Wartime Allocators & Rialto's Double Agent

Summary

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The Promote Podcast – “Wartime Allocators & Rialto’s Double Agent”

Host: Hiten Samtani (ten31 Media)
Co-host: Will Krasne
Date: March 11, 2026

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Episode Overview

This episode dives deep into the shifting landscape of Commercial Real Estate (CRE) amidst global turmoil, policy whiplash, and lurking deal wildcards. Hiten and Will break down three major industry stories:

• The impact of the Iran conflict on CRE allocators and markets
• A seismic policy shift threatening the build-to-rent housing segment
• The increasing scrutiny on special servicers—especially Rialto—and their controversial workouts with bondholders

The discussion is candid, insider-y, and touched by the usual dry irreverence that characterizes The Promote Podcast.

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Key Discussion Points & Insights

1. CRE Allocators and Wartime Uncertainty

(Timestamps: 13:16–19:36)

The New Era of Market Volatility

• The Iran conflict has turned already jittery markets upside down.
  • Quote: “We need to make sure we have the blaring Chiron: markets in turmoil.” — Will (13:54)
• Energy and oil prices have skyrocketed (oil hitting $120+) and zigzagged violently, spooking investors.
• Inflation, already a primary worry, looks set to stay elevated, even in the face of weak job numbers.

Impact on Allocators and Investment

• Institutional fund flows have ground to a halt.
• “He who controls the nuclear codes makes the rules.” — Hiten (18:33)
• Global allocators (e.g., Norgis, BlackRock) are spooked; even at major conferences, sentiment is downbeat.
  • Quote: “People are very scared.” — Hamish McDonald, BlackRock Asia PAC (16:44)

Uncertainty Breeds Paralysis

• “Not yet is as good as no.” — Will (17:22)
• With war’s unpredictable escalations and shifting policy, big CRE deals are retrading, stalling, or outright dying.
• Long-term planning is nearly impossible in a market where government triggers for war are hair-quick and messages are mixed.
  • Quote: “Investors hate uncertainty. …As long as I know what [the rules] are, we can figure out a way to build 99 units. But when it’s just hair trigger, we might go anywhere at any time. That makes it really, really hard.” — Will (16:06)

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2. The Build-to-Rent (BTR) Backlash and Policy Shock

(Timestamps: 03:32–07:57)

Shifting Rules and Industry Disruption

• The Road to Housing Act: a major policy move restricts institutional ownership and forces sale (after 7 years) of BTR communities to individual owners.
  • Quote: “What this essentially meant is that if you build or buy a built-to-rent community, you had to sell it to an end user…in seven years, come hell or high water.” — Will (05:38)
• The law features loopholes that practically invite gaming—such as exceptions for “three or more attached units,” with hosts joking about 99-unit condo filings in NYC as precedent.
• Arbitrary timelines and definitions are likened to bad H1B visa and housing laws, causing perverse workarounds.
  • Quote: “When you create stupid policy, you kind of encourage stupid workarounds…” — Hiten (07:03)

Economic and Constitutional Implications

• Significant slice of new housing supply (BTR) is now at risk. About 250,000 homes in the last few years, now in the crosshairs.
• Discussion over property rights, deed restrictions, and likely legal challenges.
• Private equity as an easy villain in the housing debate—policy often driven more by optics than logical economics.
  • Quote: “Glad to see that the business utopia we were promised by this administration is essentially just violating everyone’s property rights.” — Will (07:36)

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3. Special Servicer Wars: Rialto’s "Double Agent" Moves

(Timestamps: 26:20–34:44)

Increasing Scrutiny on Special Servicers

• Spotlight on a Long Island City “creative office” building and a controversial workout engineered by Rialto (special servicer).
• Background: Asset owned by Atlas Capital, Invesco, Partners Group. Defaulted on a $300M CMBS loan.
• Rialto quickly struck a deal before a new, lower appraisal could strip them of control:
  • Two-year extension
  • Discounted payoff ($223M on a $300M loan)
  • Sponsor kicks in ~$19M, but most goes into Rialto-controlled reserves and fees—not to bondholders.
• Quote: “It’s not what you owe. It’s what your special servicer lets you get away with.” — Hiten (26:30)

Bondholder Frustration

• Bondholders furious over lack of transparency and principal dilution.
  • Quote: “This modification crystallized future losses while reallocating principal that could have been used to pay down bondholders into a reserve account.” — B of A CMBS Group, relayed by Hiten (31:08)
• Rialto mostly comments “on background,” avoiding on-the-record accountability but spinning for the trade press.
• Broad systemic tension: Special servicers have opaque incentives, extracting fees while bondholders take losses.

