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- [00:04]
A
So I finally made it to JP Morgan's Sky Temple of Capitalism, and it was because of this podcast.
- [00:09]
B
Jamie let you in to use the restroom.
- [00:12]
A
I'm in midtown. I'm leaving a meeting. I hear a guy yell 1031, the promote. And initially I thought you had just hired one of your actor buddies to prank me.
- [00:21]
B
It was Jeremy Strong. Yes.
- [00:24]
A
So it's this young CR striver from JP Morgan. He's hooked on the pod. He showed me texts where he's sending episodes to all his friends, and then he's like, do you want a tour of the building? I'm like, absolutely. He starts hitting me with lines from the show as we're going around. And what was initially kind of a starstruck moment for him, honestly, turned into like an inspiring moment for me. This is this Dominican kid from East New York. Came from nothing. Dad used to work the graveyard shift at a cheese factory, mom was a nanny. And now he's working in the ultimate symbol of finance.
- [00:54]
B
That's incredible. The American dream is alive and well.
- [01:07]
A
Welcome back to the promote podcast, your insider guide to the money and mania of the CRE markets. I'm Hatan Samtani.
- [01:11]
B
And I'm Will Krasny.
- [01:13]
A
A shout out to our sponsors, LoanBoss, the best in Class CRE debt management software.
- [01:18]
B
Bravo Capital, a leading HUD and bridge lender that lives and breathes Captex and
- [01:22]
A
Real Property Captive, the first group captive insurance for mid market owners. This week, we look at Texas billionaire Tilman Fertitta's $18 billion megadeal for the Caesars entertainment empire. This is really just an excuse for us to talk about Tillman, one of the industry's capital C characters.
- [01:37]
B
An Alzheimer.
- [01:38]
A
Next, we dive into CoStar's $800 million acquisition of Home data startup Zonda. It's really part of Andy Florence's grand quest to control every little piece of information in the real estate universe. And finally, it might be curtains for a prominent multifamily developer. We're told that ZOM Living is prepping a bankruptcy filing.
- [01:57]
B
Let's get started though, before any of that, with the punch list, our signature rundown of the newsiest news. And.
- [02:07]
A
Haten.
- [02:08]
B
You are in New York, I am the capital of Kabital and the socialist hellscape of the Mamdani verse. What are your thoughts?
- [02:17]
A
Dude, it's ripping on every metric. The restaurants are full, there's beautiful people everywhere. Everyone's doing business, everyone's taking meetings.
- [02:25]
B
That's what you love to hear. I got a call Friday at 9pm from Friend of the Pod and he was walking his dog in Bushwick.
- [02:31]
A
Oh, yeah, he told me about it. We were hanging out. Yeah.
- [02:33]
B
Yeah. He says it's one of those nights that makes you wonder how you can be anywhere other than New York because every bar is full, everyone's young, everyone's hot. And I can tell you, living outside of New York now, everyone is not hot.
- [02:44]
A
It is really cool to see it firing on all cylinders, but this is what it's all about.
- [02:48]
B
Well, speaking of things firing on all cylinders, banks are back.
- [02:53]
A
We're back, baby. Banks are back. CRE originations are up 80% year over year in Q1, just north of 450 billion. Now, obviously, the big story of the last couple of years has been banks retreating and debt funds and other exotic financiers stepped into the mix. But now banks are back. One of my buddies was telling me, I'm going to quote him verbatim here, he said spreads for direct lending are tight AF plus 200 to 225 range for 65% LTC.
- [03:21]
B
I can confirm that for a couple of regional banks on industrial acquisitions in central Pennsylvania, that's true. And it's super competitive. And what's interesting too, the swap rates are actually way inside of term SOFR or the Treasuries. So that actually lends itself to being more competitive for banks because if you fix your rate via swap, it's actually inside of what you would fix at
- [03:41]
A
otherwise, with the debt funds having kind of taken primacy in the cap stack, so to speak. What does all this mean for when you're out there trying to get one of these big loans done? Are you now a price setter as
- [03:52]
B
a sponsor right now? Yeah, you absolutely are. Talk with anyone. The amount of debt capital out there is astonishing for almost everything.
- [04:00]
A
Still can't find equity, though.
- [04:01]
B
Yeah, equity, no one wants to do equity. Everyone wants to do debt COGP or pref. But there is a ton of debt capital out there for almost any project that's real.
- [04:10]
A
That's real is an operative word here because remember a few weeks ago we talked Atlanta.
