The Signet Podcast – Jeff Hudson Transcript

In this episode, Eduardo Signet speaks with Denver commercial real estate broker, landlord, and investor Stuart Zall, founder of The Zall Company.

The conversation explores how relationships, tenant selection, networking, mentorship, long-term ownership, and neighborhood-building shape success in commercial real estate. Stuart shares lessons from his career in retail leasing, property ownership, Denver development, international projects, and the practical realities of working with landlords, tenants, brokers, contractors, and emerging brands.

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Podcast transcript

SIGNET: Stuart, thank you for coming. I have so much to ask you. I want to introduce you as the broker and landlord in the Denver market, although you do brokerage and properties everywhere, including a deal in China. You have quite a lot of experience. Do you want to say a little bit about yourself or introduce yourself?

STUART ZALL:

I am Stuart Zall, founder of The Zall Company, which I founded in 2000.
I did not grow up expecting to go into real estate, and I did not come from a multigenerational real estate family.
I studied accounting at the University of Denver, got my CPA, and started at Arthur Andersen, but I lasted only about a year.
I moved into real estate almost by accident after helping Steve Gettleman with accounting on a strip center, then being asked to help lease it by calling people from the phone book.
I learned by u201cdialing for dollars,u201d got results, and eventually moved through Lakeside Mall, Taubman, and outlet-mall projects around the country.
Taubman taught me the art of leasing, merchandising, and building tenant relationships across multiple markets.
In 2000, when my firm was bought, I chose to start my own business instead of moving, and the business grew from hired-gun leasing work into a brokerage company.
Along the way, I started buying properties when opportunities came up, often through partnerships, because I believe successful brokers should have some investment exposure to commercial real estate.
I eventually bought the Larimer building where we are now, partly because I needed space for my own company and could lease the rest to another tenant.
Having a storefront and a sign on the street has changed the business because people now drive by, see the company, and call.

SIGNET: It is so interesting. I love this area. I have been here a few times and have been to the restaurants. I did not realize everything was right on this block, like Barcelona, Federales, and other places. It is a cool part of town. How did you know this was going to become that?

STUART ZALL:

Sometimes you get lucky.
A friend from New York, Stephanie Rubenstein, was representing a concept connected to the founder of Lululemon, and they wanted a gritty part of town for a millennial worker-focused concept.
At that time, Larimer Street was very rough; Denver Central Market was not open, and there was very little there besides Ratio Brewery.
My friend saw something in the area that reminded her of Brooklyn, and I trusted her perspective even though I did not fully see it myself at first.
I made it a quest to find a building in that area, and we got what I believe is one of the best blocks on Larimer Street in RiNo.
When I bought the building, I was nervous enough that I did not tell my wife exactly where it was at first.
The area still has city challenges, but the building has worked out extremely well.
My advice is not to overanalyze real estate; sometimes you have to find it, take the risk, and let time work for you.
Real estate is scary because you are putting a lot at risk, but time can become your best friend if you take the chance.

SIGNET: You hit on so many points I want to talk about. Mentorship is one. First, can you talk about your mentors and the values you learned in your training with Taubman? You have also been a mentor for me in Denver, and I have met many people you have mentored who became incredibly successful. What qualities do you look for in people that lead them to success?

STUART ZALL:

I think it starts with heart.
If you have passion for what you do, then it does not feel like work.
You need drive, passion, and the ability to dream.
I think younger people are missing face-to-face communication because so much is done through texting, Instagram, and efficient digital communication.
When I started, even sending someone a picture of a space took days, and that slower process created dialogue and relationship-building.
Today, information can be sent instantly, but the relationship process can be lost.
Networking begins with meeting people and building relationships.
I try to create platforms, such as breakfasts, where people can meet others who may help advance their careers.
If you want to make deals, you need to put yourself where decision-makers are, such as shopping-center conventions and industry events.
You should not only spend time with people you already know; you should try to meet as many people as possible and then follow through.
Many deals begin with a cup of coffee, a handshake, or simply bumping into someone.

SIGNET: I love the idea of networking outside your own category. Developers often network with developers, and brokers often network with brokers. I have looked at finance events and capital groups because you get exposure to different people and make different links. One thing I have heard you say is that you never know where a deal is going to come from, and it is about being there. Is that one of the ideas?

STUART ZALL:

I learned something from doing business in China: if you are in a room where everyone speaks English, you are less valuable, but if you are the one person who speaks a language no one else speaks, you become extremely valuable.
I apply that metaphor to real estate networking.
If I am in a room full of brokers, everyone already understands leasing, so I am less differentiated.
If I am in a room where no one understands what I do, then I may be able to provide something valuable.
I like working with contractors, architects, finance people, and others connected to real estate but not doing the exact same thing.
I see networking as collaboration, where different people can benefit from different parts of the same opportunity.
I try to pay it forward by connecting general contractors or other professionals with people who may help them, without keeping a strict scorecard.
Those relationships often come back in useful ways, even if not immediately.
Mentoring people is not just telling them what to do; it is encouraging them to go out, network, socialize, talk to people, and learn from events.
As an example, I paid to meet Danny Meyer at an event, got a signed book, introduced myself, and created a connection that later became useful.
You cannot build those kinds of connections if you only sit in the audience; sometimes you need to go to the front and introduce yourself.

SIGNET: You talked about win-win situations. One thing you have said before, and I have seen you do, is that you want your tenants, your clients, and the people you represent to win. You have said that after the lease is signed and the commission is done, that is when you start to work by helping promote them, because if they expand, they are going to call you. What do you do after the lease is signed, since they still have so much to do?

STUART ZALL:

You can go too far and become your clientu2019s outsourced administrative staff, so you should not go looking for trouble.
It is still important to check in and help when there are problems.
I try to guide clients toward good people, such as reliable liquor-license attorneys, contractors, or other professionals.
I prefer to give clients two or three strong referrals rather than just one, so they can do their own homework and choose.
My role is to point them toward people who are tried and true, not to make every decision for them.
Most of the help is needed between signing the lease and opening the store.
After opening, I cannot solve every operational problem, such as labor or marketing, but I can pick up the phone and be available.
Signing a lease can be a multimillion-dollar commitment, so I want the tenant to succeed.
I once helped a restaurant franchisee renegotiate terms and work through problems even though I technically represented the landlord.
A lot of salespeople disappear after they get paid, but we want continuity, repeat business, and clients who know we tried to help.
At the core, I see our work as solving problems.

SIGNET: I love the way your brain thinks. You are very creative. Taking a wider-angle point of view, why commercial versus residential? I love commercial, but I am curious why you chose that path.

STUART ZALL:

Triple-net leases are a major reason.
I had experience with residential early on, including buying condos during a period when banks wanted properties off their books.
At one point, I had about 50 condos with a partner.
Residential was more management-intensive, especially before todayu2019s technology made banking and administration easier.
I do not have the patience for residential.
Commercial is more interesting to me because I am fascinated by businesses, retail, and how those businesses operate.
I moved most of my residential holdings into commercial projects over time.
In commercial, if a store does not work out for an operator with many stores, it is usually not as emotionally catastrophic as something going wrong with someoneu2019s home.
Residential deals involve peopleu2019s shelter and can be more personal and stressful.

SIGNET: In commercial real estate, what trends are you looking out for? We have tariffs, the internet has been affecting retail for a while, and there are other forces in the market.

STUART ZALL:

People have probably been worrying about the future of retail and commerce since ancient times.
Humans will always need commerce in one form or another.
There will be AI, headwinds, and other changes, and the key is to keep pivoting.
If you sit back and do nothing, you are going to be dead.
COVID was a major test for restaurants, and the smart operators quickly moved into patio seating, takeout, and alcohol-to-go where allowed.
Apparel is changing because so much can be bought online, but people still shop when traveling or looking for experiences.
Food still has to be made somewhere, even if DoorDash or another service delivers it.
I think ghost kitchens have mostly been a bust because people still need to see, experience, and trust a restaurant.
Food, entertainment, and apparel will remain, but models may change, stores may get smaller, and department stores need to reinvent themselves.

SIGNET: I am loving these public markets you see everywhere. I drove up and down the coast, and places like San Luis Obispo and Santa Barbara have public markets. Here there is The Hangar and Edgewater. I love those developments because they have synergy together if they are done well. Colorado Mills may have been an example of that 15 or 20 years ago.

STUART ZALL:

Denver is often a poster child for jumping on trends harder than other cities.
We probably overdid the public market and food hall concept.
Some public markets and food halls are winners, but others do not work.
It is not enough to build a food hall and assume people will show up.
You still have to put real thought into the concept, location, tenant mix, and execution.
Denver Central Market and Edgewater are strong examples.
Some others have gone out of business, which shows the model is not automatically successful.
If the concept is done right, it can work very well.

SIGNET: Your company has come such a long way. I think it is incredible that you started as an accountant, which uses a certain type of brain, and then went into such a relationship-heavy business. What qualities did you bring from accounting into your current work?

STUART ZALL:

I can understand financial statements, accounts receivable, and the basic mechanics of a business.
That is valuable because many brokers do not really understand the business side.
I understand operating properties and mortgages.
At the same time, I outsource almost everything that is not one of my strengths.
I use an outsourced bookkeeper and outsourced graphic arts help.
I know I need to work within my strengths.
Running numbers and detailed accounting work are not where I perform best now, even though the background helps.

SIGNET: I have a personal question that I think applies well to the podcast. Hiring people and managing people is really a talent. There is a reason CEOs sometimes manage managers, and managers manage individuals. How do you develop the skills needed to manage people? If you do not do that right, your business suffers and you reach dead ends.

STUART ZALL:

Managing people is a real challenge.
I believe there may be some force or timing that helps you find what you need when you need it.
About a year ago, I hit a wall because sales were down and I was struggling to motivate the team.
Our leasing meetings were not productive, and people, including me, were distracted.
I realized I needed a coach.
I met Steve Benoit from Crafted Consultants through my son and later sat down with him for coffee.
Steve explained a structured process for working with people, and I decided to try it even though it was not cheap.
He has become a meaningful part of the team.
We now have mandatory Monday meetings, with no cell phones, where each agent reviews what they said they would do and whether they got it done.
We also have one-on-one status updates and KPIs.
One KPI is getting one positive Google review per month from each person, which helps the company cast a wider net.
We now track deals by quarter instead of just doing deals without tracking them.
The coaching and structure have been important to our growth.

SIGNET: I asked that because I am managing a construction project in Pebble Beach right now, and you manage subs and contractors. Many people I have interviewed say their success is due to the people they hire. A lot of it is finding the right people with drive, quality, and pride in workmanship. It is hard to find those people because everyone wants to present themselves that way, but not everyone is that person.

STUART ZALL:

A lot of hiring is trial and error.
We now have an onboarding sheet and an interview sheet that lists what we are looking for.
You can also overanalyze hiring.
Right now, we are at capacity and do not have room for more people unless we build up or expand.
I am willing to take a chance on a lot of people.
Many people in the industry probably got their start with me.
In the past, I may not have had the tools to mentor and coach people properly, so I probably lost some talented people.
If you love what you do, it is not work.
I work in some form seven days a week because I am always available and always thinking about how brokers can be more productive.
I do not only think about their productivity in terms of my own income; I want them to succeed.
People are giving me their time and part of their lives, especially when they are young.
Even if someone only stays with me for a year, two years, or three years, I want them to leave with skills that help them succeed elsewhere.
At Arthur Andersen, many good accountants eventually went to work for clients, and the firm saw that as creating a friend at that company.
I see former employees similarly: if they leave and succeed, the relationship may help both of us later.
I do not expect anyone to give me their entire life, but I want their time with us to be productive.

SIGNET: You said you are at capacity. Where do you want to go from here? What is really good now, and what do you want your legacy to be? That is a two-for-one question, but they are different intentions.

