class.
Laura, from where your vantagepoint is and where you're
sitting, where are you the mostactive?
Who is reaching out to you andwho is taking the most advantage
of today's market and whatyou're able to offer?
Speaker 4 (22:45):
We're all over the country.
To tell you the truth, I'mbusier than I've ever been.
It's all the Western.
It really depends on thelender's footprint.
So I do have over a dozenlenders and different ones are
based in different parts of thecountry and they have a
different footprint.
(23:05):
But I've done deals recently inFlorida and Atlanta, lots in
California, Oregon, Washington,Arizona, actually up in Park
City.
So we're not constrained.
The program is not handcuffedby where we can go.
(23:27):
The governor there is wherethat specific bank is willing to
make a loan and some of themfollow their customers, you know
, to different places that theywouldn't normally go to.
But I will also say that thereare some merchant builders that
we do do this, you know, prettyeffectively with.
Speaker 1 (23:51):
Oh, okay.
So it doesn't like a long-termhorizon is not required then?
No, oh, okay, it's an option,it's an option.
Speaker 4 (23:57):
So it's an option of construction to perm.
But if you don't want to takethe perm, you know the developer
has the option of paying it offbecause the bonds trade at par.
Yeah, so there's trade at paryeah.
So there's no payment penalty.
Okay, and it really isdependent on what the lender
(24:18):
puts in place with regard to,you know, any prepays or whatnot
, but the bonds are payable atpar because they're seven-day
bonds.
Okay, no, it's so interesting,because they're seven-day bonds.
Speaker 1 (24:27):
Oh, okay, no, that's so interesting.
I, you know again, I don't dealas much in the debt space.
My colleague, who also is anAndrus, has been.
But I'm just curious are youthe only player in this, Laura?
Are there other folks andlisten?
In my bio notes about you, youare referred to as the godfather
(24:50):
of this program.
So tell me, who are yourcompetitors?
Are there any, and why is?
Speaker 4 (24:56):
this not more prevalent.
I did the first one with theguy John McCormick of the
Federal Home Loan Bank back inthe early 90s and as far as I
know I'm the most active person.
As far as I know I'm the mostactive person, because people
have to, and there are otherpeople that are doing some
volume of this, but not as muchas I don't think as much as we
(25:17):
are at Stern, but it's reallybecause you have to take the
time to teach the bank.
The real starting point is thebank and getting them
comfortable with the structure.
Once they find out about thestructure, they love it.
Like I say, one took me twoyears to get through and they've
(25:39):
already given me a billiondollars worth of bandwidth to go
play with.
But it's a contingent liability, it's fee income and it's not
dependent on deposits.
So those are the three factorsthat you know a bank you know
really, really likes about thisprogram.
Speaker 1 (25:55):
Yeah, you know, with all the upheaval, especially you
know, the regional banks asyou've mentioned out, mentioned
earlier about Silicon Valley andFirst Republic, where do you
see sort of the landscape forregional banks and the larger
banks moving forward?
Speaker 4 (26:14):
Well, right now we're busier than we've ever been
because our spreads are betterthan we're seeing on
conventional loans.
I have lenders that haveconstruction loans in their
(26:37):
portfolio that are offeringtheir clients a bond execution
for permanent, and they canoffer that at a better spread
than they can their conventionalloans.
So in my small world, that'swhat I see.
Speaker 1 (27:04):
That's what I see.
I see this as an option foreither banks that have another
portfolio or developers that arecoming out of and need to pay,
you know, get their constructionloan again.
I love hearing about, you know,good spreads and anything
that's accretive to the investor.
So, brad, you then tapped intoLoro.
You were able to find Loro andI know that you're on emeritus
status, but, kind of from yourvantage point, where do you see
(27:27):
debt financing moving forward,especially with sort of these?
You know changes in the marketand you know, I think, interest
rates are going to and they'renot going to be, where they were
, you know, in the last 15 years.
So just curious how you see thedebt markets moving forward.
Speaker 2 (27:43):
Like I said at the beginning, I'm starting to see
things moving again where thereare now loan payoffs and I think
that's what's frozen theregional banks.
You just can't make more loansuntil you get the other ones
paid off.
And what's happening now isthat now there are payoffs and
(28:05):
now the banks haven't made.
In general they have madeprobably maybe 20 percent of
their normal volume.
So now they're going to begearing up.
We're starting to hear thatbanks are increasing their
exposure limits, which is a goodthing.
So that engine may be goingagain.
(28:27):
But I see the agencies may begetting going again.
But I see you know the agencies, um, having you know, put out I
don't know what, maybe eight,$10 billion of agency financing.
Over the years it has reallychanged drastically and I think
one of the reasons there it'snot that, it's it's it's frozen,
it's just they are they.
(28:47):
They were always the-all right,they were the lender of last
resort and that was the FHFA putthem into that position.
So there was always financingfor housing there.
But I think right now they havebecome far more conservative
and they've been really focusedon affordable housing.
(29:09):
So that's their mandate.
So when it gets into theconventional financing, their
job is incentivized as if it's aworkforce housing deal.
So I think that's more thereason where you can see
Laurel's program really kind ofpicking up the slack there.