- [04:14]
B
We're going to bring that up forever. I can't wait for 10 years from now. I go back to a couple episodes ago and I said we really don't try to make fun or we're really not about spearing people.
- [04:22]
A
Except for this guy.
- [04:23]
B
Except that guy.
- [04:24]
A
All right, next one more bad news for S2. Over a quarter billion dollars in CMBS loans tied to three properties. This is Scott Everett, the Prominent multifamily syndicator. They went to special servicing. Lots going on with that portfolio.
- [04:38]
B
Not just that portfolio. There are other assets that are in pre foreclosure or foreclosure, but these three specifically. Basically, if you're going to special servicing, what it means is that you don't maintain the net cash flow necessary. Yeah, it hit your debt service coverage ratio. And CMBS tranche had underwritten when the loan was funded. I think though it is bad news. But like the Modest Mouse album says, it's good news for people who like bad news because Scott Everett also launched a development fund focused on the Sun Belt to take advantage of the dislocation that we've all talked about. And again, the reason I say this is good news overall is because the perfect mark of an institution is the ability to torch a bunch of equity and raise a lot more, which is what he's doing.
- [05:22]
A
When you're building a platform, you just kind of have to forge ahead. Starwood doesn't talk about what was the vehicle. They don't really talk about anymore.
- [05:29]
B
Starwood retail partners.
- [05:30]
A
Right. They're doing their own thing. They're going and raising something else. So even as all of this is happening to Scott, he's out there raising money, and successfully in some cases for new vehicles and new ventures. And that he resembles our boys at Brookfield, which is our next one.
- [05:45]
B
I just said that we don't try to make fun or really kick people while they're down. I think we might have to add Brookfield to the one kind of lan
- [05:53]
A
at least Ben Brown's very handsome.
- [05:55]
B
Yeah, right.
- [05:55]
A
According to Will's incel chart preference.
- [05:59]
B
Oh, my God. So this one. Come on. They sold three. Bethesda Metro center in Bethesda, Maryland, which is a great market, fantastic location. I grew up just across the district line from there. But that's not what makes it great. They bought the property for 151 million in 2011. 10. What did they sell it for?
- [06:20]
A
Sounds like it's a rough trade, so I'm going to say 80.
- [06:23]
B
They sold it for 20 million. They were down 87%.
- [06:30]
A
Who's coming in on these things? I'm always interested. Who's carcass shopping?
- [06:34]
B
Who's grave dancing? It's a company I'd never heard of called Inrel Properties and they did the same thing across the street. They bought it out of severe distress and they took the office occupancy from 40% to 80% leased. And this property is 52% leased.
- [06:52]
A
So there's a lot of room to run.
- [06:53]
B
The reason why there's this great office reset is because there's still demand for office space. We're seeing it in New York and that absorption is off the charts and that's predominantly for class A. But in the other markets and in New York as well, it's really about resetting your basis. So you can offer lower rents. Yes, if they're 87% lower basis, when again they're going to have TIS LCs, they're going to do a capex plan, what have you, but they can offer rents half, 75% lower than what the building needed previously to make the math work. And there's demand at that level.
- [07:22]
A
They can show a thesis to a lender and say, hey, we've done this before. Get the requisite financing they need then to go and build out the product, make it semi attractive at least. And then a semi attractive product combined with below market rents is a very attractive product.
- [07:36]
B
Right. There are groups that are doing this in a very targeted fashion. If you pre build out suites so you can just move in with your toothbrush, as they like to say on million dollar listing RIP if you're a professional services firm that needs 5,000 square feet to have a built out office suite is very attractive. And so they're able to do that at very competitive rates. At some point these things are just going to be cash machines. I think the standout trade of this cycle is going to be Triperian partners buying Keystone Crossing.
- [08:03]
A
Our boy is that friend of the pod, Elliot. Okay.
- [08:05]
B
And Jeff Karsh. They bought Keystone Crossing, which I think from dra and I want to say Morgan Stanley. Five buildings, a million plus square feet and they bought it at a similar discount. Yeah, they're going to do phenomenally well there, but with this type of strategy. So it is possible to go out there and execute. But it's hard to get loans and as we said, it's really hard to get equity. Because even if you're shopping office distress and there are a lot of folks out there who say we want distress, we want contrarian plays. It's like Ronnie Coleman says, anybody want to be a bodybuilder? Don't nobody want to lift no nitty ass weight. You want distress, but not like that next one.
- [08:45]
A
So we've talked about the crown, the stiff upper lip lads breaking up with the US real estate.