STUART ZALL:

I am having a lot of fun and enjoying what is happening.
We are working on projects with the Orlando Magic, which has been very cool.
I have partners outside my company, including Dan Nelson and Neil Berkowitz, who help expand our bandwidth.
I like the arena and sports district space and see it as an area for future growth.
Many arenas are moving back into central business districts, which creates opportunities around live music, sports, restaurants, retail, and event traffic.
Time is precious for people, so projects that combine sports, entertainment, food, and retail can create strong commercial environments.
We do a lot of leasing downtown, in RiNo, and in Cherry Creek, and I want us to continue being a leader in those markets.
Downtown Denver still has a lot of opportunity, despite lingering perceptions from COVID, crime, and 16th Street Mall disruption.
When you lease space and bring in a store or restaurant, you can change a neighborhood for better or worse.
A lease such as Mendocino Farms in Cherry Creek changes the everyday experience of a neighborhood by adding a useful commerce point.
My legacy is not about ego; it is about improving the city or the commercial playground I work in.
Early in my career, I was focused on getting paid, but over time I came to care more about the type of tenant and whether they improve the neighborhood.
A street full of banks may pay rent, but it does not create the same neighborhood energy as coffee shops, restaurants, and places to shop.
The goal is to help create neighborhoods where people feel commerce, culture, and activity.

SIGNET: The tenants really give a neighborhood its feel u2014 the restaurants, bars, and different spots.

STUART ZALL:

The right tenant mix creates a good environment.
When neighborhoods improve through thoughtful retail and restaurant leasing, everyone benefits.

SIGNET: I was listening to another interview you did, and you said 2010 was a hard year after the Great Recession. How did you survive that, and what advice would you give to other people in future recessions?

STUART ZALL:

Praying is real.
If you have your health, you should not let your stock account or money account consume you.
Do not listen to all the background noise.
I do not watch much news because it can become distracting and negative.
In our business, the recession showed up late because commissions often take six months to a year to come in.
2009 was still fine, but in 2010 nothing was coming in.
I tried to get exposure by writing articles and appearing in trade magazines.
A partner and I wrote an article about repositioning malls, and someone from China called asking whether we could do that work there.
Our default answer was yes, even when we had to figure out how to execute afterward.
We needed demographic and psychographic data in China, which was difficult to get, but a colleague connected us with someone who did data work in Asia and had gone to the University of Denver.
We partnered with him, created a merchandising plan, and the client then asked whether we could lease the project.
The project was in Xiu2019an, which was connected to the Terracotta Warriors and the Silk Road.
I used my U.S. relationships with brands to find the right international contacts and started leasing the project.
I worked between China and Denver, using a Wi-Fi phone line with a Denver number so clients did not know I was overseas.
The project was ultimately scrapped because housing became more lucrative for the developer, but we had been paid in advance.
By the time that project ended, the U.S. economy had improved.
That experience helped us survive and led to work in places such as Puerto Rico and Hawaii.

SIGNET: I do residential in Europe, but it is interesting because that is another market. Even here, RiNo and Cherry Creek feel like different markets because the tenants are different. You deal with a lot of high-end, popular, and trendy tenants.

STUART ZALL:

I would not call most of our work true luxury, like Gucci or Hermu00e8s, because Denver is not a very luxury-heavy market.
We work more with upper-moderate and emerging brands.
That includes brands like Lululemon, North Face, Birkenstock, and other better brands.
I also love working with immigrants because many of them are fearless.
Some people create businesses because they may not have the same access to conventional jobs, and they are willing to take chances.
Those chances sometimes turn into great businesses.
I have worked with clients from one store to very large store counts, and it is rewarding to watch a brand grow.
It is interesting and fun to see a person or brand evolve from one location into something much larger.

SIGNET: That is part of their story. I think you did that with H&M, where you had the first one in Colorado.

STUART ZALL:

We did the first H&M in Colorado.
H&M has withstood the stress of downtown.
We also brought Uniqlo to downtown Denver, although it unfortunately closed during COVID.
Forever 21 was another example.
No brand lasts forever, but if you can get 15 years or more out of a brand, that can still be meaningful.

SIGNET: Thinking about the 16th Street Mall, coming from Los Angeles, what is the secret? In LA, it is very hard to turn around cities, maybe because of bureaucracy or something else. Here, you have the Downtown Denver Partnership and developers working with political bodies. What is the secret to turning around a place like that?

STUART ZALL:

Comparing Los Angeles and Denver is difficult because Los Angeles County is massive and harder to move.
Denver is smaller and more nimble.
Denver has a lot of downtown history.
Union Station was critical to Denveru2019s growth and connects directly to the 16th Street Mall.
The redevelopment of Union Station was a beautiful project.
Historically, the railroad helped Denver grow because the rail route came through Denver instead of elsewhere.
Larimer Street and downtown Denver developed around rail traffic, travelers, and the commerce they needed.
Denver has historic assets, including Larimer Square and older buildings, that give it a character beyond steel, brick, and glass.
The city has serious struggles, including high minimum wages and permitting timelines, but there are good people who believe in downtown.
With the 16th Street Mall work completed or nearing completion, I expect to see more positive activity in the next couple of years.

SIGNET: It is a great area. I lived near Union Station and would jog through 16th Street. That area has completely changed, with Whole Foods, the train, and a safer environment.

STUART ZALL:

During COVID, Denver dropped its guard and got hit on multiple levels.
The trend is now improving.
Some older office buildings may be converted to residential if conversion is feasible.
There is still a need for housing, even if apartment rents are currently soft.
I expect the need for apartments to continue as the city grows.

SIGNET: Prices have come up a lot since then too.

STUART ZALL:

Prices have come up, and interest rates are another obstacle.
Every generation has something that gets in the way.
I often hear people say something is too expensive and that they will wait for prices to come down.
In the long run, saving a relatively small amount on price may matter less when amortized over decades.

SIGNET: I once heard that it is not timing the market, it is time in the market. It is the same principle.

STUART ZALL:

Jordan Perlmutter once told me that some real estate projects succeed because of timing.
Even if you do not time it perfectly, real estate is a long game.
It is like golf: people focus on individual shots, but real estate has waves.
There are periods when you can make a lot of money quickly, but overall you need a long-term view.
If you take the long view, you have a better chance of being successful.

SIGNET: It seems like that is also what you do with your investments. Originally, the name of this podcast was u201cThe Long-Term Real Estate Investor,u201d because thinking long term removes some of the pressure around things like IRR calculations. If you have a 100-year business plan, it changes the mentality. I feel that in your investing and leasing, it is always long term, and there are also a lot of transaction costs in trying to flip.

STUART ZALL:

In commercial real estate, long-term thinking is important.
Because I did not come from a real estate family, I had to start by planting seeds myself.
It would have been nice to walk into an existing forest, but I had to begin building it over time.

SIGNET: It is tricky too, because when you are starting out, how are you going to buy something without financing? A lot of times the long-term plan is to get rid of financing so you have more stability and the bumps in the road are not as dramatic. Let me ask you the wrap-up questions. What was the number-one deal that changed your career, taught you the most, or had the most impact on you?

STUART ZALL:

The most important turning point was not really a deal; it was going to work for the Taubman Company.
That job was transformational because it taught me how to lease not just to fill space, but to create neighborhoods.
When I was about 27, I met a friend at a restaurant called Fresh Choice, saw a huge line, and asked about the owner.
I had just taken a job involving two malls, and within about 30 days I made two deals with that restaurant operator.
That happened because I asked a question when the opportunity was right in front of me.
Sometimes you are on the one-yard line and only need to ask the question.
Over my career, I did several deals with that operator, so that became an important relationship and an important early lesson.

SIGNET: What are your three key daily habits that have made you successful? I am always curious what time people wake up, whether they meditate, read a certain newspaper, or spend family time.

STUART ZALL:

I do not read a newspaper.
I get up early, usually around five.
My most productive time is between about five and eight in the morning.
I try to filter out negative noise because there is always a lot of it.
I would tell people not to listen to all the noise that is designed to stop them.
I try to stay positive.
I meditate for about ten minutes almost every day.
I use paper and pencil to write things down, even with all the CRMs and technology available.
I try to be thankful.
I remind myself that there are many opportunities available and that people do not need to stay stuck.
I try to wake up with a smile and a mindset of taking on the world, even if some days are harder by the end.

SIGNET: Final question: what would you say to a young individual who wanted to start in the real estate business? They might not know whether they want to be a broker, investor, or what segment to focus on. How would they find their path?

STUART ZALL:

I would tell them not to be afraid.
If they need to live at their parentsu2019 house or drive Uber while getting started, they should do what they need to do.
They should absorb as much information as possible.
There is so much information available now that they do not even have to subscribe to everything to learn.
They should become an expert at something and become the go-to person in that area.
They should not try to do everything.
They should find one area and try to be the best at it.
They need passion for the business.
If they think of it only as a job, they are in the wrong business.
It is always a good time to get into real estate, and bad times can actually be the best times to start.

SIGNET: Stuart, thank you so much. We could do round two another time. Thank you for joining the podcast, and hopefully we will grab dinner soon.

STUART ZALL:

I hope so.

INTERVIEWER u2014 SPEAKER UNCERTAIN: Bonus question: what are your thoughts about the new Burnham Yard deal and what it is going to do for downtown?

STUART ZALL:

I do not know exactly how it will affect downtown, but I think it will be very positive for Burnham Yard.
Burnham Yard feels like one of the last major pieces of Denver that has not really been developed.
A key question is what happens to the area where the stadium is now if activity shifts.
I think the project will not hurt downtown because people will still come downtown, and the distance may not be dramatically different.
Large investments, such as a multibillion-dollar stadium, create a multiplier effect that benefits many people.
I do worry about displacement, especially for people who currently live nearby and may have cheaper rent.
Growth can be positive, but people still need places to live.
Denver has done some work around affordable housing, but development can still affect neighborhoods.
I think developers and stakeholders need to think carefully about who is affected.
Overall, I think the project is good, but I hope there is thoughtful attention to housing and displacement.

