Race to the Bottom, Related Bets the House, Funds Feeling Fund-y

Race to the Bottom

"A mohel's craftsmanship can only be appreciated when the tide goes out." - Old RE Jungle Saying

The yardstick in multifamily syndication has moved from how much money you can make your investors to how rapidly you can lose it. 

It’s one thing to bleed out slowly over time, brought down by a combination of tightening rents, rising rates and bad decisions. It’s another to go from splashy acquisition to foreclosure in a year. Twice. 

(Listen 👂️ to today’s lead story here)

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Syndicators (cont.)

Last January, Kenny Wolfe, a protegé of multifamily syndication maharishi Brad Sumrok, teamed up with John Williams and Ike Bams’ Bluelofts to buy the Oil & Gas building, an office property of some renown in downtown Fort Worth, and announced plans for a 180-unit resi conversion. A few months later, they picked up the adjoining Star-Telegram building, eyeing an 88-unit conversion.

The JV scored a $12.3M loan from Legacy Bank & Trust for Oil & Gas. It was one of several office-to-resi conversions for Wolfe, who has been a big evangelist of historic tax credits for conversions (see graphic up top). Bluelofts, for its part, launched a fund in December hoping to raise $100M for conversion projects, with a target of creating 3K units of housing. 

“We believe there is a huge need for workforce housing for police officers 👮‍♀️ , teachers 🧑‍🏫 , firefighters 👩‍🚒 – regular people who have a job but cannot find any place to live,” Bams told the Dallas Morning News in Dec. (Thinking a good rule of 👍️ is when you hear sponsors citing housing for “firefighters,” run.)

Earlier this month, Wolfe lost another conversion project, in downtown Dallas, to foreclosure, with his lender snapping it up for $8M, or just $42 a foot. And now, TRD reports that Oil & Gas is set to meet that same fate.

There are allegations of shady connections between the two deals: Wolfe’s short-term lender on the Dallas property (211 North Ervay) accused Wolfe of taking money provided for the purchase of that building and instead using it to open a line of credit to buy Oil & Gas. When Wolfe failed to repay the loan, the short-term lender, Niraj Shah of Priya Capital, agreed to a mod in which Wolfe transferred minority ownership in several properties, including Oil & Gas, to Shah, per the suit.

Meanwhile, Bluelofts is syndicating the Star-Telegram deal to retail investors, looking for min. $25K checks. 

“Our investors are loving these historic office conversions and we’ve got more teed up,” Wolfe told fellow syndicator Whitney Sewell on the Real Estate Syndication Show in October. “It’s a little more work…it’s definitely well worth it for the returns to the investors.”

(This whole saga btw is one of my biggest gripes w peer-to-peer industry media. For all its pluses – intimacy, specificity, access – the BS 💩 radar is often nonexistent. It doesn’t matter as much in the good times, but does come back to bite in tough times – Sequoia’s megapuff piece on SBF is a classic cautionary tale.)   

Funds Feeling Fund-y

It’s “DEAL FLOW season,” and the real estate megafunds want you to know it.

“2024 is going to be a year of reacceleration,” Jon Gray said earlier this month on Blackstone’s airwaves, brandishing his record $30.4B BREX fund. “While you’re in this period bouncing along the bottom (referring to RE values), this is when we want to deploy capital, when you can see that light at the end of the tunnel but it’s not yet priced into the market.” Per Gray, there are 3 places for Blackstone to play:

• Private credit (so hot rn, but w 80s junk bond roots)

• Capital solutions (“a lot of folks need to delever”)

• Equity investing (in their favorite “secular tailwinds”™️ )

Not to be outdone, KKR’s head of RE credit Matt Salem wrote to clients that the behemoth is “bringing multiple deals to our equity investment committee each week.”

Banks, Salem wrote, hold about half of outstanding CRE debt. If that share drops to 40% after regional bank failures and in the face of more regulatory scrutiny 🔍️ , it would leave a $500B hole in the market. 

“Who will be able to fill that gap? We do not think insurance companies or U.S. government agencies can allocate significantly more to CRE given their existing exposure,” he wrote. “That leaves CMBS and debt funds.” KKR’s own pipeline, Salem wrote, has swelled to $15B, up from $10-12B last year.

“We are finding that it is possible to lend at a significant discount to replacement cost and often at 50% of peak valuations,” he added, “while earning low-to-mid teens gross returns on mezzanine-like exposure at loan-to-value ratios near 65%.”

Arrested Development - Update

Former HFZ principal Nir Meir had his first day in criminal court Wednesday. Didn’t go as hoped.

“I am a 49-year old guy, I’ve never been arrested. I have been an upstanding citizen all my life,” said Meir, per TRD. “I’ve been active in community service and community outreach for many years.” He offered to surrender his passports and asked to be released. Instead, the judge set cash bail at $5M, + a $10M insurance bond and a $15M surety bond. Mir could not pay up and so it was back to Rikers.