- [08:50]
B
The Grosvenors.
- [08:51]
A
Yeah, the Grosvenors breaking up with the US real estate market. Our neighbors in the north have been doing this for A while too. And there's some stark new data showing just how intense it's been.
- [08:59]
B
Canada has long been a source of capital for US real estate transactions. And that transaction volume actually fell by a third year over year to about 5 billion for 12 months ending in Q1. That's already off of a lower base because that's less than half the average invested by Canadians over the past half decade.
- [09:16]
A
Typically, New York and other gateway markets in the US were their top destinations for most of that money. But now they're looking elsewhere and you can see why. Right. CPP's taken a bath here.
- [09:27]
B
Oh yeah.
- [09:27]
A
Oterra and Ivanhoe, Cambridge took such baths that they actually were dissolved and merged into La Cais. It's been a bad time for the Canadians and it's funny because they typically would invest in top tier properties with local partners like rxr, et cetera. Those guys have found new partners that are going to keep going.
- [09:43]
B
German capital has been very historically focused on they love office and they love SMAs. And I think that the SMA business, it's really fallen apart. And not just for office, but for almost anything. If you're allocating to an SMA with a specific strategy as the allocator, you are making the investment decision and so it opens up a ton of career risk for you Talked about RXR Savannah. Yes, Those guys are really good office asset managers, office investors. But when you're going into the wood chipper, what do they say about Larry Ellison? You can't get mad at Larry Ellison because you have to imagine Larry Ellison as a lawnmower and you're the grass. And you can't hate the lawnmower for mowing the grass.
- [10:23]
A
Just fulfilling his manifest destiny. Exactly.
- [10:25]
B
They're going to go more towards blind pools and away from the US because again, the US office market, which was a huge attractor of capital for so long, is still in the middle of a paradigm shift. As we just talked about.
- [10:38]
A
Next one Miami development drama is one of our emerging favorite topics.
- [10:43]
B
Oh, it's fantastic. The Fisher Island. Man, that's a pretty tony place.
- [10:49]
A
It's where the ultra frou frou go to escape the merely frou frou. There was this one last great development parcel on the island. Almost 10 acres of developable land. And it was bought by a company out of Chicago called HRP. They paid 180 million or something for it. When they did this deal, they apparently signed two simultaneous deals, a development agreement which meant that they would demolish this hulking fuel depot right There. And then they were going to do luxury condos, obviously. On the rest, there was this four acre piece of that deal that the Fisher Island Residents association, which is, how would you describe them?
- [11:23]
B
Strip mall guy talks about how you don't want to be on an hoa. It's the worst thing ever. Now imagine the richest people in the world who are incredibly opinionated in being in an hoa.
- [11:33]
A
So HRP apparently had signed an option agreement that they would potentially convey 4 acres off the site to that residents association. Now, the association alleges that HRP went and did a clandestine deal with Miami Dade county and is about to sell them the whole thing for 400 million. You might ask, why didn't Miami Dade just buy this site by themselves? That's the right question. Because apparently there have been talks to take over, do something with the site for a very long time. In September, the county Commissioner, Oliver Gilbert, described the failure to be proactive as, quote, really, really bad. He added, we've done some bad things before, but this isn't like the favorite position that I want.
- [12:15]
B
Yeah, we're paying a massive markup with taxpayer money because we were lazy. It's not like a great position to be in.
- [12:22]
A
All right, that's it for the punch list. When we come back, we'll be hailing Caesar. Okay, I'm here with Aaron Kurwitz from Bravo Capital. What are some of the elements of the business that you'd like to see come in or evolve in the next. Let's call it 12, 18 months.
- [12:40]
C
We're optimizing for quality. And if that's what your goal is, your first question has to be, how can I attract more quality borrowers? And of course, higher leverage, lower rate, speed of execution, scalability, those all matter. But if you ask a borrower today, what do you want from your lender? They'll tell you, we want off market deals, equity. And I want to bring in teams that can do that. To not have a shoulder shrug when your borrower needs something.
- [13:12]
B
Right.
- [13:12]
C
And to not say, oh, sorry, like, I can't do that. But to say, I will run through a wall for you and I'm going to find a solution.
- [13:20]
A
Thank you, Aaron. And where can people find you?
- [13:22]
C
People could find us at bravocapital. Dot.
- [13:34]
A
If I survive, the country survives. I can tell you this. I'll survive this before the country does. Okay? I'll out survive the country. Just like I out survived the bags in 87. Okay? The country will fold before I do.