00:00 hello today i’m talking to my longtime
00:02

00:02 friend jeff hudson
00:04

00:04 his specialty lies in commercial real
00:06

00:06 estate debt and financing
00:08

00:08 at walker dunlop jeff has helped to
00:10

00:10 finance more than 10 billion
00:12

00:12 of loans across many property types
00:14

00:14 including office industrial
00:16

00:16 retail apartment hotel mobile home parks
00:20

00:20 and many warehouses
00:21

00:21 today he structures loans throughout the
00:23

00:23 country that range from one million
00:25

00:25 dollars to 500 million dollars in size
00:27

00:27 jeff is also pretty entrepreneurial when
00:30

00:30 he was working at george elgin’s morgan
00:31

00:31 division
00:32

00:32 in 1992 he bought out the mortgage
00:35

00:35 division with a group of investors and
00:37

00:37 later
00:38

00:38 selling it to walker dunlop where today
00:40

00:40 he is a senior vice president and
00:42

00:42 managing director
00:43

00:43 on top of jeff’s experience of the real
00:45

00:45 estate debt market
00:46

00:46 he is also a lawyer receiving his
00:48

00:48 doctorate of jurisprudence
00:50

00:50 in 1978 jeff serves on several boards
00:53

00:53 including the union rescue mission of
00:55

00:55 los angeles
00:56

00:56 the bottom line is this his incredible
00:59

00:59 understanding
00:60

00:60 of the philosophies of each of his
01:02

01:02 clients and providing them with the debt
01:04

01:04 solutions that fit their plans
01:06

01:06 is what makes him incredible enjoy
01:08

01:08 today’s episode of the long-term real
01:10

01:10 estate investor
01:18

01:18 [Music]
01:26

01:26 well it’s nice to chat with you i don’t
01:28

01:28 know how often i get you uh
01:30

01:30 to myself but i i’m happier
01:34

01:34 you’re discussing this i feel like a
01:36

01:36 rock star here this seems like a dj
01:38

01:38 booth yeah you want to talk about the
01:40

01:40 new album and stuff like that totally
01:42

01:42 okay well we’re trying some different
01:43

01:43 stuff as long as we play that same kind
01:45

01:45 of music on the webcast that was
01:47

01:47 fantastic
01:48

01:48 oh yeah yeah yeah so i think you should
01:51

01:51 write a book
01:52

01:52 first off because you deal with agency
01:54

01:54 loans cmbs
01:56

01:56 loans bank loans with insurance
01:58

01:58 companies
01:59

01:59 you work and finance rv parks hotels
02:02

02:02 retail industrial all different types of
02:05

02:05 assets
02:06

02:06 and then different operators who have
02:07

02:07 their completely different
02:09

02:09 unique business plans how did you get
02:11

02:11 from studying law
02:12

02:12 and getting your juris jd yeah jd
02:16

02:16 and then going into the finance debt
02:19

02:19 markets
02:20

02:20 yeah but it’s an interesting question it
02:22

02:22 was really pretty serendipitous
02:25

02:25 because i went to law school at night i
02:27

02:27 sold
02:28

02:28 real estate during the day single-family
02:30

02:30 homes and apartments wow
02:31

02:31 okay and um i got out
02:35

02:35 i practiced law for a short period of
02:37

02:37 time and
02:38

02:38 absolutely did not enjoy it wow okay
02:41

02:41 fully enjoyed law school
02:43

02:43 loved the education loved the discipline
02:45

02:45 loved the mod the kind of mindset which
02:47

02:47 you and i talked about before
02:48

02:48 right which is kind of seeing things
02:50

02:50 from a completed vantage point
02:52

02:52 and then figuring out what steps need to
02:55

02:55 be taken to get back to where you are
02:56

02:56 and then go back out to the completed
02:59

02:59 and so
02:60

02:60 um it was from from
03:03

03:03 from a mental perspective it was a good
03:06

03:06 move
03:06

03:06 because my mind
03:09

03:09 works better in a non-confrontational
03:13

03:13 uh collaborative manner okay than
03:16

03:16 lawyers do
03:18

03:18 okay um i don’t really enjoy
03:21

03:21 going in there and just beating people
03:23

03:23 right so um
03:25

03:25 as a financier if you’re going to do
03:28

03:28 more than one deal
03:30

03:30 and just retire from it you’ve got to
03:33

03:33 leave both parties happy
03:35

03:35 the lender the investor the seller
03:37

03:37 they’ve all got to be happy
03:39

03:39 the buyer the borrower the developer has
03:42

03:42 also got to be happy
03:43

03:43 right so it is it must be a win-win
03:47

03:47 but on the other hand the clients that
03:49

03:49 we represent
03:50

03:50 have to feel that they’ve got the best
03:52

03:52 the best possible
03:54

03:54 deal that was available and so
03:57

03:57 to your question about the the kind of
03:60

03:60 uh
04:00

04:00 landscape of projects that we work on it
04:03

04:03 it does seem
04:04

04:04 like they’re broad i mean we you and i
04:06

04:06 have known each other for a while
04:08

04:08 we will finance anything from an empty
04:10

04:10 um
04:12

04:12 out pad in a in a tired shopping center
04:16

04:16 up to a 500 million dollar uh
04:19

04:19 stock co-op right in santa monica right
04:22

04:22 i mean we we basically do everything
04:26

04:26 and so it it may seem like
04:30

04:30 it it’s more complex than it is any
04:33

04:33 transaction whether it’s the
04:35

04:35 empty retail project in a strip center
04:38

04:38 up to a 500 million dollar stock co-op
04:42

04:42 always turns on three different things
04:44

04:44 it’s
04:45

04:45 always the same and they must be present
04:48

04:48 in any real estate transaction
04:50

04:50 and and it is basically the borrower
04:54

04:54 the cash flow and the hard asset
04:58

04:58 and it’s a three-legged tripod and
05:01

05:01 if anything is is wrong or missing in
05:04

05:04 those trans in
05:05

05:05 those three points it would be great if
05:07

05:07 it were four because the the tripod can
05:09

05:09 stand on three but since it’s three
05:12

05:12 it won’t it won’t last so an example
05:15

05:15 would be
05:16

05:16 uh let’s say a starting small
05:20

05:20 a four plex someone wants to buy a four
05:22

05:22 plex in santa monica
05:24

05:24 and uh they are bringing in all their
05:28

05:28 friends and family
05:29

05:29 they have very little net worth but
05:31

05:31 they’ve got friends and family and
05:33

05:33 they’re willing to bring in
05:34

05:34 25 30 percent of the cost of the project
05:40

05:40 that borrower will have a bit of a
05:42

05:42 problem going out and putting together
05:44

05:44 the transaction because
05:45

05:45 just theoretically in this hypothetical
05:48

05:48 they’re too weak
05:49

05:49 right lenders want to see net worth
05:52

05:52 of anywhere from minimum
05:55

05:55 two to three times the the loan amount
05:58

05:58 that the borrower is borrowing
06:01

06:01 and a minimum liquidity within that
06:04

06:04 of 10 to twenty percent okay
06:07

06:07 so looking at that at the hypothetical
06:09

06:09 in santa monica where somebody’s buying
06:11

06:11 a four-plex and what would that cost
06:13

06:13 two million dollars today yeah yeah so
06:16

06:16 maybe more but yeah you really need to
06:18

06:18 have a borrower who is worth at least
06:20

06:20 four million dollars
06:21

06:21 and has net worth of
06:24

06:24 400 excuse me liquidity of 400 000
06:27

06:27 that’s incredible it’s a lot that’s a
06:29

06:29 huge barrier to entry it’s a huge
06:31

06:31 barrier to entry if it is an investment
06:33

06:33 property
06:34

06:34 right if it’s an owner user or if it is
06:36

06:36 a one to four where the
06:38

06:38 where the buyer is going to move in it
06:40

06:40 becomes a residential
06:41

06:41 okay so that was one of the questions
06:43

06:43 that’s the difference i guess between
06:45

06:45 commercial and residential loans
06:47

06:47 right it gets underwritten totally
06:49

06:49 different totally differently i
06:50

06:50 thought that commercial was more based
06:52

06:52 on the income of the asset
06:53

06:53 not as much on the individual well
06:55

06:55 that’s okay that’s so that’s the one
06:57

06:57 step so
06:58

06:58 we’re talking about the borrower even if
07:00

07:00 it’s a non-recourse loan which
07:02

07:02 means the borrower doesn’t personally
07:05

07:05 guarantee or promise that he will pay
07:07

07:07 back the loan
07:08

07:08 which means the lender has the
07:09

07:09 opportunity to foreclose on the property
07:12

07:12 and nothing else
07:13

07:13 that’s a non-recourse loan
07:16

07:16 lenders want to see borrowers that one
07:19

07:19 have the
07:19

07:19 background and sophistication even to
07:22

07:22 buy a fourplex in santa monica
07:24

07:24 two they have the cash flow on other
07:27

07:27 properties so that if they lose two
07:29

07:29 tenants in that four plex in santa
07:31

07:31 monica they’re not under water
07:32

07:32 okay and that there is enough cash flow
07:36

07:36 on the property that it justifies
07:38

07:38 support for the loan okay and so
07:41

07:41 we talked about the borrower where the
07:43

07:43 borrower has to have adequate net worth
07:45

07:45 the cash flow of the property is
07:48

07:48 is critical because if it if it’s
07:51

07:51 completely empty
07:52

07:52 then there has to be enough of an
07:54

07:54 analysis to show how the property is
07:56

07:56 carried
07:57

07:57 it is released it is occupied
08:00

08:00 at market rates and then the value is
08:02

08:02 based on that
08:04

08:04 okay so number two the cash flow on the
08:07

08:07 property
08:08

08:08 um amazon being the
08:13

08:13 the tenant in a property for a 10-year
08:15

08:15 lease
08:16

08:16 is totally different than jeff hudson
08:20

08:20 being
08:21

08:21 a tenant in a property with a startup
08:24

08:24 sock company
08:25

08:25 right uh both paying the same rent
08:28

08:28 this run with amazon almost becomes like
08:31

08:31 a bond it’s like a credit lease
08:33

08:33 lenders will look at that and they will
08:35

08:35 look at amazon if they’re in there for
08:37

08:37 10 years and they’ll say
08:38

08:38 what’s the bond rating for amazon if
08:41

08:41 amazon sells bonds what are they selling
08:43

08:43 them for well it turns out it’s probably
08:45

08:45 about two percent
08:46

08:46 so they’re they’re a bond rated
08:49

08:49 credit company so the lenders can look
08:52

08:52 not only at the real estate but also at
08:54

08:54 the credit of the tenant
08:56

08:56 so they’ve got a great deal with amazon
08:59

08:59 in there
08:59

08:59 look over at jeff’s new sock company
09:03

09:03 brand new startup never sold a sock in
09:06

09:06 his life but likes the idea
09:08

09:08 and his wife just wanted to get him out
09:09

09:09 of the house that’s not a very strong
09:12

09:12 tenant and not a very strong cash flow
09:13

09:13 right so from a lending perspective the
09:16

09:16 qualitative spectrum
09:19

09:19 you are going to get the top quality
09:22

09:22 lenders with the lowest rates for the
09:25

09:25 same building with amazon in it
09:28

09:28 that and you will get weaker lenders who
09:31

09:31 will charge more
09:33

09:33 and they will be tougher to deal with
09:36

09:36 with jeff and his sock company
09:37

09:37 right okay so that’s the cash flow the
09:40

09:40 property so the third
09:41

09:41 the third leg of the tripod that we were
09:43

09:43 talking about the property itself
09:48

09:48 properties become obsolete and
09:51

09:51 one of the the better examples is um
09:55

09:55 an industrial building which was built
09:58

09:58 say in
09:59

09:59 in the 60s all over los angeles and you
10:01

10:01 can see them
10:02

10:02 they’ve got the bow truss ceilings
10:04

10:04 they’re older buildings built 50 years
10:06

10:06 ago
10:08

10:08 a lot of support stanchions throughout
10:10

10:10 the building it is
10:12

10:12 it’s an obsolete model for users today
10:14

10:14 okay
10:16

10:16 some buyers are coming in and using that
10:18

10:18 for creative office space and blowing it
10:20

10:20 out and making it something nice but for
10:22

10:22 its intended use
10:24

10:24 which is industrial it’s not happening
10:27

10:27 new industrial buildings now have clear
10:30

10:30 heights
10:31

10:31 ceilings which are 20 to 20 to 40 feet
10:35