Structural Issues in CMBS Workouts

• The entity selecting the special servicer is often the controlling class rep—typically also the servicer (Rialto in this case)—heightening conflicts.
• “Rent seeking” and “black box” are recurring metaphors, with a prediction that this will drive litigation and further scrutiny as maturities hit.

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4. CRE Shockwaves: Declining College Enrollment

(Timestamps: 20:52–25:51)

A Tectonic Demand Shift

• The number of US high school grads peaked in 2025, expected to decline 13% by 2041.
  • Quote: “That 13% is tectonic.” — Will (23:04)
• The “meds and eds” mantra—underpinning multifamily, office and retail investment strategies for years—is suddenly at risk.
  • Example: George Washington University sold off major campus assets to Amazon, reflecting new pressures even for prestigious schools.
• Fewer students, rising tuition, skepticism of ROI on college driving a decline in ancillary CRE demand (student housing, faculty homes, campus retail).
  • Quote: “The things you could rely on for decades, really, maybe just aren’t there anymore.” — Will (24:32)

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5. Other Notable Deals & Moments

Massive Crowdfunding Meltdown

• 1500 Market (Center Square, Philadelphia) traded at one-third its previous price following the Nightingale crowdfunding scandal.
• Dissection of a Jeff Epstein–backed Manhattan condo project and the normalization of “shady money” in NYC real estate.
  • “Developers tend not to ask too many questions… nothing was unusual here except that this was Geoffrey Epstein.” — Hiten (11:44)

Running Joke: CRE’s Black Boxes

• “Another black box of a program.” — Hiten, on Galvanize and climate-driven investment narratives (03:23)

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Notable Quotes & Memorable Moments

• “He who controls the nuclear codes makes the rules.” — Hiten (18:33)
• “Not yet is as good as no.” — Will (17:22)
• “When you create stupid policy, you kind of encourage stupid workarounds…” — Hiten (07:03)
• “It’s not what you owe. It’s what your special servicer lets you get away with.” — Hiten (26:30)
• “That 13% is tectonic.” — Will (23:04)
• “The things you could rely on for decades, really, maybe just aren’t there anymore.” — Will (24:32)

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Segment Timestamps

• CRE Market/War Discussion: 13:16–19:36
• Punch List: Major News Stories: 03:32–12:15
• Declining College Enrollment Impact: 20:52–25:51
• Special Servicer Spotlight (Rialto): 26:20–34:44

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Final Takeaways

• Global conflict is paralyzing CRE allocators and freezing capital flows.
• rash, headline-driven policy shifts (e.g., Road to Housing Act) threaten housing supply and rational investment.
• Special servicers, with shadowy incentives and little oversight, are becoming the big wildcards in the CMBS world.
• Foundational “safe” CRE sectors (like those tied to universities) are facing new, existential threats as demographics and demand shift.
• In each story, insiders see inefficiencies, loopholes, and unexpected opportunities—but also warning lights flashing across the industry.

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(For full CRE insider goodness and more “bad-boy” stories, catch the next episode or subscribe at The Promote Newsletter.)

Transcript

[A]

Let's go back to fifth grade.

[B]

My sculpture project about the Mayans won awards. So happy to.

[A]

You lent your classmate 10 bucks for lunch money. He can't pay you back, so you cut him a deal. Fine, give me seven bucks.

[B]

But in two years, I am a benevolent lender, very generous.

[A]

But here's the thing. You're also last in line in the cafeteria, so everyone else gets served before you. So you've just agreed to eat. A $3 loss, and you're still last in line.

[B]

And on Taco Tuesday, no less.

[A]

Your classmates are losing their minds. Why would he agree to take the hit? But you don't care because you got your classmate to pay you $1.50 in exchange for that term. And your other classmate, Dave, lent you $6 of that 10.

[B]

And let's be honest, who cares if Dave Lo.

[A]

Welcome back to the Provoked Podcast, your insider guide to the money and mania of the CRE markets. I'm Hatan Samtani.

[B]

And I'm Will Krasny.

[A]

A shout out to our sponsors, Bravo Capital, a leading HUD and bridge lender

[B]

and loan boss, the best in class, CRE debt management software.

[A]

This week, we have no choice but to tackle the topic of war.

[B]

What is it good for?

[A]

What is it good for? The conflict with Iran continues to roil markets, and CRE's biggest allocators are in sixes and sevens. Fewer young people are going to college, which puts a big question mark on what's historically been one of the biggest drivers of real estate activity. And finally, with special servicers continuing to play an outsized role in the market, some of their more, shall we say, exotic strategies are coming under a pretty harsh spotlight.