- [13:50]
B
Wasn't he like 24 in 87.
- [13:55]
A
We're talking about one of the cowboys here. Tillman Fertitta, Texas billionaire, just finalized a deal to buy the Caesars Entertainment extravaganza of an Empire for 17 and a half billion.
- [14:08]
B
Yes, 17 and a half billion, but 12 of that is debt.
- [14:11]
A
That's par for the course. So let's talk to him.
- [14:13]
B
He's a guy buying Caesars. You know, the previous people who bought Caesars was Apollo, like the opposite of a guy. What's interesting about him is you talk about guys who can control a company have the liquidity, or the ability to get the liquidity, which I think is the Tillman's specialty, to do something like this and put together. He's now going to own one of the largest gaming conglomerates in the country. He's got the Golden Nugget. He's tried to merge that into Caesars. He's got Landry's, which encompasses a ton of restaurants. He's got the Houston Rockets, and he also has a pretty significant portfolio of cre. The reason I want to talk about him is because he's one of these guys that if he didn't exist, you'd have to make him up. He's literally got a TV show called Billionaire Boss or something.
- [14:52]
A
We haven't even mentioned that. He's now the ambassador to Italy and San Marino. I just want the ambassadorship to San Marino. Sounds way more interesting, less work.
- [15:01]
B
Emblematic of the characters that came out of the 80s. But he's a little bit younger than your icons, than your Steve Wynns.
- [15:08]
A
That name kind of rings a bell. Fertitta. There's another big Fertitta. The brother is the ufc.
- [15:14]
B
Yeah. Frank Lorenzo.
- [15:15]
A
Any relation?
- [15:16]
B
Yeah, they're cousins, so they're on stage in casinos. I think there's a little bit of a rivalry there. They're the most successful cousins, I think, outside of George Roberts and Henry Kravitz. So he started off a man about town in Houston in the 80s. He had restaurants. He was young and flashy. I think he tried to buy a couple percent of the Rockets when he was like 31 for around $2 million, and ends up buying the Rockets later for much more than that. And he started off with restaurants, and he was an operator. A lot of these guys are financial engineering things, and he has since done that a lot. He famously floated a massive bond issuance through Partido Entertainment to buy the Rockets. But he was known like Rupert Murdoch in news, where he could do every job in the restaurant and he would go through and you're wasting silverware, you're throwing away food or you're not being as efficient as you should be.
- [16:08]
A
There's an interesting nugget from the Texas Monthly profile. We're talking about rejigging operations for an in person restaurant to a heavily takeout restaurant. And I remember there's a line where he talks about how the line is set up and to reconfigure it to be all takeout just isn't feasible. So there was a level of detail there that a lot of these people do not have.
- [16:25]
B
There's a line between talking about someone who's a deal maker and an operator and they talk about the Wall street deal makers and those are the guys who just make the deals because you can just pay the most always and make the deal and what is it? Bid him up. Bruce, like Bruce Wasserstein, very famously this guy, for all the flash and living large, really could operate. He, like many fell upon hard times in the SNL crisis, I think never declared bankruptcy, but was advised to several times and. And really worked his way out of it and just kept growing and growing and growing and created this cash flow engine out of the restaurant space. And he had an eye for what was Landry's, I don't think is anyone's idea of per se. It's also not Long John Silver's it's attainable luxury quote, unquote. I guess.
- [17:07]
A
Yeah, I think about this a lot. Someone said this about Trump.
- [17:10]
B
He's a poor person's ideal of what a rich guy looks like.
- [17:13]
A
Exactly. And there is a whole category of services in FNB that caters to that opulence. But opulence at a $200 price point. Maybe not a thousand dollar price point.
- [17:22]
B
Exactly. He took his company public, he then took it private, took on a lot of risk and expanded into gaming and took on a lot of risk in floating this massive bond issuance to buy the Rockets. Right. When Covid hit. And as guy who owns hospitality and restaurant assets, that must have been a pretty scary time. And it was able to work his way through it.
- [17:41]
A
It's a furlough, what like 45,000 employees or something like that?
- [17:45]
B
Some crazy number. And he's worked his way through it and really come out the other side. And he's now really liquid because he was able to execute a bunch of transactions. And I think he borrowed more against the Rockets because their value skyrocketed. And he has since bought, just in the last couple of years, $1 billion worth of super high.
- [18:02]
A
He bought The River Oaks District Mall from JP Morgan, right in his backyard. Post Oak Hotel.