10:35 high wow okay because it it is it’s all
10:38

10:38 about
10:39

10:39 volume in industrial unless it’s going
10:41

10:41 to be converted
10:42

10:42 to a different use right right so
10:45

10:45 that building that old building with a
10:47

10:47 bow truss roof
10:49

10:49 in an area where new buildings are
10:51

10:51 coming in which have a tremendous amount
10:53

10:53 of storage
10:54

10:54 is functionally obsolete okay so
10:57

10:57 the third leg of the tripod that the
10:59

10:59 actual physical asset
11:02

11:02 it must be up to date and marketable
11:07

11:07 and without that it’s not
11:10

11:10 readily financiable now
11:13

11:13 with the three legs of the tripod there
11:16

11:16 are mitigants when one leg is short
11:18

11:18 right right so if the borrower the
11:21

11:21 borrower has a net worth which is
11:23

11:23 inadequate
11:24

11:24 borrower may bring in a partner borrower
11:26

11:26 may get a lower loan to value
11:28

11:28 a borrower may have a cash reserve up
11:30

11:30 front
11:32

11:32 there are ways to mitigate that weakness
11:35

11:35 from the borrower
11:36

11:36 right on the cash flow of the tenant
11:39

11:39 if it is a if it is a short lease
11:44

11:44 lenders don’t particularly like the the
11:46

11:46 risk
11:47

11:47 of the tenant moving out unless it’s a
11:49

11:49 very well located property
11:51

11:51 you know i’m looking out your window
11:52

11:52 here santa monica promenade
11:55

11:55 somebody’s somebody’s gonna go in and
11:56

11:56 lease it or somebody moves out
11:58

11:58 right the rents have gotten a little bit
11:60

11:60 high so we’re starting to price out
12:02

12:02 a number of users but that space will
12:05

12:05 always be occupied
12:06

12:06 the only issue is how much rent they’ll
12:08

12:08 get for it right yeah
12:11

12:11 so so the cash flow is
12:14

12:14 extremely critical but if it is
12:17

12:17 either short because of the short-term
12:19

12:19 lease or
12:20

12:20 it has other issues to it again there
12:22

12:22 can be mitigants
12:23

12:23 lower loan to value you can go back to
12:26

12:26 the first leg of the tripod
12:28

12:28 which is the borrower and the borrower
12:30

12:30 can guarantee the loan
12:31

12:31 if the borrower has a substantial net
12:33

12:33 worth right
12:35

12:35 so short term lease on a well-located
12:39

12:39 building
12:40

12:40 tenant could move out in the next year a
12:43

12:43 strong borrower comes in and says i will
12:46

12:46 sign
12:46

12:46 and i will make i will personally
12:48

12:48 guarantee the loan
12:50

12:50 and i’m going to replace the tenant when
12:51

12:51 they move out okay
12:53

12:53 and so we’re able to mitigate the
12:56

12:56 the weakness in the cash flow of the
12:58

12:58 building by the borrower
12:60

12:60 okay okay the the
13:03

13:03 the one thing that is really difficult
13:05

13:05 to mitigate is an obsolete building or a
13:07

13:07 poorly located building
13:09

13:09 and i gave you the example before of
13:12

13:12 of an industrial building yeah another
13:14

13:14 example
13:15

13:15 would be because i know you know the the
13:17

13:17 central valley
13:20

13:20 what has happened in bakersfield in
13:22

13:22 fresno is
13:24

13:24 unlike southern california or at least
13:27

13:27 unlike this area in west l.a
13:31

13:31 areas completely change very quickly
13:35

13:35 retail areas shopping centers and
13:38

13:38 the classic example is the enclosed mall
13:42

13:42 which in the 80s was the the hottest
13:44

13:44 piece of real estate
13:45

13:45 in the country the enclosed mall where
13:48

13:48 you’ve got a pennies on one side you’ve
13:50

13:50 got a sears on the other you’ve got a
13:52

13:52 you’ve got a magnums it is this half a
13:54

13:54 million square foot enclosed
13:57

13:57 colossus okay and for
14:00

14:00 years for decades everybody wanted to go
14:03

14:03 there
14:04

14:04 right and then maybe
14:07

14:07 10 to 20 years ago people started
14:10

14:10 in areas like particularly fresno and
14:12

14:12 bakersfield they
14:14

14:14 they decided they’re going to start over
14:16

14:16 in new retail
14:17

14:17 areas miles away from the old core
14:21

14:21 retail area and suddenly
14:24

14:24 it become that area becomes in essence
14:27

14:27 obsolete
14:29

14:29 and we had one project up there years
14:31

14:31 and years ago
14:32

14:32 where a very conservative
14:35

14:35 uh family bought the body kmart
14:39

14:39 and they bought it on a 15-year
14:41

14:41 self-amortizing loan which is you know
14:44

14:44 that’s
14:44

14:44 they just want to pay it off fast and
14:46

14:46 it’s very conservative
14:48

14:48 relatively low low loan to value right
14:51

14:51 so you’ve got kind of weak borrowers um
14:55

14:55 but you’ve got a good tenant which is
14:56

14:56 kmart and
14:58

14:58 the location was okay well turns out as
15:02

15:02 that market evolved
15:03

15:03 and new product was being built two
15:06

15:06 miles
15:07

15:07 up i think it was the 99 yeah
15:10

15:10 99 yeah up to 99. um
15:15

15:15 turns out our enclosed mall or in this
15:18

15:18 particular situation our kmart
15:20

15:20 was not getting the customers anymore
15:22

15:22 right kmart then goes bust
15:24

15:24 yeah and because of the fact that the
15:27

15:27 location was i guess you could say
15:28

15:28 becoming or had become obsolete
15:31

15:31 there was not somebody ready to come and
15:33

15:33 move in and take over for kmart
15:35

15:35 right ever wow yeah and so
15:40

15:40 i mean the the types of uses at that
15:42

15:42 point were swap meets
15:44

15:44 storage just nothing yeah and the rents
15:47

15:47 much lower
15:48

15:48 yeah and it was and so the borrowers
15:51

15:51 who were not real estate people got a
15:55

15:55 low loan to value
15:56

15:56 great makes sense got a rapid
15:58

15:58 amortization to pay it off as quickly as
15:60

16:00 possible
16:01

16:01 good that was smart the problem was
16:04

16:04 really beyond what they predicted
16:06

16:06 and that is uh the weakness of kmart
16:10

16:10 and the the shifts within the community
16:14

16:14 of where the new development was going
16:16

16:16 okay
16:17

16:17 and so they lost the property it was
16:19

16:19 foreclosed that’s incredible
16:20

16:20 and with they probably put 50 down wow
16:23

16:23 that’s there was no solution but
16:27

16:27 it’s main and main moves to a different
16:29

16:29 location that’s right that’s uh
16:31

16:31 that’s something that we’ve actually
16:32

16:32 talked to people about we were looking
16:34

16:34 at a deal a few years ago for a friend
16:36

16:36 right
16:37

16:37 i think that was what scared him away he
16:39

16:39 wasn’t sure if
16:40

16:40 you didn’t know if maine and maine was
16:42

16:42 going to be a different location
16:44

16:44 that’s right yeah yeah it’s really like
16:47

16:47 i mean it’s like the old wayne gretzky
16:48

16:48 line right people said why you know how
16:50

16:50 what was it about you
16:53

16:53 that that you were all you
16:56

16:56 always were where the puck was yeah and
16:59

16:59 that made you
17:00

17:00 so great how was it that you were always
17:03

17:03 where the puck was and he said
17:05

17:05 i was never where the puck was i was
17:08

17:08 where the puck was going
17:09

17:09 yeah that’s interesting that’s where i
17:11

17:11 went that’s very interesting
17:13

17:13 and if you’re not if you’re not
17:16

17:16 buying or building within a dense infill
17:18

17:18 location
17:20

17:20 you really need to know where things are
17:22

17:22 going where is the puck going to end up
17:24

17:24 right
17:25

17:25 so you just talked about underwriting a
17:28

17:28 little bit
17:30

17:30 and this is just out of my own curiosity
17:32

17:32 because there’s so many different types
17:34

17:34 of lenders
17:36

17:36 the underwriting probably needs to be a
17:38

17:38 little bit different for each of them
17:39

17:39 because they each
17:40

17:40 i don’t know how they each make money i
17:42

17:42 mean the cmbs market they resell
17:44

17:44 you know you resell the loans and you
17:46

17:46 make you keep
17:48

17:48 recycling money i guess yeah um so is it
17:51

17:51 the same for all of them in terms of
17:53

17:53 that process the way they look at it or
17:55

17:55 no
17:56

17:56 no no that’s a great question and and um
17:59

17:59 it’s just amazing to me how few people
18:01

18:01 really kind of
18:02

18:02 follow the ball on that and you do and i
18:04

18:04 know this
18:06

18:06 um lenders
18:09

18:09 lenders will lend
18:12

18:12 based on the cash that they have
18:16

18:16 okay okay and so let’s go categorically
18:18

18:18 through the lending groups
18:20

18:20 banks traditionally have money from
18:23

18:23 people who have checking accounts
18:25

18:25 savings account
18:26

18:26 they walk in they open up a deposit they
18:29

18:29 walk back out
18:30

18:30 they walk back in the next day and they
18:32

18:32 want to take a lot of money out so the
18:33

18:33 money is
18:34

18:34 rapidly coming going in going out coming
18:36

18:36 in going out
18:38

18:38 and they’ve got backups from the feds
18:40

18:40 and they’ve got backups
18:42

18:42 with other other security for their
18:45

18:45 deposits
18:47

18:47 but the money is constantly moving in
18:49

18:49 and out quickly
18:51

18:51 so the type of projects that
18:54

18:54 traditionally
18:55

18:55 particularly community and local banks
18:57

18:57 would lend on
18:58

18:58 would be short-term financing okay
19:02

19:02 construction interesting right mini perm
19:04

19:04 loans
19:05

19:05 they really don’t want to do 10-year
19:07

19:07 fixed-rate loans unless they’re selling
19:09

19:09 the loan to another group okay so
19:13

19:13 because of the fact that again look at
19:14

19:14 look at the bank people are coming in
19:16

19:16 all day long that’s where their money is
19:18

19:18 they need to know that they can get the
19:20

19:20 money back everybody who has a deposit
19:22

19:22 over at the bank
19:23

19:23 and so the bank’s investments are are
19:26

19:26 generally by nature short term
19:30

19:30 now the bank also lends to the borrowers
19:35

19:35 and they back into the collateral
19:38

19:38 okay and that’s that’s another thing
19:40

19:40 that um
19:42

19:42 a lot of people may not fully appreciate
19:45

19:45 is most banks land on a recourse basis
19:49

19:49 which means there’s a personal guarantee
19:51

19:51 and so they will ask for a tremendous
19:54

19:54 amount of
19:55

19:55 data and you know this already because
19:56

19:56 you’ve been through the process
19:58

19:58 with a number of banks that we’ve worked
19:60

19:60 with they want a ton of financial data
20:03

20:03 and background
20:04

20:04 on you the borrower before they even
20:06

20:06 want to talk about the asset
20:08

20:08 yeah and so we walk into the bank and we
20:12

20:12 say i want to i want to get a loan on
20:13

20:13 that fiveplex or fourplex down in santa
20:15

20:15 monica
20:17

20:17 say great great mr hudson let me um
20:19

20:19 let’s get your financial statement
20:21

20:21 well let’s get this let’s get that and i
20:23

20:23 can and i’ll say to the bank well look
20:25

20:25 the financial statement is i’ve got
20:27

20:27 x amount of net worth right and relative
20:30

20:30 to i know what your underwriting
20:31

20:31 standard is i’ve got adequate net worth
20:33

20:33 to buy this and i’ve got the capacity to
20:35

20:35 buy it okay
20:36

20:36 not so fast as the banker i want to look
20:39

20:39 i want to see your financial statements
20:41

20:41 i want to see your tax returns
20:43

20:43 i want to see your k1s i want to do a
20:45

20:45 credit check
20:46

20:46 right because of the fact that i’m i’m
20:48

20:48 really lending to you
20:50

20:50 yeah because you’re credit worthy right
20:53

20:53 and yeah the real estate’s going to make
20:54

20:54 sense but you’re not even getting to the
20:56

20:56 discussion of the real estate
20:58

20:58 until you pass the the test of
21:01

21:01 creditworthiness with the bank
21:02