New York has more color on the prosecutor’s case, which focused on 3 projects: the XI on the High Line (now a Blavatnik/Witkoff joint), the Marble Collegiate Church site in NoMad, and a smaller deal in San Francisco. The SF caper is by far the smallest – a $5M venture compared to the $2B XI – but what it lacks in size it more than makes up for in chutzpah.

 Prosecutors say that just $400,000 of the money went toward HFZ’s attempt to acquire the building, while $4.6 million was diverted to other HFZ projects. Meir then allegedly spent years lying to Arica, claiming the project was moving forward when, in fact, HFZ had failed to even close the deal to buy the building. Again, Meir allegedly sent fake documents and permits that made it seem like everything was proceeding as planned.  

Meanwhile, the other big CRE fraud drama will have to wait until at least the autumn. Austin-based erstwhile tycoon Nate Paul’s trial on federal charges of wire fraud has now been pushed to Nov. 6 - the cited reason is that there’s just too much damn paperwork.  

(If you’re new to the Nate Paul saga, I’m jealous, because you’ll get to experience this Joe Lovinger banger for the first time. It’s the rare RE criminal case that straddles the highest levels of political corruption - Paul was at the heart of the impeachment trial last year of Texas AG Ken Paxton, for bribery and abuse of office.)  

For now, it appears that Paul will be free to travel domestically and maybe even 🛫 internationally. "I have no reason at all to worry (that) Mr. Paul is a flight risk," the judge said.

In God We Trust. Everyone Else, Bring Data

One of Blackstone’s secular tailwinds™️ is data centers, which Gray sees as the firm’s window into the Gen AI boom: data centers, in its mind, will become the railroads of the new digital economy. It’s apparent others feel that way too, which can make for massive profits for those who happen to own the right sites.

On Wednesday, Toll Bros. CEO Douglas Yearley dropped a Woj 💣️ when he revealed that the firm had made a $175M pretax profit on a Northern Virginia site (PP: $5M) once slated for a 1,300-apartment and townhome project.

"We had a unique piece of property in Northern Virginia (the 🌎️ data center capital) that we were processing for approvals to build homes on, and a data center operator came along and made us an offer that we couldn't refuse," Yearley said.

He didn’t reveal the buyer on the call, but Washington BJ reported that it’s Chuck Kuhn’s JK Land Holdings. Toll cannily got a site plan application in May in for a 1.1M sf data center project, so Kuhn gets grandfathered in, avoiding the new zoning ordinance that removed data centers from as-of-right use in December, the publication reported.

Related Bets the House

“The town will never be the same. After the Tangiers, the big corporations took it all over. Today it looks like Disneyland.”- Ace Rothstein, “Casino”

It’s no longer quiet on the Western Front. Related has unveiled its $12B proposal (h/t Crain’s) for the undeveloped portion of Hudson Yards, and it’s as ambitious as you’d expect from the Ross/Blau behemoth: 3 towers, 2M sf of office, 1,500 housing units, a 2.7M sf casino building and a hotel-resort. 

Compare that $12B budget to the $8B tag Wall Street 🐳 Steve Cohen is pegging on his casino plan near Citi Field ⚾️ . Larry Silverstein’s company (which recently pushed out its former CEO Marty Burger in favor of Larry’s daughter, Lisa Silverstein) is also vying for a license, with a two-tower project a few blocks north of Related’s.

A Related flack told Crain’s that the gaming license is what makes the whole thing viable, a pointed remark given all the political uncertainty around it: the Hudson Yards area’s State Senate and Assembly reps are not casino stans, and their support will be crucial.

Good to put the $12B number in context: it is gargantuan, even for Related, but that firm’s 🐐 attribute is its ability to make massive bets while continuously taking chips off the table in the form of foreign investors, JV partners, office condo sales and such. Never seen anyone better at it. Consider what they’ve already done at HY:

• $550M for Neiman Marcus space at 20HY to Wells Fargo

• KKR, Wells, Time Warner all own their offices at 30HY

• Coach paid $750M for its spot at 10HY, later bought by Allianz

• Mitsui Fudosan took a 90% stake in 50HY during development

• KKR bought HY observation deck for $500M

Chaser: Related’s got condo & hotel plans in the works for 625 Madison, Ben Ashkenazy’s former trophy.

Newmark Gets its Mojo Back

Newmark had a monster quarter, more than quadrupling its YoY net income to $37M. Revenue hit $747M, with marked jumps in I-sales, originations, leasing and property management. The highlight was the jackpot $50B Signature Bank loan 📗 assignment (Harmon/Spies). CEO Barry Gosin made sure to let the industry know that he’s talent-shopping.

“If you’re great, you should be at Newmark,” he said, while also noting that the upcoming CRE distress could be a boon to its debt platform. “These maturities represent an enormous opportunity for us,” he said.

Unquotable Quotes

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