- [18:07]
B
Yeah, he's got a lot of stuff in the montage. Laguna beach, which he just paid a massive number for I think last year.
- [18:12]
A
Oh, that's where the IMN conference is. Gorgeous. It's absolutely stunning. As we've talked about, one of the reasons we love CRE is it touches everything. When you're in the mix on sports and entertainment. When you're in the casino business, you're seeing real estate opportunities arise. As you do your thing, you can also kind of create a lot of real estate opportunities out of those deals. Right. You can activate areas around you. You can subdivide the parcels and do something fun. And I'm sure he's touched upon all of that.
- [18:38]
B
This move, too, is something that is really tying in real estate, gaming and sports. People talk about when why did Mark Cuban sell the Mavericks and specifically to the Adelson family, who owns the Sands. And there's this conspiracy theory that they were trying to get gambling legalized in Texas. Obviously this would very much help Tillman Fertitta as well. If you look around Texas state legislature races, there's been a lot of entities out of the gambling industry that have been shelling out capital to local government races and trying to put gambling friendly lawmakers in power. And if this happens, and two families own the premier sports franchises, basketball franchises, I should say, like, obviously the Cowboys are number one. Sure. In Texas. And they also have huge ties to the gambling industry. I mean, that's the great thing about real estate, is that there's no such thing as insider trading. You can just like, put your finger on the scale a little bit.
- [19:28]
A
Acquiring Caesars puts Fertitta's overall haul of casinos to about 60. Is that right? Domestically?
- [19:34]
B
Correct.
- [19:34]
A
This book, it's an incredible book called Caesar's Palace Coup by Sajit, your guy from the ft. We'll put it in the show. Notes Sajit Andap Sajit ndap. Great name. When you own the operating business, you still have the landlord, and the landlord in this case is quite interesting. We should get into it.
- [19:48]
B
It used to be that Caesars owned their real estate and they're running the casinos. The problem is these casinos are just massive working capital incinerators in a lot of cases. And so just part of the bankruptcy, they took out a bunch of intellectual property and they also sold and leased back all the real estate to create a reit. Yeah, create a new reit.
- [20:06]
A
Vici Properties at Vici. This name might be Familiar to some even if you're not in the entertainment business because inexplicably they provided a giant mezz loan for one Beverly Hills project that we're obsessed with. Anyway, that's an aside.
- [20:18]
B
So the billionaire boss now has a boss. Because before, before you make those debt payments, you got to make that ground rent payment, baby.
- [20:33]
A
So Will, what if I told you insurance could become an asset instead of just an expense?
- [20:37]
B
I'd say that you're trying to sell me something, but it's also something that I'm very interested in.
- [20:40]
A
The big institutional firms in Fortune 500s use captive insurance. And now you can too. Real Property Captive has designed the first group captive structure for mid market owners. Members own all the equity and all the profits in that captive.
- [20:52]
B
So what you're telling me though is that my unused premiums no longer go to subsidize my insurance brokers lakehouse and carrier overhead.
- [20:59]
A
That's exactly right. You're not getting middlemanned into oblivion. Carriers issue policies and then provide reinsurance for lender compliance. The reserve stay in your account and
- [21:07]
B
after a few clean years, I'm converting that excess spend into equity. I'm in. I like it.
- [21:12]
A
Bingo listeners. Check out the platform@rpcaptive.com that's rpcaptive.com and tell them the promote sent you. I think it's fair to say that no company in CRE is hated as much as the company we're going to talk about next.
- [21:32]
B
I think that's very true.
- [21:35]
A
COSTAR Group. This is the behemoth. How would you describe CoStar?
- [21:40]
B
The Salesforce of CRE. The Salesforce may be the Salesforce of CRE because everyone hates Salesforce too.
- [21:47]
A
It's kind of an all your base or belong to us philosophy that Andy Florence, the founder and CEO of costar uses. He started this company that has become oxygen for any CRE broker owner in the space. Right. It's got all the lease comps. That's kind of where the, the initial bread and butter was, right?
- [22:03]
B
Lease comp sale comps. They've really antagonized their customer base because they sell by the seat. They will check in, make sure that you can't use the same login. And it's always the best when it's someone who's not worked at the company like 5 years and their name is SIL Login.
- [22:18]
A
More broadly, CoStar is hated because you're captive to it in a sense. Right.
- [22:22]
B
A lot of brokers, it's a necessary evil.