Yeah, I think a high level.
You know the debt funds havebeen so active.
(29:29):
They are still going to beactive.
There is a concern about whatoffice will do to some of these
debt funds that have massiveexposure, because if they start
having to take those back, thenthat really breaks the CLO and
if that happens it's a house ofcards.
But that's not the borrower'sproblem, that's the debt funds
(29:51):
issue.
But they're still a very activesource and I think that the
money is starting to come backagain.
I think we'll look at 25 as aphenomenal year.
Speaker 1 (30:00):
I would concur, I think we've had enough of kind
of figuring things out.
Concur, I think we've hadenough of kind of figuring
things out and I think thingsare settling and I think the
opportunities are becoming moreand more apparent and I do think
2025 year will be a great year,a good vintage.
I think we're heading into agood vintage year.
Brad, again, you've mentionedfive market cycles that you've
(30:21):
been through.
I always ask my guests this iskind of a parting when do you
see the current real estateinvestment opportunities and
what are you most interested inright now?
Where are you most active?
Speaker 2 (30:34):
Well, I tell you what .
The one thing that I wouldalways say lenders in general
will always favor thoseborrowers, like Peg, you know,
like the Bridges, that reallyhave a history of strong
performance.
You know, the weekend warriors,which are the groups that kind
(30:55):
of spawn out of the biggercompanies and try to do it on
their own.
That'd be really tough becausethey just don't have that
bandwidth, they don't have thehistory.
So I think that that's one ofthe things where the cream just
rises to the top and I thinkthat's where the best
opportunities are.
And I will tell you one otheradvantage for Peg, you know,
(31:17):
with with Laurel's program,because he and I made a phone
call to a lender as we'restrolling down the 14th fairway
at Torrey Pines saying would youdo a hotel loan on a
development deal?
Now, laurel, you haven't done ahotel development deal yet,
have you?
Speaker 4 (31:35):
No, we've done them.
Speaker 2 (31:36):
Sure, okay, but lenders generally are not in
favor of doing development dealson hotels.
But we're happy to say and Ican't release the name, but you
guys know them well that theyare interested in doing the
taxable bond financing for hoteldevelopments.
But it'll be case by case withsomebody who really knows what
(31:59):
they're doing.
So that bodes well for Peg.
Speaker 1 (32:01):
Yeah, no, no, listen, we think that as we're heading
into a vintage year for hoteldevelopment, you know, with the
with pandemic kind of slow,having slowed things down, uh,
and you know tourism back up andpeople starting to travel I
mean not starting to, they'vebeen traveling like crazy and
hotels are full and occupanciesand etc.
We definitely think that'sgoing to be a banner cut next
(32:23):
couple of years for hotels.
Uh, lauro, where you sit, youknow you've got a nationwide
program, you're dealing with allsorts of asset classes and all
sorts of borrowers and et cetera.
Tell me where you, you know,from your vantage point, where
do you see the real estateopportunities?
Speaker 4 (32:41):
Well, I focus on apartments and I think
apartments will continue to be avery strong sector, first of
all because, with rates wherethey were where they are today,
the single family market's notas big a competition and
actually forcing people intoapartments.
We're really bullish on theapartment space and we're doing
(33:07):
new development.
We're refinancing deals, so wehave done some hotels and that's
up to the bank any bank thatwants to do it.
The Federal Home Loan Bank hasa mandate and this is how I got
this thing started with theFederal Home Loan Bank.
They were getting beat up byCongress in testimony back in
the 90s for not creatingaffordable housing.
(33:30):
Well, the Federal Bank lovedthis.
I mean they actually come to theclosing dinners and
groundbreaking because they canshow where they've been they've
assisted in getting housing done.
So that's a really big positiveAgain and the one thing that is
working, because we are makingnew construction deals work and
(33:54):
I wanted to touch on this as aforward trend because of the
inversion and the forward curvewe're able to act to do swaps
during the construction andstabilization period, which will
give you a 100 basis pointadvantage over the current rate
on your underwriting.
So that helps your debt servicecoverage going in and helps with
(34:17):
the sizing of your loan andgetting you closer to 65% loan
to cost than the 50 to 55 thatBrad talked about.
Speaker 1 (34:27):
Yeah, no, we've seen a lot of the 50, 55.
So I would love to see more inthe 60s Kind of back when I, you
know, I've been at Peg now forsix years and it's been a bit of
a ride, so but it's good tohear.
I just think things arestabilizing.
I feel like there's just a lotmore activity.
People are no longer as nervousas they were, I think, where
we're just really trying to be,you know, prudent, wise, and you
(34:51):
know reading through the tealeaves a bit, but also just
moving forward and focusing onthe right asset classes, the
right geographies.
You know all the fundamentals.
So appreciate you two gentlemensharing your knowledge and your
experience, and, and, and Laura,I know, I know that you're
working on some things with PEG,so really excited to see some
of those things come through.
So, uh, gentlemen, thank you somuch for joining.
(35:14):
You guys can go back to golfingor lounging or whatever it is
that you were doing from thepeaks of the mountain West.
Thank you everyone for joiningus on peaks and portfolios by
PEG companies until next time.
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