21:02 right okay because they need to get that
21:05

21:05 money back
21:05

21:05 fast because of the again where the
21:07

21:07 money comes from they can’t mess around
21:10

21:10 with a borrower who just is flaky
21:13

21:13 right all right so let’s go over to the
21:16

21:16 other end of the spectrum which is
21:17

21:17 really the long-term fixed rate
21:19

21:19 which has traditionally been life
21:20

21:20 companies okay okay
21:22

21:22 life companies get their money where
21:25

21:25 from selling life insurance policies
21:29

21:29 all right life insurance policies
21:31

21:31 traditionally
21:32

21:32 are long-term payments
21:35

21:35 by people like me who have been paying
21:38

21:38 on their insurance for
21:40

21:40 gosh i think i bought my first insurance
21:42

21:42 policy in my 20s so i’ve been i’ve been
21:44

21:44 putting money into my insurance for 40
21:46

21:46 years
21:47

21:47 and one of these days i’m going to kick
21:49

21:49 the bucket
21:50

21:50 and sandy hudson is going to pick up the
21:53

21:53 phone and call
21:54

21:54 our agent frankie okay and say
21:57

21:57 jeff’s kicked the bucket we need the
21:59

21:59 money we want it now
22:02

22:02 okay but meanwhile jeff’s been putting
22:04

22:04 in the money for years and years and
22:05

22:05 years and years and years and years
22:07

22:07 so the life company goes and looks at
22:11

22:11 actuarially what they what the
22:13

22:13 anticipated
22:14

22:14 payout time frame is going to be on life
22:18

22:18 insurance policies on whole life
22:20

22:20 policies on annuities
22:22

22:22 on um term life
22:25

22:25 they will say jeff hudson will walk in
22:27

22:27 there age 68
22:29

22:29 say okay he actually has got another 12
22:32

22:32 years under the hood
22:34

22:34 okay so if if jeff buys insurance right
22:38

22:38 now we’re going to anticipate we’re
22:39

22:39 going to be paying it out
22:41

22:41 in 12 years right okay so they can make
22:44

22:44 investments and they will match
22:46

22:46 the maturity of their investments to the
22:48

22:48 people that they’re selling the
22:50

22:50 insurance policies to okay
22:52

22:52 now they do all all sorts of other stuff
22:54

22:54 obviously they do
22:56

22:56 um a number of our life companies do
22:58

22:58 property and casualty insurance too
23:00

23:00 well every five years uh when the storms
23:03

23:03 come in off of the gulf
23:05

23:05 there is catastrophic damage okay so
23:09

23:09 those companies have to be a little bit
23:11

23:11 more nimble
23:12

23:12 those life companies when they’re
23:14

23:14 selling asset when they are selling
23:16

23:16 policies
23:17

23:17 for property and casualty than those who
23:19

23:19 are just selling life insurance
23:20

23:20 long-term
23:21

23:21 fixed-rate life insurance company
23:23

23:23 because they have a little bit more risk
23:25

23:25 yeah but again
23:26

23:26 that the way that the money comes into
23:28

23:28 the life company
23:30

23:30 dictates the type of loans that they do
23:33

23:33 it reflects that that’s very interesting
23:36

23:36 i
23:36

23:36 sort of had a question about that and
23:38

23:38 you sort of answered it with the banks
23:40

23:40 because you know how do you calculate
23:42

23:42 inflation on a long-term
23:44

23:44 loan that you have on your books you
23:46

23:46 know the risk but
23:47

23:47 i mean in the i think it was the early
23:49

23:49 90s we had 15
23:51

23:51 inflation right how do you how do they
23:53

23:53 protect themselves when
23:55

23:55 that could happen i mean yeah unlikely
23:57

23:57 but it’s
23:58

23:58 it is a risk yeah well they generally
23:60

23:60 will price their loans
24:02

24:02 off of uh treasuries and off of
24:05

24:05 corporate bonds
24:07

24:07 okay so the the answer is how do they
24:09

24:09 know where inflation is
24:11

24:11 is going one they don’t
24:14

24:14 right and two the people that they talk
24:16

24:16 to
24:17

24:17 don’t entirely either but the people
24:20

24:20 that they
24:21

24:21 that they use to dictate
24:25

24:25 what they’re going to charge which are
24:27

24:27 the feds
24:28

24:28 they’ll look at the treasury bills and
24:30

24:30 they’ll say okay
24:32

24:32 a life company like a like life company
24:34

24:34 is like a human being too it’s got a
24:35

24:35 whole portfolio
24:36

24:36 of investments it’s got cash it’s got
24:40

24:40 equities
24:40

24:40 it owns buildings it’s got real estate
24:42

24:42 loans
24:43

24:43 it’s got municipal bonds it’s got
24:46

24:46 corporate bonds and so it’s a
24:48

24:48 whole it’s a whole whole
24:51

24:51 tapestry of investments starting from
24:53

24:53 the lowest risk which is a treasury bill
24:56

24:56 all the way up to the highest risk which
24:58

24:58 would probably be doing joint ventures
24:60

25:00 okay a real estate loan
25:03

25:03 is way over on the conservative side
25:08

25:08 and the pricing that they will charge
25:10

25:10 will be
25:13

25:13 reflected by the amount of risk that
25:15

25:15 they foresee
25:17

25:17 in doing a loan as opposed to doing uh
25:19

25:19 just buying a treasury
25:21

25:21 right so life companies today
25:24

25:24 are loaning in anywhere from let’s say
25:26

25:26 two and a half to four percent
25:28

25:28 for a ten-year fixed-rate loan okay uh
25:32

25:32 ten-year treasury today is
25:34

25:34 three-quarters of one percent
25:36

25:36 okay so the life companies are saying in
25:39

25:39 our portfolio we’re going to have this
25:41

25:41 bunch of it’s generally up to about 10
25:44

25:44 of our assets in real estate loans
25:48

25:48 because we are getting anywhere from
25:51

25:51 150 to 200 basis points more than we
25:54

25:54 would get
25:54

25:54 if we just bought a treasury right so
25:57

25:57 again
25:58

25:58 looking at the whole landscape of their
25:59

25:59 investments they got their treasuries
26:02

26:02 they’ve got a bunch of those they’ve got
26:04

26:04 some corporate bonds
26:06

26:06 and they’ve got real estate loans
26:09

26:09 and they’ve got real estate equities and
26:12

26:12 they’ve got other things which are
26:13

26:13 higher risk
26:14

26:14 and so they’re the the price that they
26:16

26:16 charge is all
26:18

26:18 based on the risk that they see compared
26:20

26:20 to just buying a treasury right
26:22

26:22 interesting so that is very interesting
26:24

26:24 so they
26:25

26:25 look more to they’ll look at the
26:28

26:28 borrower
26:29

26:29 they look more to the asset itself
26:33

26:33 and the cash flow and they’re less
26:35

26:35 concerned with the borrower because they
26:37

26:37 generally don’t ask
26:38

26:38 for recourse yes they still want to
26:41

26:41 borrow or the net worth of two times the
26:42

26:42 loan
26:44

26:44 they just want that kind of a borrower
26:46

26:46 but not because they’re the borrowers
26:48

26:48 are guaranteeing it they just
26:50

26:50 they don’t want to have that as a risk
26:52

26:52 in their own mind right
26:54

26:54 they will also low loan at lower loans
26:57

26:57 to value
26:58

26:58 than will the next category we’ll talk
27:00

27:00 about which is the wall street conduits
27:03

27:03 okay because they do not want sandy s
27:06

27:06 hudson
27:08

27:08 calling up on the untimely demise of her
27:11

27:11 husband jeff
27:12

27:12 and being told that the investments
27:15

27:15 sadly
27:16

27:16 that mass mutual made lost money
27:19

27:19 and sadly mrs hudson we don’t have it
27:22

27:22 because our deals went bad
27:25

27:25 right okay they the life companies can’t
27:28

27:28 do that
27:29

27:29 they’d be out of business and they’re
27:30

27:30 backed up into certain respects but that
27:32

27:32 is
27:33

27:33 that’s the mentality lower loan to value
27:36

27:36 they will charge better rates they don’t
27:39

27:39 need
27:39

27:39 recourse but they really want high
27:42

27:42 high quality they just don’t want much
27:45

27:45 risk
27:46

27:46 all right enter in kind of and there’s
27:48

27:48 so many different buckets but enter in
27:50

27:50 the third
27:51

27:51 the third kind of bucket which is this
27:55

27:55 alchemy that was put together um
27:59

27:59 on wall street some probably
28:02

28:02 30 years ago which is a wall street
28:05

28:05 conduit
28:07

28:07 and basically what they did is
28:10

28:10 they would pool a number of loans
28:13

28:13 together
28:14

28:14 and then securitize them which means put
28:17

28:17 them in
28:18

28:18 a trash compactor pack it all down
28:22

28:22 anywhere from a half a billion to two
28:24

28:24 billion dollars in this one
28:26

28:26 pool of loans in the trash compactor and
28:29

28:29 then
28:29

28:29 they will take that to standard and poor
28:32

28:32 or moody’s or the rating agencies
28:34

28:34 and the rating agency well will look at
28:37

28:37 that
28:38

28:38 which is called a billion dollar pool
28:40

28:40 and they will say
28:41

28:41 okay the top 80 of the loans
28:46

28:46 are really rated triple a
28:49

28:49 rated the same as a triple a bond okay
28:52

28:52 okay the reason is
28:53

28:53 is if an if a loan is
28:56

28:56 um say 70 percent loan to value
28:60

28:60 80 of the 70 percent is 56
29:04

29:04 okay which means the the rating agencies
29:07

29:07 are saying
29:08

29:08 okay apiece buyers because they are bond
29:12

29:12 buyers in the in the securitization
29:15

29:15 it’s a 55 loan loan to value the risk is
29:18

29:18 very low
29:19

29:19 you’re going to pay x amount of a rate
29:21

29:21 and it’s over
29:22

29:22 again it’s over treasuries right but
29:24

29:24 it’s not quite as high as what what
29:26

29:26 what it would be for the next drink
29:28

29:28 right so we’ve chopped this thing up
29:31

29:31 first 80 percent is the a paper
29:34

29:34 after that that’s triple a paper after
29:36

29:36 that it goes single a
29:38

29:38 it’ll go single b triple b and then
29:41

29:41 it’ll be unrated
29:42

29:42 and for each different layer there are
29:45

29:45 different rates and different risks
29:48

29:48 and so the the last risk which is really
29:52

29:52 the
29:52

29:52 if there is a loss on a property the
29:56

29:56 top part of the loan is generally going
29:59

29:59 to be getting
30:00

30:00 let’s say in today’s market a 10 return
30:04

30:04 okay in exchange for the risk of if this
30:07

30:07 property goes bad
30:08

30:08 you’re the first one out the door right
30:10

30:10 you will lose right
30:12

30:12 okay so so back to how how the sausage
30:15

30:15 is made
30:17

30:17 wall street basically takes a bunch of
30:19

30:19 real estate loans
30:21

30:21 and turns them into securities bonds
30:25

30:25 and those bonds are sold in the
30:27

30:27 secondary market
30:29

30:29 by every wall street house imaginable
30:32

30:32 and you can buy triple a’s you can buy
30:34

30:34 single a real estate cmbs loans
30:36

30:36 and you can buy unrated and it’s just
30:38

30:38 it’s sold
30:40

30:40 it is transformed that’s why i call it
30:42

30:42 alchemy right
30:43

30:43 from a real estate loan yeah to a bond
30:45

30:45 yeah yeah
30:46

30:46 it’s very interesting so all right
30:49

30:49 that’s
30:50

30:50 kind of where the money comes from so
30:52

30:52 now let’s talk about why they lend the
30:53

30:53 way that they do
30:55

30:55 all right they are really 100
30:58

30:58 concerned with cash flow because a
31:00

31:00 bondholder
31:02

31:02 or bond buyer buys a bond to get a
31:05

31:05 certain amount of return
31:06

31:06 for the life of the loan right he
31:07

31:07 doesn’t want breaks he doesn’t want to
31:09

31:09 know
31:10

31:10 that a tenant moved out or that there’s
31:13

31:13 you know there’s a recession or there’s
31:15

31:15 this or that he just wants his
31:17

31:17 his payments to come in safe doesn’t
31:19

31:19 care about real estate
31:21

31:21 and the vast vast majority of the buyers
31:24

31:24 of
31:24

31:24 of these bonds particularly the the uh
31:27

31:27 the triple a’s and the
31:28

31:28 and the higher higher rated ones they
31:31

31:31 don’t even look at the real estate
31:32

31:32 it’s the guys who are in the who are who