- [22:24]
A
Yeah, exactly. But it's also hated because of what many people describe as the lawfare. Any competitor pops up, anyone has created any kind of incredibly litigious, really come hard at companies.
- [22:35]
B
So here's a fun fact about costar. What is the first time that costar appeared in popular media?
- [22:42]
A
Is it the SNL commercial?
- [22:44]
B
It is the final episode of season one of the Wire.
- [22:49]
A
What?
- [22:50]
B
Yes, I swear to God this is true. They ask McNulty how he found the office above the strip club.
- [22:56]
A
Yes.
- [22:58]
B
Jimmy says, they said, how did you find that? And he says, costar search.
- [23:02]
A
That is incredible.
- [23:03]
B
I swear to God. Yeah, it's 2001.
- [23:05]
A
I gotta go. Yeah, I gotta play that tape. So they're best known for their CRE data platform, but they've massively expanded out of that, so they now have the hotel data company, str.
- [23:16]
B
Yeah. One of the first things you do when you're underwriting a hotel acquisition is you ask for the start reports.
- [23:20]
A
When you were a young buck in the Starwood hotel team, I'm guessing you were living and dying by that. Right?
- [23:24]
B
Right. The middle tabs, because you want to see segmentation. Don't just look at the first one. Go to the middle. Go look at day of week. Go look at the weekends. Transient versus versus, not versus Corporate. That was a really smart acquisition, I would say. But what has been more controversial is their push into the residential home data space. They bought homes.com in 2021. They've invested billions of dollars. Some would say incinerated billions of dollars. And recently, the stock, which had performed tremendously well for a long time.
- [23:52]
A
Oh, yeah, by the way, we should say. I mean, they went on a tear in the 2010s. No matter what came at CoStar, stock kept popping. It was a great time.
- [23:59]
B
It has not been a great time recently. And it has attracted the interest of Dan Loeb. He recently was on another podcast. Dan, come on our podcast. I know you invest in real estate at your family office, and we should just read some of these letters because they're tremendous. And also, the fact that Andy Florence fought back tells you a lot about Andy Florence.
- [24:16]
A
I mean, Andy Florence is a. He's Sicilian.
- [24:20]
B
Here's what Dan Loeb had to say. The company's anemic performance can be ascribed entirely to the misallocation of billions of dollars into homes.com overseen by a feckless board of directors that has failed to protect shareholders from Mr. Florence's quixotic quest while rewarding him with exorbitant pay packages like an elementary school child. Who wins a prize even for finishing last. Mr. Florence's bonuses are perhaps the costliest participation award our firm has witnessed. You can see what he's trying to do, which is close the loop around all of commercial real estate and residential real estate data.
- [24:52]
A
Right. Any significant real estate transaction he wants to have insight and leverage into. He famously bought Matterport, which is one of those companies that kind of the prop tech exits that actually worked out for them at least. I think he paid $1.7 billion for it.
- [25:07]
B
I thought Matterport was actually good product, except for the fact when people take the pictures of the bathroom and they keep the camera where you can see in the vanity, you look like you've got the predator in there. Don't do that. But just listing out the things they own, I mean, it's really kind of staggering. It's LoopNet apartments.com, homes.com, 10x str matterport. And they didn't really have new home construction. It was a real void for them. And so this fills that. It's a big price to pay. It's all cash. Really nice exit here from Mid Ocean.
- [25:37]
A
800 million. Nice. For Zonda. 40th acquisition, I believe.
- [25:40]
B
Yeah. So they've really built this by acquisition.
- [25:42]
A
How much did they pay? What, 7 north of. $7 billion, I think, for all these put together. What is CoStar's market cap right now?
- [25:49]
B
Let's check.
- [25:52]
A
Their market cap is $13.1 billion.
- [25:57]
B
Oh, okay, so that's not great.
- [26:00]
A
Their stock is down 62% over the past five years.
- [26:03]
B
Right. So it should. This used to be a $26 billion company.
- [26:09]
A
Zonda is considered to be one of the more definitive sources of new home construction data. They have great stuff from the builder side of things, and they also have the demand side of things.
- [26:19]
B
Yeah. So it's what's being built where forecast. So again, if you're a commercial real estate professional, the lines are being blurred, particularly with build to rent.
- [26:28]
A
Oh, yeah.
- [26:29]
B
Between commercial and residential. So you kind of have to have it. And if you have to have CoStar, it makes CoStar more valuable if it's bundled in ultimately with that or it makes it really valuable as a standalone. So you see what Andy Florence is doing. Whether or not the market's going to appreciate it, we shall see. And he's paying a lot of money for these things.
