Nightingale Sings Again, CRE's Prisoner's Dilemma & the Carbon Trap

Nightingale Sings Again

“A half truth is a whole lie.” - Yiddish proverb

The chutzpah barometer 🌡️ has officially been broken. Nightingale Properties’ Elie Schwartz, who allegedly misappropriated tens of millions of dollars of investor money via CrowdStreet, was reportedly under investigation over the summer by the DOJ and SEC, and is in the midst of a settlement with CrowdStreet investors, is back in the game: the dealmaker is soliciting funds for an office play in New Jersey, The Promote has learned.

NPG [Nightingale’s name after the rebrand 🤲 ] “is highly regarded for its operational strength and problem-solving abilities,” states the offering memorandum, a copy of which was shared with The Promote. “Known in the industry as one of the most agile, creative, and operationally savvy real estate investors, NPG develops an asset specific strategy designed to maximize value on all levels.”

Today’s sponsor is: BetterPitch

Whether raising an SPV, open-ended or REPE fund, lean on BetterPitch’s team of seasoned analysts, copywriters and designers to make your pitch professional and crisp. Focus on your core competency – real estate – and let us figure out how to make your pitch pop. 

Get in touch today for a free pitch deck audit.

Nightingale (cont.)

Schwartz’s team is acquiring an office building in Bergen County (470 Chestnut Ridge Road) for $10M ($186 a foot, 10.1% cap rate) and is projecting two scenarios: locking in a long-term renewal with the existing tenant (IRR 20.1%, profit $6.15M, 7.75% cap rate), or re-leasing after the tenant vacates at the end of the lease term in 2030 (IRR 11.1%, profit $3.6M, 8% cap rate). NPG says that it’s had “positive conversations” with lenders to fund the deal at 60-65% LTC, at rates of 6.5-7%.

The OM highlights Nightingale’s track record as a sponsor that’s done “nearly $10B in transactions” and controls a portfolio of “more than 10M SF in 7 states.” It also highlights sponsorship’s core values, including “entrepreneurial,” “strategic” and “trust.” (The OM does not, of course, mention anything about CrowdStreet or the nightmare Atlanta Financial Center deal 🤷‍♀️ )

Schwartz and his deputy, Alex Roth, did not respond to requests for comment.

I had a couple of experienced operators look over the OM to gauge the deal. Here’s one: “I’ve seen worse deals. I think biggest gotcha here is there is zero percent chance they get that loan and that a lender allows full free cash flow to borrower as lease gets closer to expiration.” Another said that as long as investors had sufficient transparency into how Schwartz would use the funds and had guardrails built in, it was not out of the question that he’d be successful raising money. “Should investors always be ‘buyer beware?’ Of course,” he added.

In January, Nightingale’s $82M deal to sell a Miami Beach office building – a key source of funds for Schwartz’s settlement with CrowdStreet investors – fell apart. (If you’re somehow new to the tale, or you just need a refresher, start here.)

CRE’s Prisoner’s Dilemma

Odd Lots drops a much-needed CRE overview with Cohen & Steers’ Rich Hill (I like this guy - not a doomsday prophet, just real talk, and he brings data). Highlights

• Office vals. down 35%-ish (in general), prob 50% peak-to-trough

• Lending conditions tightening, but not as stringently as was expected: “The worst for lending conditions are behind us.”

• NOI growth holding up really well

• Appraisals leading transaction volumes significantly atm - no. of deals is back to Covid lows, but appraisal vals. down 20%. “That has everything to do with higher interest rates and higher discount rates, and an appraiser has no choice but to deal with that. So this cycle is a little bit different where transactions are just now beginning to catch up to where appraisals are.”

• Pooh-poohs the “Wall of Maturities” chatter 👏 , instead focuses on “prisoner’s dilemma” in the capital markets being solved. “Borrowers are not in a good position, lenders are not in a good position. They're sort of forced to work with each other right now.” (I wrote a bit about this dynamic wrt the multifamily market here)

The Carbon Trap

That whole CO2 emissions headache thing is no longer resigned to pitch decks: The EU 🇪🇺 passed a directive this month that compels building owners to take on expensive renovations ($300B/year) to meet tighter emission and energy standards. Bloomberg estimates that tens of thousands of buildings across the EU will be affected. (The Promote generally doesn’t cover Europe, but I have a feeling you could see similar policies make their way over here.)

“It’s huge sums of money,” real estate attorney Rory Bennett told the publication. “The reality is there will be some who simply can’t afford or would choose not to comply with the legislation directive on the basis that paying a penalty is, at least in the short term, easier than having to spend a huge amount of your reserves on bringing your stock up to grade.”

Stricter energy rules could become a “regulatory cliff edge for unrentable European offices,” said Fidelity International’s Kim Politzer. Meanwhile, green buildings are getting a nice rental premium (7%) 💚 

(More: I had a broad conversation about this stuff during the pandemic with Fifth Wall’s Brendan Wallace and Greg Smithies- check it out here)

Quickies

• Crikey. Bad landlord Daniel “Shalom” Ohebshalom gets roughed up at Rikers. He had turned himself in re to a case of “egregious” neglect at two Upper Manhattan buildings; he’s set to serve slammer time unless he corrects “nearly 700 violations”

•  Like a good neighbor no more: State Farm will not renew 30K policies for CA homeowners & renters. To get a primer on the carnage 🔥 🌊 in home insurance markets, here’s Odd Lots 

• A good reality check for homebuyers expecting savings galore from the landmark NAR settlement. (It’s as emotionally charged an issue is there is in resi real estate, and the takes reflect that)

• Maggie Miracle has brought in Norman Foster to design a $1B “vertical campus” in Hollywood aimed at tech & entertainment tenants

• Checking in on RE titan Joe Chetrit’s recent hiccups (If you’re new to one of the most fascinating characters in the business, drop everything and read this profile I got to work on w New Kings author Adam Piore)

• Miami Design District impresario Craig Robins gets a flattering look in WSJ, incl. a quote from LVMH 👜 top brass. Big stat: Asking rents in the DD up 200% since ‘19

Policy Corner: NYC’s 421a, Chicago’s Transfer Tax

🗽 : New York developers are holding firm on their terms on increasing wages & benefits for construction workers tied to projects receiving the comeback version of 421a. The Building Trades rejected REBNY’s offer last week, per TRD, but both sides are projecting hope that a deal can be done. The state budget’s due 4/1, and Gov. Hochul has effectively outsourced wage negotiations (new 421a won’t happen without them) to those 2 groups.

Plus, a new Super PAC has sprung up to elect pro-housing candidates across New York: Abundant New York (birthed from pro-development advocacy group Open New York) says it won’t take money from RE figures, and will support pols who push for market-rate and affordable housing while also supporting stronger tenant protections.

“If you’re serious about solving New York’s housing affordability crisis, we will support you,” Open New York head Annemarie Gray told the NYT. “And if you’re standing in the way, we’ll hold you accountable.” The PAC’s creation follows a Feb. move by a group of NY politicians to create a pro-housing “league.”

Meanwhile, in Chicago 🐂 , voters rejected Mayor Johnson’s proposed tax increase on RE deals of $1M+. Johnson had pegged the policy as a “mansion tax,” but that was obviously nonsense – the tax would also impact tons of CRE deals in an already-shaky market.

“What it [Johnson’s proposal] does is it really just sort of triggers and adds to that overall perception that maybe Chicago isn’t the place that we should be going or isn’t the place that we should be buying,” Joe Ferguson, of fiscal watchdog group Civic Federation, told Bloomberg.

Unquotable Quotes