31:35

31:35 are the triple b’s or the or the high
31:37

31:37 risk position
31:38

31:38 that look very hard at the real estate
31:40

31:40 because they’re the first ones to lose
31:41

31:41 right right and it’s all about the cash
31:44

31:44 flow and so conduit lending
31:48

31:48 is all based on preserving cash flow no
31:51

31:51 matter what happens
31:53

31:53 right if if a tenant moves out okay
31:56

31:56 then we’ve got these trap doors and
31:58

31:58 we’ve got these systems within the loan
32:00

32:00 such that we have x amount of money
32:03

32:03 which
32:03

32:03 which you the borrower have already been
32:05

32:05 putting aside every month
32:07

32:07 to carry the property and the event
32:09

32:09 ex-tenant moves out
32:11

32:11 and we have this amount of money left in
32:14

32:14 in our bucket to put out for the ti’s
32:17

32:17 and the
32:18

32:18 and the leasing commissions because
32:20

32:20 they’re non-recourse loans
32:22

32:22 we can’t the the conduit lenders
32:25

32:25 aren’t going back to the borrowers and
32:27

32:27 saying you got to kick in more money
32:29

32:29 right they’re not it’s non-recourse and
32:31

32:31 the borrowers won’t do it
32:33

32:33 and so they have to look at properties
32:36

32:36 and they have to structure the financing
32:38

32:38 that they provide
32:40

32:40 strictly based on preservation
32:43

32:43 and protection of cash flow that
32:45

32:45 property does that
32:46

32:46 by nature make them less flexible
32:48

32:48 absolutely
32:49

32:49 you nailed it it’s a very rigid type of
32:52

32:52 a transaction
32:54

32:54 and it’s an expensive transaction
32:57

32:57 if you decide you want to pay it off
32:58

32:58 early because remember
33:00

33:00 we had transformed real estate loans
33:03

33:03 into bonds
33:04

33:04 and so you’ve got to what we call the
33:07

33:07 fees the loan
33:09

33:09 which is to turn that bond back into
33:14

33:14 a real estate loan and so what they
33:16

33:16 would basically do is they would buy
33:18

33:18 back
33:19

33:19 all the bonds pay them all off
33:23

33:23 the borrower would have to pay the cost
33:25

33:25 of that okay because the bond
33:28

33:28 the bond buyers were promised x amount
33:30

33:30 of yield over the whole term of the loan
33:32

33:32 and so to defeat the loan all the bond
33:35

33:35 buyers
33:36

33:36 must be made whole to the same level
33:39

33:39 that they had expected
33:40

33:40 when they made the original bond
33:42

33:42 investment okay and so again that’s a
33:44

33:44 that’s a real long answer to why do
33:46

33:46 different lenders
33:48

33:48 lend the way that they do strictly
33:50

33:50 because of what they’re told
33:52

33:52 by the people who put money into their
33:54

33:54 institutions
33:55

33:55 right okay whether it’s it’s you and me
33:58

33:58 with a checking account is
33:60

33:60 you don’t want to go to the bank
34:01

34:01 tomorrow and
34:03

34:03 being told eduardo really bummer
34:06

34:06 you can’t have any money in your
34:08

34:08 checking account right there’s a run on
34:09

34:09 the bank and the bank gets closed down
34:11

34:11 when that happens
34:12

34:12 so that money’s got to be available so
34:14

34:14 their investments generally are fast
34:16

34:16 right okay other side as we talked about
34:18

34:18 sandy hudson calls up
34:20

34:20 don’t want to hear that that you’re
34:22

34:22 having problems when jeff kicks the
34:24

34:24 bucket
34:24

34:24 right all right cnbs lenders the
34:27

34:27 bondholders do not want to hear
34:30

34:30 that um pennies went bankrupt right
34:33

34:33 they don’t care right they want their
34:35

34:35 payments
34:36

34:36 okay here’s here’s the situation um
34:41

34:41 certain facets of the real estate
34:43

34:43 business
34:44

34:44 have been severely impacted by covet
34:47

34:47 and you can name them you can name the
34:50

34:50 gems you can name restaurants
34:52

34:52 you can name um any big box
34:56

34:56 retailer where people cannot and will
34:58

34:58 not
34:59

34:59 go in shoulder to shoulder because a
35:01

35:01 they’re not allowed to
35:02

35:02 and b once they are allowed to they’re
35:04

35:04 going to be uncomfortable doing it
35:06

35:06 so within the retail space
35:10

35:10 a tremendous amount of tenants are
35:12

35:12 unable to pay their rent
35:14

35:14 yeah because a they’re closed down by
35:17

35:17 the cities
35:17

35:17 yeah and b nobody’s leaving the house
35:20

35:20 and nobody’s going in
35:21

35:21 they’re all buying it on amazon yeah and
35:23

35:23 so the brick and mortar retail
35:26

35:26 has been severely severely impacted
35:29

35:29 by covet and it will take it years to
35:32

35:32 come back
35:33

35:33 apartments on the other hand
35:35

35:35 particularly with the cares act and with
35:38

35:38 checks going out to a good slice of the
35:40

35:40 population
35:42

35:42 the collection rate which maybe is
35:44

35:44 normally
35:45

35:45 95 is maybe 92 percent right now
35:49

35:49 very little fall off wow office
35:52

35:52 buildings
35:53

35:53 oddly enough same thing very little fall
35:56

35:56 off
35:56

35:56 and the reason is is because the office
35:58

35:58 tenants have long-term leases and
35:60

35:60 there’s not much they can do about it
36:01

36:01 and it’s not often mom and pops in a lot
36:04

36:04 of the office spaces it’s firms
36:06

36:06 okay i haven’t heard that before but
36:07

36:07 that’s interesting that makes sense now
36:10

36:10 industrial there there are very few
36:13

36:13 delinquencies in foreclosures if any at
36:16

36:16 all
36:16

36:16 so far in industrial because
36:20

36:20 they’re still making widgets right they
36:22

36:22 they may have to slow it down they may
36:24

36:24 have to change their schedules they may
36:25

36:25 have to do something different or they
36:26

36:26 may actually be closed down for a short
36:28

36:28 period of time
36:30

36:30 but particularly manufacturing you can
36:32

36:32 be
36:33

36:33 plenty socially distant and be back up
36:36

36:36 in detroit
36:37

36:37 making cars or be out
36:40

36:40 in uh in the central valley uh
36:44

36:44 outside of bakersfield and storing tires
36:47

36:47 for american tire in a giant logistics
36:50

36:50 facility
36:51

36:51 because people are still getting their
36:53

36:53 tires right and you still need to
36:55

36:55 you still need a and i’m thinking about
36:57

36:57 one project we financed which is a
36:58

36:58 million square foot
36:60

36:60 box filled with tires
37:03

37:03 literally wow um and that goes back to
37:05

37:05 where you’re talking about before
37:07

37:07 it had like 40 foot ceilings wow that
37:09

37:09 was nothing more than a giant box
37:12

37:12 wow and so those tenants and those
37:15

37:15 properties have done fine
37:16

37:16 so covid has disproportionately
37:20

37:20 affected retailers and within the retail
37:24

37:24 gyms movie theaters just things that
37:27

37:27 people
37:27

37:27 are not going to be able to go back into
37:31

37:31 with the velocity that they had been
37:35

37:35 are the most severely impacted right do
37:38

37:38 lenders look at trends as much as
37:40

37:40 uh as investors buyers they do more and
37:43

37:43 more
37:43

37:43 they didn’t used to as much if it was a
37:45

37:45 warm body with decent credit
37:48

37:48 the lenders didn’t need to worry about
37:50

37:50 that right the the traditional
37:53

37:53 retail center was like a market what we
37:55

37:55 call the dumbbell center a market drug
37:58

37:58 you got a safeway at one end and you’ve
37:60

37:60 got a cvs at the other
38:02

38:02 and all the happy satellite tenants in
38:04

38:04 between
38:06

38:06 have customers because people are going
38:07

38:07 to safeway in cds that’s a dumbbell
38:09

38:09 center yeah
38:11

38:11 then you know it’s evolved into bigger
38:13

38:13 retail centers where
38:14

38:14 the enclosed mall was a hot product
38:17

38:17 that’s no longer the hot product that’s
38:19

38:19 a whole different discussion
38:20

38:20 um now the retail centers which are
38:23

38:23 really the most popular are caruso type
38:25

38:25 centers
38:26

38:26 right which are it’s a it is and people
38:29

38:29 copying that
38:30

38:30 it is a combination of entertainment and
38:33

38:33 having a good time
38:34

38:34 and shopping okay and it’s not it
38:38

38:38 it isn’t as um
38:42

38:42 as as purely utilitarian
38:45

38:45 as a as a market drug center right or
38:48

38:48 you’re not going there to be entertained
38:49

38:49 you’re going there to get
38:50

38:50 your diapers and you’re going there to
38:53

38:53 get your
38:53

38:53 your ground chuck right all right
38:56

38:56 there’s not a lot of pizzazz in that
38:57

38:57 you’d like it to be nice and clean and
38:59

38:59 wide aisles but that’s about it
39:01

39:01 right so
39:04

39:04 lenders were far less
39:08

39:08 careful about the types of tenants
39:11

39:11 up until about 2007 2008 during
39:14

39:14 that last great recession that we had
39:18

39:18 um which really affected
39:21

39:21 broadly far more real estate industries
39:25

39:25 than covid yeah covet is really crushing
39:28

39:28 retail right now
39:30

39:30 yeah the the interesting thing eduardo
39:33

39:33 is retail was getting hammered well
39:37

39:37 before
39:37

39:37 covent because there is this there’s
39:40

39:40 this tension
39:42

39:42 with amazon eating away at brick and
39:44

39:44 mortar
39:46

39:46 and i don’t know about you i finance a
39:49

39:49 lot of retail but i really enjoy
39:51

39:51 shopping on amazon i i’m not a shopper i
39:55

39:55 don’t like it
39:56

39:56 yeah once i’m the same way when i find
39:58

39:58 something i just buy it over and over
39:60

39:60 again maybe different colors or whatever
40:01

40:01 but
40:02

40:02 that’s right i just don’t you know women
40:04

40:04 seem to like it more than men
40:06

40:06 maybe that’s an over generalization
40:09

40:09 but there has to be something which
40:11

40:11 draws people back into the centers and
40:13

40:13 that’s why
40:14

40:14 kind of the caruso approach is really
40:17

40:17 the right thing to do
40:18

40:18 yeah eventually people will be going to
40:20

40:20 movies again they’ll just have to spread
40:22

40:22 out more
40:22

40:22 caruso centers always have very good
40:24

40:24 restaurants which are surviving better
40:27

40:27 than
40:27

40:27 gyms right now because of the fact that
40:29

40:29 people are just doing takeout
40:31

40:31 right um they’re survivable
40:34

40:34 right so that’s really the situation
40:38

40:38 with with retail and why covet has been
40:42

40:42 has been really disastrous right for it
40:45

40:45 and it will come back but it will be
40:48

40:48 different
40:49

40:49 and so just going back to your your
40:51

40:51 fundamental questions
40:53

40:53 do the lenders carefully look over rent
40:55

40:55 rolls they do now
40:56

40:56 right on retail they did it before
40:59

40:59 they’re going to go tenant by tenant and
41:01

41:01 they’re going to want to know
41:02

41:02 can this tenant survive what do they do
41:05

41:05 you know what do they do can they
41:07

41:07 survive are they well capitalized
41:09

41:09 and is it a use that in our opinion has
41:12

41:12 legs or is potentially obsolete
41:16

41:16 you said something is super i mean it’s
41:18

41:18 interesting that you said that’s a
41:20

41:20 changing way to look at
41:22

41:22 underwriting and of uh of trends i have
41:25

41:25 a book right now the link of like
41:27

41:27 banking and lending throughout like the
41:29

41:29 last 150 years
41:31

41:31 and i’m interested in reading it because
41:33

41:33 there is
41:34

41:34 changes that happen in the residential
41:36

41:36 loan market you know you had these
41:38

41:38 no income no verification loans have
41:41

41:41 commercial loans
41:43

41:43 changed a lot and is has have they
41:45

41:45 become more restrictive or less
41:46

41:46 restrictive is it more creative
41:49

41:49 approaches to underwriting yeah it’s
41:51

41:51 definitely been more cree
41:52