- [26:52]
A
Will, you've worn many hats in your glorious life so far. Pro baseball player, thespian, tornado remediation specialist. I want to ask which was your
- [27:01]
B
least favorite the first two, ugh, they were dreams. The third was a nightmare. Turning into a dream though. However, if you asked me a few months ago, I would have said Excel Monkey was my least favorite. Modeling out the debt tab was really, really annoying. Maturity dates, extension options, rate caps.
- [27:17]
A
Ugh.
- [27:19]
B
My spreadsheets were beautiful. But at what cost?
- [27:22]
A
Sounds like you had good roi, but your roi BD return on invested brain damage, not so good. So what changed?
- [27:29]
B
I discovered Loan boss. All my loans live on one screen, no more. Let me just pull that up while I jazz hands a capital partner. And the extension option tracking with automatic notice reminders. I used to have a post it note on my monitor for that. A post it note?
- [27:42]
A
A 10 in this day and age?
- [27:44]
B
Don't. I'm not proud of it. But the one click DSCR testing every lender adjustment, every unique requirement. Automated. Oh my God.
- [27:52]
A
No more getting surprised by your own cap stack listeners. Check him out@ LoneBoss.com that's LoneBoss.com and tell them the promote sent you
- [28:03]
B
in your head. In your head. Zombies.
- [28:09]
A
No, what's in your head? This is bad. Inevitable, but it's bad.
- [28:19]
B
It's been a slow moving car crash for better part of a decade.
- [28:24]
A
So Zom Living, which is a major multifamily developer, is prepping, as the promoter understands it, to file for bankruptcy.
- [28:31]
B
Jesus. Yeah, it's been a tough multifamily cycle for a lot of people. So is this from a bunch of bets that have gone poorly?
- [28:40]
A
I think this is just the consequence of a legal massive defeat that they recently had in Arizona. So here's what happened. According to the judgment, ZOM Living in 2019 was approached by a developer called Gray. And Gray said, hey, we have this 13 property, one and a half billion dollar pipeline of sites that we've assembled over a decade or so. Why don't you JV with us on these five sites? Zomb's like, that sounds good. They had no presence at the time in Arizona and so they started picking the brain of Gray about the market. And according to this court battle, they were drilling them for information, et cetera. And when they were done extracting what they needed, they're like, all right, ciao, we're going to do this ourselves. And apparently this was such a devastating blow for Gray that it ceased to exist. It went out of business in 2020.
- [29:26]
B
So that may seem just like a well, guys like you should have had something signed.
- [29:30]
A
Well, they did.
- [29:30]
B
That's the whole crux of this, that Zahm had signed A non circ agreement.
- [29:35]
A
What is a non circ agreement and how prevalent are they in real estate development deals?
- [29:39]
B
So in real estate development or finance, there's a lot of non solicit non circs. We won't go around you to do the deal, we're agreeing to do it with you. And these are really serious. I've never seen an NDA get prosecuted. You sign them on everything, you blindly sign them. But this is really serious because a lot of the real estate businesses with operating partner and capital, and if you are the operating partner, you bring the deals and that's your whole value proposition. Especially for Gray here. I'm assuming that they were contributing them at some markup considering it took 10 plus years to put together this site.
- [30:11]
A
Yeah, they put the site together. They approached a developer with better or broader base of equity sources and also national presence to go and build these things. These were, let's call it a few thousand units of development. So pretty significant project.
- [30:25]
B
It's really significant. And so for Gray, you need to make sure you're getting paid. And so generally in the joint vent, you sign a non cirque, which means you can't go around us through these deals or if you do go around us, you have to pay us. And that's sort of agreed upon. What they tried to do, I guess not allegedly anymore, was just go around them and cut them out of the deal.
- [30:42]
A
A Maricopa county jury found that Zahm had in fact squeezed them out of the JV. And the judgment, staggering $323 million. There's not that many firms that can survive that. So when this hit, I'm like, is that the end? And it turns out it just might be.
- [30:58]
B
It's important to differentiate between the end. It's the end of zom potentially. I don't think it's the end of this company. They are just going to throw this thing into bankruptcy. Be like, come collect, I dare you. Start up again.
- [31:08]
A
Yeah. Restructuring is a beautiful thing.
