Herzka Shaken Not Stirred, Blackstone-AIR Deets & California's CRE Banking Exposure

Herzka: Shaken, not Stirred

His firm is staring down Fannie and Freddie probes, and the fallout has resulted in a leadership shake-up and the departure of key rainmakers. But Ralph Herzka is sticking to his message: If you want to get deals done, Meridian Capital Group remains the place.

“You realize you’re defined by an overall picture, not by one event,” Herzka said Tuesday at ReDeal’s shindig (Hookahman!) in Garfield, NJ. “Who you are and what your character traits will always come through, no matter what controversial issue you go through.”

Today’s sponsor is: KWEV

Powering Progress. KWEV offers best-in-class EV charging hardware solutions for commercial properties, providing a sought-after amenity for tenants and visitors alike. Property owners can also earn extra revenue from charging usage with the KWEVCloud intelligent load management dashboard. Explore how KWEV can help optimize your property and delight tenants.

The Future is KWEV. Get started today.  

Herzka (cont.)

Herzka noted that in Q1, Meridian did $4B of business with 99 different lenders, and said he was “blown away” by the support he’d received from lenders and clients. “I learned who your friends are and who they aren’t,” he said.

Herzka was interviewed by RXR’s Charlie Harary, who sources described to me as a Frum Tony Robbins. Harary did not ask Herzka the stickier questions on the agency probes or on how Meridian’s being run since the change-up – Fannie alum and former acting comptroller of the currency Brian Brooks is now CEO and chairman, but Herzka is “senior chairman.” Instead, the conversation had a more philosophical bent, with lots of references to teachings from the Talmud. Herzka also shared an anecdote about having dinner (kosher, natch) at the home of longtime client and investing legend Charlie Munger, who dropped some pearls on him.

“Take the high road,” Herzka recalled Munger saying. “It’s less crowded.”

Cap-tivating: Crunching Blackstone’s $10B Deal

Blackstone’s $10B multifamily megadeal for AIR Communities is all anyone can talk about this week. The problem is everyone is saying different things about 1 of the key metrics investors use to gauge a real estate deal: the cap rate – everything from 4.85% to 5.9% to 7.36% 🤣 was being tossed about.

I don’t even attempt to be a numbers wonk, but luckily I have friends who are: Hunter from Lewis Enterprises breaks down the cap-rate calculations around this deal, and RE nerds will find plenty to nerd out on: from how property management expenses play in to how the number might change when accounting for JV or fully-owned properties.

Here’s the juice:

If you’ve made it this far, you may still be wondering, “So, what cap rate did Blackstone actually buy this for?” That question is crucially important to Blackstone, but less crucial for you, who I am guessing is not in the 99.9th percentile of commercial property investors in the world. In my opinion, a +21,000 unit deal is a difference in type entirely, not degree, from the transactions that make up the bulk of the commercial real estate market. Blackstone has a long-established strategy of using their size to “buy wholesale and sell retail.” In this case, the cap rate is more in service of creating a malleable metric that can be theoretically “right” and flatter both buyer and seller.

California’s Cross to Bear: CRE Loans

“Lean mean money-making-machines servin' fiends.” Tupac, California Love

California is where the regional-banking crisis began, and it’s also at the heart of the industry’s overexposure to CRE loans – a concentration that’s attracted the scrutiny of regulators: Nearly a third of the state’s 127 banks have property debt exceeding the 300% of capital threshold, per a new analysis by Bloomberg of federal call reports filed by lenders. Right behind California is New Jersey ⛽️ (30%), with New York 🗽 at 24%.

Some active in that market are downplaying the risk, noting that CRE is a pretty broad bucket: while DTLA and Downtown SF office may be getting rocked, for example, many other assets are performing well.

River City Bank, whose CRE loan book is a whopping 660% of its capital, noted that the bank didn’t produce any credit losses in ‘23, with chief lending officer Dan Franklin describing his business as a “a low, low risk, low-yield game that we’re playing.”

(Bonus: If you want to understand how regulators are thinking about CRE exposure, The Promote has it directly from the horse’s mouth: Check out our conversations with a federal banking regulator on the CAMELS 🐫 rating here, and on rescue capital, mergers and workouts here.)

Quickies

• Corker of a read on the lovefest between Blackstone top brass and UK prime minister Rishi Sunak 🇬🇧 : “I’ve heard Jon Gray direct, eulogising about him.”

• Biggie: SCOTUS rules California developers may challenge the dreaded “impact fees” regularly imposed by cities & counties 🏫🛣️ 

• Bizarro world: LA’s City Council voted to consider banning landlords from looking into prospective tenants’ criminal history ⛓️ 

• Good news nugget in the world of multifamily finance: Icon ( Terrence Lowenberg, Todd Cohen) scored a 2Y extension on a $143M CMBS package: Icon did 2 things well: it promised to pay down the principal, and got on the case BEFORE the loan went to special servicing

• Big boy private lender Blue Owl Capital 🦉 acquires CMBS lender Prima in $170M deal; says RE faces a “lack of capital availability.”

• Even for private equity, the machinations described here are spectacular: “Three months after the papers were signed, Kingswood demanded that Save Mart’s prior owners, the Piccinini family, fork back over $109mn after already surrendering the company.” (Gift link)

• Gotta admire the chutzpah: Housing court hearing in the Bronx was adjourned because the tenant claimed he died 🪦 and was then resurrected 🤲 👻 

  

  h/t David Zar

Raking in the Billions

In big-ticket New York real estate, it’s almost impossible not to be your father’s son. Everyone comes back to the source at some point, be it erstwhile journalist Rob Speyer or DJ hopeful Roger Silver. The scion who’s probably been the most successful at carving out his own identity is Stefan Soloviev, son to the late Sheldon Solow, who built a multibillion-dollar property empire (9 West 57th flagship) in Manhattan in his signature scorched-earth fashion. Soloviev, who opted to reclaim his full Ashkenazi last name at the age of 22, parlayed a tricky relationship with his father into one of the largest empires of something, as Mark Twain advised us, they’re just not making anymore: land

Soloviev is today one of the country’s largest (#21) landowners, with hundreds of thousands of acres (amassed with the help of federally subsidized loans) of farmland across Kansas, Nebraska, Colorado and New York. “Every cent I had went into farmland—nothing else,” he told CRE’s grand dame Lois Weiss in a fun new chat. “I mean everything.”

Having sold $1.8B worth of his dad’s rental towers, he’s gunning for a NYC casino license 🃏 for his former power plant site by the East River (“I’m in it to win it”) and is also using a 120-mile-long railroad he bought in Colorado to help him hit his goal of 7M bushels of grain 🌾 . (“Then, when I have ships, I will be able to cut deals and transport the grains from our Weskan Grain facilities directly to Asia.”) He demurred on a question about his plans for his Billionaires’ Row development site - “we are keeping it, and it’s all about protecting the southern views from 9 West.”

(Bonus: A superb read from the archives on how the wealthiest families have amassed huge chunks of land across the Great American West.)

We’re Cookin’ on Insta

If you want quick, sharp video breakdowns of some of the hottest trends & stories, look no further than ten31’s Instagram: We just went live this week, and we’ve already looked at Frum-friendly EB-5, the luxury space race on Fifth Ave and Blackstone’s megadeal for AIR. If you’re into the voice of The Promote, it’s a great companion 📹️ 

Unquotable Quotes