41:52 it’s gotten more creative and when it
41:54

41:54 gets ahead of itself it it
41:56

41:56 it starts seizing up um
42:01

42:01 the residential loans and residential
42:05

42:05 lending
42:06

42:06 um is reflective of this country’s
42:10

42:10 policies okay and
42:13

42:13 when you buy a house or a condominium
42:16

42:16 you are able to write off the interest
42:21

42:21 the reason is is because the country
42:23

42:23 wants to encourage people
42:25

42:25 to buy houses it makes them more stable
42:27

42:27 right somebody who owns a house and
42:29

42:29 lives there for the
42:30

42:30 for their entire lives and then retires
42:33

42:33 is less of a burden for the country than
42:36

42:36 someone who doesn’t have that house
42:38

42:38 and is a renter okay yeah because they
42:41

42:41 sell their house
42:42

42:42 they’ve got their nest egg even if they
42:44

42:44 weren’t smart enough to se to
42:45

42:45 to save they still have that house right
42:48

42:48 and so as a country
42:50

42:50 um our policy has always been to
42:52

42:52 encourage
42:53

42:53 homeownership right and so going back to
42:56

42:56 your question about this no income
42:58

42:58 verification that was something that
43:01

43:01 that
43:01

43:01 um fannie and freddie went off
43:05

43:05 those are the the buyers of these home
43:07

43:07 loans from from
43:08

43:08 companies that originate them they were
43:11

43:11 buying those
43:12

43:12 loans right and so what that did
43:16

43:16 is that just opened up the market to bad
43:19

43:19 credit right and what they did is if
43:22

43:22 you remember the analogy i used before
43:24

43:24 about securitized loans which are going
43:27

43:27 into a trash compactor
43:29

43:29 they all they come out and then the
43:30

43:30 rating agency
43:32

43:32 looks at the trap looks at all the
43:34

43:34 assets in the trash compactor and goes
43:35

43:35 okay 80
43:36

43:36 of those we’re going to rate aaa right
43:39

43:39 the the the the tragic
43:43

43:43 and um you know i don’t know what other
43:46

43:46 way to put it
43:48

43:48 you know fraudulent
43:52

43:52 methodology of evaluating single-family
43:56

43:56 loans
43:58

43:58 was completely uncovered and resulted in
44:02

44:02 the the the the crash of 07 and 08.
44:06

44:06 go back and look at our analogy we take
44:11

44:11 all of these loans which are um
44:14

44:14 from people who don’t qualify their 95
44:17

44:17 financing
44:18

44:18 they are all
44:21

44:21 very very weak very very weak
44:25

44:25 credit right going in the trash
44:27

44:27 compactor
44:28

44:28 millions of them you now have a half a
44:30

44:30 million or
44:31

44:31 half a billion worth of loans okay take
44:34

44:34 them out of the trash compactor
44:36

44:36 take them over to the rating agencies
44:39

44:39 and the rating agencies
44:40

44:40 up until 2007 happily went okie dokie
44:45

44:45 first 80 percent were going to treat as
44:46

44:46 triple a’s
44:48

44:48 wow okay and they yeah it was crap
44:51

44:51 yeah it was people who couldn’t qualify
44:54

44:54 it’s not
44:55

44:55 it’s not as if it would they put in a
44:57

44:57 cross-section of everybody and then a
44:58

44:58 very small
44:59

44:59 section yeah they would put specific
45:02

45:02 pools of loans
45:03

45:03 which were junky loans right
45:06

45:06 and get them rated by the by the rating
45:09

45:09 agencies who are complicit
45:12

45:12 and they all defaulted right
45:15

45:15 yeah you know somebody somebody who buys
45:17

45:17 a a 500
45:19

45:19 000 house because they’ve got a two
45:21

45:21 percent rate which
45:23

45:23 which has moved up to market to let’s
45:26

45:26 say at the time it was six percent
45:28

45:28 is going to default as soon as it moves
45:30

45:30 up to six percent
45:32

45:32 because they can’t afford it they can
45:33

45:33 afford two percent they can’t afford six
45:35

45:35 right the market was at six these people
45:39

45:39 can’t afford it and so
45:40

45:40 the the brokers would get the people in
45:44

45:44 the house
45:45

45:45 telling them home prices are home values
45:49

45:49 are going up 10
45:50

45:50 a year yeah so you’ve got you’ve got
45:54

45:54 two percent which is which is fixed for
45:56

45:56 the next three years
45:58

45:58 your 500 000 house should go
46:01

46:01 up yeah by 10 every year so just
46:04

46:04 make it simple it’s now worth 650 000
46:08

46:08 at the end of three years right mr
46:11

46:11 homeowner you’ve made 150
46:12

46:12 000 already sell the house for 650 000
46:17

46:17 buy another one using your 150 000 down
46:20

46:20 that you just made
46:21

46:21 yeah and you never have to pay six
46:24

46:24 percent
46:24

46:24 yeah yeah that makes that’s the sell
46:27

46:27 it’s a great i mean
46:28

46:28 it’s a it’s a great program as long as
46:31

46:31 houses go up 10
46:33

46:33 a year every single year yeah that’s
46:35

46:35 yeah that’s the thing you can’t really
46:38

46:38 count on that all the time that means
46:39

46:39 they double in value every seven years
46:42

46:42 so as a young person you look at that
46:44

46:44 how you look at a house for five hundred
46:46

46:46 thousand which seems cheap now
46:48

46:48 and you and you’re going geez i can
46:51

46:51 it it’s gonna cost me in seven years a
46:54

46:54 million for the same house
46:56

46:56 yeah i can’t afford that yeah or the
46:59

46:59 flip side is i gotta buy now
47:01

47:01 even though i can’t afford it yeah
47:05

47:05 so it it it was a it was a mirror game
47:10

47:10 that remarkably went unpunished
47:14

47:14 um it was not a mirror game it was a
47:15

47:15 shell game right that went unpunished
47:19

47:19 until the whole thing collapsed
47:22

47:22 that’s that was an that was bound to
47:25

47:25 happen
47:25

47:25 it was bound to happen and more of us
47:29

47:29 you know only a few people really kind
47:31

47:31 of got it more of us should have gone
47:33

47:33 this is going to blow up yeah yeah
47:34

47:34 you’re right i think
47:37

47:37 didn’t i don’t think we appreciate we
47:39

47:39 appreciate it and i’m a commercial guy
47:40

47:40 so i’ve got to kind of
47:42

47:42 plead ignorance yeah but i still knew
47:44

47:44 enough to know that this is an uh
47:46

47:46 it was an unsustainable seems unhealthy
47:49

47:49 yeah yeah
47:49

47:49 and um what the ramifications would be
47:53

47:53 once it collapsed never even thought
47:55

47:55 about
47:56

47:56 until they collapsed and then we saw the
47:58

47:58 ramifications what are the covenants
47:60

47:60 different
48:00

48:00 in commercial loans that maybe new
48:03

48:03 borrowers would need to
48:05

48:05 be aware of that maybe they don’t think
48:07

48:07 are a problem that may be a problem down
48:09

48:09 the road
48:10

48:10 okay that’s a good good question
48:12

48:12 generally
48:14

48:14 when one buys a property buys a house
48:17

48:17 and puts a loan on it it is a
48:18

48:18 non-recourse loan
48:22

48:22 it can become recourse once
48:25

48:25 one refinances with a different lender
48:28

48:28 so buyers borrowers owners have to
48:32

48:32 have to look very carefully at the loan
48:35

48:35 documents to make sure that the loan is
48:37

48:37 not becoming recourse
48:40

48:40 because the recourse meaning it’s
48:42

48:42 personally guaranteed is opposed to just
48:44

48:44 having
48:44

48:44 the the asset be the collateral for the
48:47

48:47 loan
48:48

48:48 okay um that’s for residential
48:51

48:51 that’s for residential okay residential
48:54

48:54 loans also
48:57

48:57 um in in 99 of the situations don’t have
49:01

49:01 prepays
49:03

49:03 okay so you get yourself a three and a
49:06

49:06 half percent loan and you think that you
49:08

49:08 died you went to heaven and you will
49:09

49:09 never refinance for the rest of your
49:11

49:11 life
49:12

49:12 until rates become two and a half
49:13

49:13 percent right
49:15

49:15 you call up the lender and you say we’re
49:17

49:17 refinancing
49:19

49:19 and the lender says hot dog
49:22

49:22 let’s do it there is no prepay
49:25

49:25 right commercial on the other hand you
49:27

49:27 get a 10 year fixed rate loan this is
49:29

49:29 let’s let’s assume for the first example
49:31

49:31 that was 10-year fixed-rate loan
49:33

49:33 home loan you do a 10-year fixed-rate
49:36

49:36 loan
49:37

49:37 from a lender and there is a prepayment
49:40

49:40 and they they basically have gone out
49:44

49:44 and either borrowed the money from the
49:46

49:46 people who make deposits or they have
49:47

49:47 sold it in the secondary market
49:49

49:49 and they’re expecting to get that return
49:53

49:53 over the life of the loan and so if you
49:56

49:56 pay it off early which you can
49:59

49:59 you must make them whole by paying the
50:02

50:02 interest
50:03

50:03 which is outstanding for the rest of the
50:06

50:06 term
50:07

50:07 alone less what the lenders can reinvest
50:11

50:11 that money in in you guessed it
50:15

50:15 t-bills wow okay so yeah the spread you
50:18

50:18 have to make up for
50:19

50:19 so let’s say that we we do um
50:22

50:22 on one of your projects we do a 10-year
50:24

50:24 fixed-rate loan right now and it’s at
50:26

50:26 three percent
50:27

50:27 and you are loving life right okay
50:30

50:30 um six months from now
50:34

50:34 somebody comes and says i love your
50:36

50:36 property
50:37

50:37 i want to buy it it’s just perfect for
50:39

50:39 my location
50:40

50:40 um and i don’t want a loan i’m all cash
50:44

50:44 and you say you gotta if you have to
50:46

50:46 have this property you’re gonna have
50:47

50:47 this property
50:49

50:49 and i will sell it to you you pick up
50:51

50:51 the phone you call the lender and you
50:53

50:53 say
50:53

50:53 i need to pay off the loan now lender
50:56

50:56 says
50:57

50:57 you know presuming it’s in the loan
50:58

50:58 documents not a problem eduardo
51:00

51:00 okay your prepayment is going to be
51:05

51:05 the difference between a nine and a half
51:07

51:07 year treasury
51:09

51:09 and let’s just say that that would be 60
51:12

51:12 basis points
51:14

51:14 and the three and a half percent
51:16

51:16 interest let’s just say it’s 50 basis
51:18

51:18 points because we can do it in our head
51:19

51:19 okay the 50 basis points which is what a
51:21

51:21 nine and a half year treasury would go
51:23

51:23 for today
51:24

51:24 and the three and a half percent coupon
51:26

51:26 rate that’s three percent
51:28

51:28 yeah times nine and a half
51:31

51:31 yeah right should pay us back it’s not a
51:34

51:34 problem yeah
51:35

51:35 instead of taking your money and
51:37

51:37 reinvesting in another real estate loans
51:39

51:39 most loan documents give the lender the
51:43

51:43 the obligation only to reinvest in
51:45

51:45 treasuries
51:46

51:46 okay so you’re paying after having that
51:50

51:50 loan
51:51

51:51 for six months you’re going to pay a
51:54

51:54 prepayment penalty of about 25
51:56

51:56 of the loan amount okay so okay
51:60

51:60 yeah you needed to have gotten a very
52:02

52:02 good offer yeah
52:03

52:03 you know that makes sense that is
52:04

52:04 something to concern right you know one
52:06

52:06 other thing that i was thinking of was
52:09

52:09 you know we were helping my uncles
52:11

52:11 uh look for properties right and one of
52:13

52:13 the concerns was
52:14

52:14 to get a longer-term loan and then
52:16

52:16 there’s a balloon payment
52:17

52:17 at the end of like 10 or 15 years even
52:20

52:20 though it’s a 25-year amortization loan
52:22

52:22 one of the concerns we always looked at
52:24

52:24 was if
52:25

52:25 the balloon payment was something that
52:29

52:29 could easily be paid off if financing
52:32

52:32 was difficult to achieve
52:33

52:33 or right or for whatever reason just to
52:35

52:35 have that safety net
52:37

52:37 um so that was something else that we
52:39

52:39 were looking at
52:42

52:42 i know you have to go so let me ask you
52:43

52:43 my my wrap-up questions
52:45

52:45 sure so what is your
52:49

52:49 best lesson that you’ve had in your 30
52:52