[B]

Exotic? Scummy. Tomato, tomato. Let's get started with the punch list. Our signature rundown of the newsiest news in crew.

[A]

I'm pretty galvanized, baby.

[B]

So, Tom Steyer, who is Mount Rushmore Farallon, firm he founded in the 80s in San Francisco.

[A]

Heavyweight.

[B]

Yeah. Smartest of the smart money. Hasn't been involved for a while. Had a very kixotic. Quixotic.

[A]

Quixotic?

[B]

Yeah, Quixotic run for president. Came off terribly. He's now having a slightly less but still pretty quixotic run for governor. He founded a firm called Galvanize, which was committed to decarbonization of real estate.

[A]

I thought that was out of style. This is the thing that fifth wall and a bunch of those guys raised tons of money on a couple years ago. But since Trump came in, it's just the most unfashionable thing now.

[B]

Well, you've got two guys. You've got Chris Sacca with lower carbon capital, and then you've got Tom Steyer. So you've got two legends with great track records who are switching to this. No offense to our guy Brandon Wallace, but the returns for those two are slightly better. Galvanize just raised about $370 million for the strategy. And what I think is interesting about it is that they're using the AI boom as part of their fundraising narrative. But just the contrarian view, which is that AI and data centers are going to be pushing up utility costs and we're going to figure out how to bring those utility costs down. So we'll buy stuff and increase NOI that way, which. Sure, sure, Jan.

[A]

Right. Are they trying to buy buildings and then is this a real estate play combined with smushing down those costs or what?

[B]

It's like a real estate OPCO play. It looks to me sort of like they've just been buying regular industrial multifamily and doing like the Freddy Green rewards type renovations.

[A]

Another black box of a program there.

[B]

Again, we talk about how narrative drives, flows, and this is a way in which the counter narrative can also drive flows.

[A]

All right, next one. This is fairly seismic.

[B]

Road to housing.

[A]

Road to perdition.

[B]

The Road to Housing act is a pretty tectonic shift. President Trump had issued executive orders banning or limiting institutional ownership of single family rentals after the Great Recession.

[A]

That has become such a major part of the equation.

[B]

And a lot of those firms were sort of found on the backs of going to the courthouse with cashier's checks to buy huge swaths of foreclosed homes in greater Atlanta and Tampa and all those places.

[A]

So Starwood made a killing out of that strategy.

[B]

Starwood, Blackstone did it. Invitation homes. Amh. There was really a whole industry that birthed around.

[A]

You were going to say cottage industry, weren't you?

[B]

I was boom. And I shifted towards cottages and they've done sort of dedicated build to rent. So essentially building houses for the purposes of renting them out. So you're not buying existing homes. That's really been the case for the last four or five years.

[A]

Yeah. So in contrast to say a Lennar or Tolle, which builds homes with the end user being an individual buyer who would then live in that home, this is like we're going to keep these on our books and rent them out to this growing class of affluent people who are not necessarily looking to put that white picket fence, American dream home ownership thing.

[B]

Home builders would build these, then firms like Pretium or BB Living would buy them or in some cases those firms have their own in house development capabilities and would do it themselves. And so Invitation Homes just bought a build to rent development company because again that's really where the industry is going is towards these large dedicated built to rent communities that are detached homes. The executive orders banned institutions from owning single family rentals, but there was an explicit carve out for btr. So not great. But again the industry had shifted away from that over time. Last week the bill was released and there was a provision slipped into it which basically it was a forced sale for any institution that owns a BTR community within seven years.

[A]

It's always curious to me how they come up with these arbitrary numbers about turnover time. Is this like the a fund life cycle basically or what?

[B]

It makes absolutely no sense. And what this essentially meant is that if you build or buy a built to rent community, you had to sell it to an end user. So you couldn't sell it to another investment firm, you had to sell it to to a homeowner in seven years come hell or high water. There's a lot of things wrong with that. It is preposterous policy. Build to rent homes are just not going to get built because no one's going to want to take that risk. And then also you're banned if you're an institution from buying these things. Something like a quarter million homes have been built as BTR over the last four or five years. There's about 60,000 a year. Those are homes that are essentially not going to get built. Now there's one carve out which is that the definition of home is two or fewer contiguous buildings.

[A]

Oh my God. This is being set up to be gamed so hard.