- [31:10]
B
The quotes from the head of Gray, who's Bruce Gray, kind of says it all. It's sort of basic playground stuff that I'm teaching my son. You can't enter a deal then go around the very people that made it possible and offered you a seat at the table. Contracts matter. They do.
- [31:24]
A
Contracts matter.
- [31:25]
B
It's an important lesson for everybody in that you may think that these contracts you sign have no meaning or it's all just suggestions. There's this saying that you can't do a good deal with a bad person. Some people the best contract can't protect you and other people you don't need a contract at all. They do matter, especially when it's these types of things. Certain things are really hard to prove. Like getting a eviction for a non monetary default or something like that from a commercial tenant absent extenuating circumstances. Generally pretty hard. This though where the whole reason Gray exists. Their whole business is finding these deals, putting them together and then bringing in capital. And if you're trying to go around that and make that not work, that's hugely damaging.
- [32:06]
A
I am still a little bit taken aback by the size of this judgment. $323 million is a lot of money.
- [32:11]
B
There are gone. They've had to front millions of dollars of legal expenses. It's not great, but think of it this way. How much are 5,000 brand new development units in the Sunbelt? What were they worth in 2022?
- [32:24]
A
Zom is an interesting company in itself. You would think. What the hell is this name? So it was founded by a Dutch oilman called Joost or Joost Zeider Velt. The Dutch.
- [32:35]
B
The Dutch.
- [32:35]
A
And ZOM is an acronym for his name and whatever the Dutch word for oil is, which I'm not going to undignify myself by saying here, it was largely his own money and private Dutch capital. But today it's run by Greg west and Matt Adler is the cio and the investor base has shifted from private Dutch capital to US institutional capital. For example, AEW has been one of its development partners in the past. So pretty solid. They're a big shop.
- [32:59]
B
You talk about 323 million, let's call it 300 units. So assuming 2,000 units, which I think was their Arizona pipeline by itself, I mean that's $600 million roughly a value. I mean what's the promote worth? What's the cash flow worth? It's worth a lot. Plus all the legal fees, all the damage, the company not existing. I'm sure a bunch of that is contingent liability as well. So it's a huge number. But they could have made probably 50 million a promote tack on all of the other things in there and the fact that they are gone. It's totally justified. And I for one am for contracts mattering.
- [33:32]
A
Let's say they do file for bankruptcy. We believe it's imminent. Unwinding that portfolio is an interesting process in of itself.
- [33:38]
B
This is the type of thing that great returns are made out of. And when you have a forced seller like this and frankly, who do we know who's recently raised a Sunbelt development fund. It's going to be someone opportunistic who has the development capabilities or alternatively someone who is opportunistic and has an operating partner with a development capability. So wouldn't shock me to see somebody like a KKR come into this with an operating partner like a Starwood Capital come in potentially with a development partner or just doing it internally. This is a big opportunity because these markets have been institutional favorites for a long time and they've obviously faced quite a bit of challenge, mostly from supply recently. But as that supply pipeline slows down and you're delivering into a more favorable environment, that could be pretty valuable. So I would expect these to be very hotly contested.
- [34:29]
A
The way that we found out about this imminent bankruptcy is I started hearing from people who were getting laid off at ZOM and the reason for the termination was like, hey, we're about to file for bankruptcy. So you know, that's what's happening. These things get really messy and contracts matter.
- [34:44]
B
Contracts do matter. They do indeed.
- [34:53]
A
That's it for the promote podcast this week. Billionaire casino cowboys costar running riot on the real estate data landscape and a story development firm heading for the Chapter 11 exits.
- [35:03]
B
We'll be back next week with more CRE Insider goodness and some incredibly wild takes. I think. I think we're getting a little bit looser this summer and that's what it's all about.
- [35:11]
A
The improv is the spice of life.
- [35:13]
B
And also thank you to our sponsors who make all this possible.
- [35:17]
A
Bravo Capital, a leading Hutton Bridge lender that you can find@bravocapital.com LoanBoss, a best
- [35:23]
B
in class CRE debt management software that you can find@loanboss.com and Real Property Captive,
- [35:28]
A
the first group captive for mid market owners. You can find them at rpcaptive.com William I normally say I'll see you next week, but hopefully I'll see you tomorrow.
- [35:36]
B
I know. Can't wait to see you.
- [35:37]
A
Hopefully.
- [35:38]
B
In the bustling metropolis of New York City.
- [35:41]
A
Screw the haters. All right. Thank you so much.
- [35:44]
B
Thank you.
- [35:45]
A
Ciao.
- [35:54]
B
Sam.