52:52 years or
52:53

52:53 i didn’t want to speculate i know it
52:55

52:55 gets pathetic when it’s over
52:57

52:57 when it’s over 20 i’ve been told so i
52:59

52:59 say over 20.
53:00

53:00 okay over 20. um
53:04

53:04 so much experience so many cycles i
53:06

53:06 don’t what’s the best lesson you’ve
53:08

53:08 you’ve gotten out of all that experience
53:10

53:10 yeah
53:11

53:11 lower leverage long-term fixed rates
53:14

53:14 okay um that that is
53:19

53:19 do not over leverage and it really is
53:22

53:22 it your your dad has has the perfect
53:26

53:26 philosophy for surviving and that
53:29

53:29 is keep all your assets prime prime
53:33

53:33 assets
53:34

53:34 keep the leverage extremely low okay
53:37

53:37 and be smart the difference though
53:42

53:42 is he will not make
53:45

53:45 nearly as much money as somebody who
53:49

53:49 leverages
53:49

53:49 higher and takes a higher risk right
53:53

53:53 of those people who will leverage higher
53:55

53:55 and take a higher risk
53:56

53:56 a third a half maybe more will lose it
53:59

53:59 all
53:60

53:60 wow but of those who who have done it
54:03

54:03 right and are able to hop off it’s
54:06

54:06 musical chairs right
54:07

54:07 yeah get their fannies into a chair
54:09

54:09 immediately when the movie when the when
54:11

54:11 the music stops
54:13

54:13 they’ll generally be fine and they’ll
54:15

54:15 make more money because they’ve
54:16

54:16 leveraged more
54:19

54:19 i’ve heard i’ve heard it said that it’s
54:21

54:21 really a game of luck when you leverage
54:23

54:23 a lot you never know when
54:24

54:24 like it’s musical chairs yeah it’s
54:26

54:26 another way to put it it’s
54:28

54:28 it’s very true yeah uh so
54:31

54:31 for the second question and you know
54:34

54:34 it’s honestly it’s an honor knowing you
54:36

54:36 you the way you’ve built your career
54:38

54:38 you joined george elkins in 1992
54:42

54:42 you ended up buying it out with a group
54:44

54:44 of investors and then selling it to
54:46

54:46 walker dunlop
54:47

54:47 i mean and now you’re vice president
54:49

54:49 there or managing director um
54:54

54:54 what are your three key daily habits
54:57

54:57 that have helped you
54:58

54:58 get success or just what’s what’s your
55:00

55:00 mantra i guess to help you
55:02

55:02 achieve so much in your life uh
55:07

55:07 number one thank you for saying that
55:08

55:08 it’s very flattering i appreciate it i
55:10

55:10 mean
55:10

55:10 you and i have been friends for a while
55:12

55:12 so that means a lot to me
55:14

55:14 um get good at something
55:18

55:18 where you are better than
55:21

55:21 most people in your industry
55:25

55:25 okay and um
55:28

55:28 the longevity helps
55:31

55:31 but unless you are really up to date
55:34

55:34 and sharp on on the changes because when
55:37

55:37 i started this business
55:40

55:40 there were there were no computers there
55:42

55:42 were no
55:43

55:43 um there were no fax machines
55:46

55:46 there were no hps uh
55:50

55:50 everything was mailed overnight and it
55:52

55:52 was all and it just
55:53

55:53 things changed so what i have
55:56

55:56 what i have learned is i have to
55:58

55:58 surround myself with people smarter than
56:00

56:00 me
56:01

56:01 i’ve got certain fundamental strengths
56:04

56:04 that i am
56:05

56:05 in my mind very good at and i have a
56:08

56:08 myriad
56:09

56:09 of weaknesses and i must have people
56:12

56:12 that i work with who can who can handle
56:16

56:16 the weaknesses
56:17

56:17 and the weaknesses are generally
56:18

56:18 technical for me
56:20

56:20 i’m just i’m just not a technical
56:23

56:23 wonk and i could learn it and i’ve got
56:25

56:25 some friends
56:27

56:27 my age who have learned it but i can
56:30

56:30 leverage
56:30

56:30 better if i have people who are smarter
56:33

56:33 than me
56:34

56:34 who totally understand that and i can
56:38

56:38 leverage them off of a whole area that i
56:40

56:40 would need to learn
56:42

56:42 and i can continue going out and
56:44

56:44 focusing on the areas that i’m strong in
56:46

56:46 right okay so so i guess the
56:50

56:50 the long and short of it is
56:54

56:54 be realistic with your skill set
56:57

56:57 and um if if it is
57:01

57:01 not at the top of your market it may not
57:04

57:04 be what you should be doing
57:05

57:05 right interesting okay
57:09

57:09 well that’s an exploration for everybody
57:12

57:12 yeah it really is an exploration
57:14

57:14 we all find out you know i read today i
57:16

57:16 don’t it was a quote it was uh
57:19

57:19 picasso i think that said it that i
57:21

57:21 think the
57:23

57:23 finding what you’re good at is like the
57:26

57:26 mission of life and then giving it away
57:28

57:28 to other people is the meaning of life
57:30

57:30 something like that yeah
57:31

57:31 that’s it i mean i’m probably butchering
57:34

57:34 it but it was
57:35

57:35 i wanted to revisit it it was in the
57:37

57:37 passing of the day that i saw it
57:39

57:39 um yeah well you don’t get good you’re
57:41

57:41 just not
57:42

57:42 good at something immediately yeah it’s
57:44

57:44 got to be interesting to you
57:46

57:46 before you you know before you can even
57:50

57:50 learn about something it’s got to be
57:51

57:51 interesting you know i always wanted to
57:53

57:53 be a doctor but i couldn’t pass
57:54

57:54 chemistry for the life of me
57:56

57:56 it just was gibberish to me yeah all the
57:59

57:59 symbols and the way that everything
58:00

58:00 worked
58:03

58:03 law school was fascinating i loved it i
58:06

58:06 see
58:07

58:07 in pictures and i see
58:10

58:10 i when i look at a at a property
58:14

58:14 i can see the numbers in my head and run
58:17

58:17 them in my head
58:19

58:19 because i’ve done it so much but that’s
58:21

58:21 just the way that i
58:22

58:22 am so if i’m look if i’m trying to
58:24

58:24 figure out what i’m good at i’m visual
58:26

58:26 right and i’m really really good at
58:29

58:29 very simple math that i can do in my
58:32

58:32 head
58:33

58:33 yeah um and uh and
58:36

58:36 i like um i like nine inning baseball
58:40

58:40 and i like in particular playing 12 nine
58:44

58:44 inning baseball games at once
58:46

58:46 and that is what real estate finance is
58:48

58:48 why nine
58:50

58:50 because it’s got a beginning and it’s an
58:52

58:52 end right
58:53

58:53 it’s a it’s a nine inning game it can go
58:55

58:55 to extra innings if it’s a particularly
58:56

58:56 long transaction or it’s a problem or
58:59

58:59 or this but it’s got a lifespan right
59:02

59:02 and so i love working on multiple
59:04

59:04 transactions
59:05

59:05 as we talked about in the beginning yeah
59:07

59:07 anywhere from uh
59:09

59:09 from an outpat and fresno to a 500
59:12

59:12 million dollar
59:13

59:13 stock co-op they’re all as interesting
59:16

59:16 to me
59:16

59:16 yeah really that’s interesting oh they
59:19

59:19 really they really are particularly you
59:20

59:20 know working with you as you’re going
59:22

59:22 out and getting into new deals
59:24

59:24 i’m thinking i love the way that you
59:26

59:26 think i love your enthusiasm
59:29

59:29 and it’s really
59:32

59:32 important to me that you get the right
59:34

59:34 type of structure
59:36

59:36 and that you understand what you’re
59:38

59:38 doing and so that’s a joy to me
59:41

59:41 working working with you and stuff like
59:43

59:43 that it’s it is fun
59:44

59:44 you are one reason why you really
59:47

59:47 understand
59:48

59:48 your the people you work with i don’t
59:50

59:50 know if it’s your legal background
59:51

59:51 that’s
59:52

59:52 sort of helped you learn keep an open
59:55

59:55 mind with different
59:56

59:56 business strategies but i i don’t know
59:59

59:59 how you’re legal
59:60

60:00 has influenced the way you operate is
60:03

60:03 there a way that it’s
60:04

60:04 yeah it’s given me discipline and
60:06

60:06 thought because it i have to organize
60:09

60:09 um the fact patterns whether it’s
60:13

60:13 as we talked about earlier running over
60:15

60:15 your foot or whether it is redeveloping
60:17

60:17 santa monica place
60:18

60:18 yeah i’ve got to understand it and
60:22

60:22 and see it and believe it before
60:25

60:25 i can articulate
60:29

60:29 your vision to third parties i see
60:33

60:33 yeah so and it’s got to make sense to me
60:35

60:35 if it doesn’t make sense to me
60:37

60:37 and i tried it when i was younger going
60:39

60:39 out and pitching things which i didn’t
60:41

60:41 understand
60:43

60:43 i would i would be laughed out of the
60:44

60:44 room yeah is this
60:46

60:46 this have you have you thought about
60:48

60:48 this have you have you
60:49

60:49 jeff have you gone into the you know i
60:52

60:52 remember working on a
60:54

60:54 on a fish storage warehouse one time
60:57

60:57 and the lender lender said there’s no
60:60

60:60 need for a fish storage warehouse right
61:02

61:02 here yeah
61:03

61:03 yeah and i said well here it is and they
61:06

61:06 said
61:07

61:07 there you go we’ll see you yeah yeah no
61:09

61:09 that it feels that way it feels when we
61:11

61:11 talk to you you get it you understand
61:13

61:13 it’s very
61:14

61:14 fun working with you because you see it
61:16

61:16 from our perspective or from the
61:18

61:18 perspective of
61:19

61:19 of you know the business plan and the
61:21

61:21 philosophy the background because it is
61:23

61:23 more than just the numbers it’s really
61:25

61:25 the
61:26

61:26 the culture of the of the buyer yeah
61:28

61:28 yeah
61:29

61:29 so one of the calls i i got and then i
61:32

61:32 do
61:32

61:32 i had a run was from
61:36

61:36 a group that owns a a
61:39

61:39 good good deal of land in
61:42

61:42 colorado near the railroad okay
61:46

61:46 and they’re buying it they’re going to
61:48

61:48 redevelop it for
61:50

61:50 for kind of railroad stuff and
61:54

61:54 what i need to do my job is now to
61:57

61:57 translate
61:59

61:59 their vision into lender speak because
62:02

62:02 the lender will be horrified
62:04

62:04 when they see this remote land in the
62:06

62:06 middle of nowhere
62:07

62:07 near nothing better railroad
62:10

62:10 and these guys are visionaries and
62:12

62:12 they’re big hitters but they have not
62:15

62:15 properly articulated their goal in a
62:18

62:18 manner that that i can sell it to a
62:20

62:20 lender yeah
62:21

62:21 so i’ve got to work with them to
62:25

62:25 to hey figure out if it makes sense to
62:27

62:27 me yeah
62:29

62:29 and b then translate their vision into
62:33

62:33 lender speak
62:34

62:34 yeah no i get that because you do i
62:37

62:37 find it super interesting how you make
62:38

62:38 brochures and you
62:40

62:40 you market the loan yeah almost like
62:43

62:43 you’re marketing a property and there’s
62:45

62:45 a lot of similarities
62:46

62:46 oh yeah but uh from my perspective the
62:49

62:49 lenders are buying the loan yeah they’re
62:50

62:50 buying the property right
62:52

62:52 not for you guys because you guys are
62:54

62:54 chickens yeah but
62:56

62:56 if somebody’s if a lender is lending 70
62:59

62:59 on on a property it’s yeah they’re
63:02

63:02 putting in most of the dough and they’re
63:04

63:04 getting three percent
63:05

63:05 and i mean it’s it is a partnership
63:07

63:07 maybe not legally exactly legal terms
63:09

63:09 but
63:10

63:10 yeah it’s a whole ecosystem of people
63:12

63:12 working together and having
63:14

63:14 a synergy absolutely if you like this
63:16

63:16 video please hit the like button and if
63:18

63:18 you want to get alerted every time we
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63:24

63:24 if you want more solutions or if you
63:25

63:25 want more information go to our website
63:27

63:27 at long-term rei dot com there we have
63:31

63:31 articles other podcasts and we have
63:33

63:33 other information
63:34

63:34 thank you for watching
63:45

63:45 [Music]
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63:54 you

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