[B]

Well, this isn't even the best way to game it. So if you have three or more attached units that is exempt from this, so an attached townhome community exempt. But if you had villas or cottages that were sort of duplexes, those are part of this. And again that's a huge portion of what has been built as btr. Now, now the language of the bill also says at seven years though, you don't have to sell it, you actually just have to offer it to the market. Now I know what you're thinking and yes, this is exactly what's going to happen where a three bedroom, two and a half bath in Murfreesboro, Tennessee is going to be offered for $9 million for 60 days to satisfy the requirement.

[A]

This is a Little controversial. When you get an H1B visa in the US you have to basically advertise that you can't find an American candidate that could do this job. So what people do is they just stick the ad in some fricking random paper, incredibly small font, they run it for 30 days consecutive and that's it. The broader point will is when you create stupid policy, you kind of encourage stupid workarounds to that policy.

[B]

Right? Yeah, you do.

[A]

New York, the 99 unit constraint is leading a lot of developers to just basically file multiple plans on the Same site for six 99 unit buildings, for example.

[B]

And also just to be totally clear, this is completely against property rights because a lot of the communities in btr, if you're buying from a home builder, they'll be deed restricted for for a period of time. So essentially what the government's saying is like your property rights kind of don't matter which. There's a constitutional issue there. So glad to see that the business utopia we were promised by this administration is essentially just violating everyone's property rights.

[A]

The big bad private equity is the easiest punching bag to have in the whole housing debate. The most emotionally fraught asset class. Obviously it's just easy to do this. Okay, next one. So we talk a lot about finding opportunity in broken capital stacks and we've seen so much of that over the last, call it 18 months. There's also opportunity to be found in the portfolios of convicted felons.

[B]

Yeah, there's alpha in all kinds of places. And what crowdfunding giveth and crowdfunding can take us away.

[A]

So 1500 market in Philadelphia, massive hulking complex also known as Center Square, been in play for a while. And now we have a buyer.

[B]

PMC Property Group. And Dean Adler, pretty big name in there, of Lupert Adler fame, one of the leading lights of PA real estate. They are buying this for what, just under $95 million.

[A]

That is what, like a third of what? Nightingale. Nightingale, Obviously the epic Ellie Schwartz vehicle that is responsible for what is said to be the largest crowdfunding scam in real estate history. Yes, he had gone on this buying spree, buying up these hulking office towers all over Atlanta. We've talked about the Atlanta Financial center as well.

[B]

Well, he never bought it. That's sort of the problem.

[A]

That's true. Sorry, important clarification there. But basically left quite a large and impressive portfolio. So PMC and Adler are going to do what? An office to resi play, I'd imagine.

[B]

Here it's such a Big complex that they're going to do a little bit of this, little bit of that.

[A]

Little column a, Little Column B.

[B]

500 apartments, a 300 key hotel, and then they're still going to keep 500,000 square feet of office. That's how big this property is. So you talk about price per pound. This is pretty stinking cheap.

[A]

Permit me a little media insight baseball here on this particular deal that I found fascinating. Of course it had to go wind itself through the courts. CBRE was the court appointed receiver on this and was marketing this. Normally in a court appointed process, the sale price and all of the kind of financial details are out there for everyone to see. CBRE though was so desperate for Inc and Green street that they basically asked the court to hold off on disclosing all that so that they could get that hit in Green street, which is where all the institutional investors hang out.

[B]

It's the paper record.

[A]

You talk about having kind of the dream LP in your project. Someone who just writes a big check, doesn't ask you too many questions. Really fascinating example. Coming out of Manhattan, you want a

[B]

guy who's really busy with other types of business, who's got, you know, got an island, you know, maybe he'll invite you to for a crazy party when the deal goes. Well, we found out one of those this week with Jeff Epstein. I'm talking about Jeff Epstein, the New York financier.

[A]

What the hell are you talking about? So there's a project, Madison Square park. It's being developed by a guy called David Mitchell. Some people might remember that name because he's also Zeal Feldman's partner on this new affordable housing venture called Good Homes. He tapped Jeffrey Epstein to fund one of his kind of splashy Manhattan condo projects.

[B]

The real deal had an article calling him like the embattled David Mitchell and being like, how is he so tied into Jeff Epstein? He was even like meeting with Saudis on behalf of Epstein. They were very intertwined. And then Jeff put this in, did no diligence. And a very splashy condo project. Yeah, one of the buyers was J.

[A]

Lo herself.

[B]

Indeed.

[A]

On the 6 pre or post Aflac.

[B]

I can't quite keep the timeline straight,

[A]

but apparently Epstein cut a really nice deal here. So not only did he serve as a regular lp, he also invested in the development vehicle, which basically gave him a really nice return profile. There's a quote in here from a rival developer, I guess, who said we would trip over ourselves to do that deal. New York real estate has always kind of been a black Hole for shady money. Developers tend not to ask too many questions about it. Epstein thing aside, this is just. This is how it works, right? Nothing was unusual here except that this was Jeffrey Epstein.

[B]

Totally. It's par for the course. The org chart's crazy for a deal this size. Takes longer than you think, it's more expensive than you think, and everyone makes a 17 and says eh. Okay, great.

[A]

All right, that's it for the punch list. We'll be back in a second with War. All right, I'm here with Aaron Krovitz from Bravo Capital. Aaron, let's get right to it. What's the story behind this mythical 100% HUD approval record?

[C]

It's pretty straightforward. We have an amazing team. We're pure play hud. We're focused on bridge to HUD all day. We're both fully HUD licensed, and we also offer balance sheet bridge financing where we could finance deals over $100 million, just like we did in Miami, Brooklyn, and Jersey City.

[A]

And what's the secret sauce? How do you put it all together?

[C]

It's our underwriting. We don't rush deals to market and hope they stick.

[B]

We.

[C]

We know what HUD wants before we submit, so there are no surprises. And we have a real balance sheet. So when we go, we go.

[A]

You were telling me when we were chatting offline that you closed a HUD Express Lane deal in four days. That's absurdly fast for hud.

[B]

Hey, Tim.

[C]

That's why we get up in the morning at Bravo. We're here to break records. We're here to innovate. And when you have tight documentation, the right underwriting, that means speedy approvals and

[A]

speed, means the sponsor can close quick. Thanks, Aaron. Good to have you on.

[C]

Thanks. Attend and you can find [e-mail].

[D]

We've carried out some of the most powerful and complex military strikes and maneuvers the world has ever seen. We're achieving major strides toward completing our military objective. And some people could say they're pretty well complete.

[B]

You've said the war is, quote, very complete. But your defense secretary says this is just the beginning. So which is it, and how long should Americans be?

[D]

Well, I think you could say both.

[A]

So last episode, we made passing reference to the conflict in Iran, which had just started. Now we're. We're very much in the thick of it, and markets are completely discombobulated. So we got to talk about what

[B]

that means for CRE on our video. We need to make sure we have the blaring Chiron markets in turmoil. But yeah, look, this is a really big deal for cre. We've been in an era of high rates for the past few years. Trump's trying to get his hand picked. Fed guy who again, in the height of the Great Recession, he very much cares about inflation. Yeah, cares about inflation. But oil prices are skyrocketing. Oil and energy is a huge input into inflation. And so oil was over $120 a barrel. It's come down a little bit.

[A]

The volatility is something we should point out here. It's been zigzagging like crazy over the last few days.

[B]

It was up like 25% or something in a week. And some of the FE majors moves were some of the most violent in memory. It's going to impact the inflation numbers. Anything with energy and input is going to get more expensive the longer this goes on and that's going to really offset declining rates.

[A]

Some of the world's biggest allocators are obviously major players in the energy markets. Think of what Nikolai Tangen is going through right now from Norgis.

[B]

I just imagine he's just very chill, hanging out, enjoying his socialized podcast, socialized health insurance and his podcast.

[A]

We're making light of this. But obviously this is a major. Think of what happened in New York city in the 1970s during the oil crisis. In fact, things had gotten so bad that the great families of New York real estate actually got together, corralled by Lou Rudin and prepaid their property taxes to the city for some reason. I can't imagine any of them doing anything similar now. Just a different breed.

[B]

They're not really the great families anymore. You'd be getting Bruce Flattening Connor Teske. Yes, yeah. To try to do that. But yeah, this is what happens. It's going to make development much more difficult. Oil and energy prices going up are tax on consumers. Consumers have already been stretched. We've talked a lot about the supply side of the equation for multi especially now we're going to have to wrangle with the demand side of the equation. Like what happens if that goes down?

[A]

This is also will right? The ultimate vibes question. The very tangible impacts on this is the ultimate vibes question because you have this war now. We just kidnapped the president of Venezuela a few weeks ago. The point is under this administration, without even making a political point about right or wrong, if the trigger for war can be that quick, what does that mean for long term investment decisions by allocators?

[B]

Absolutely. Everyone hates uncertainty. Investors hate uncertainty. It's almost like Give me whatever the rules are and as long as I know what they are, we can figure out a way to build 99 units. But when it's just hair trigger, we might go anywhere at any time. That makes it really, really hard. And if you're a global allocator, we're not just talking about the US we just talked Heinz is expanding into the Middle East. Like what does that look like right now? What happens to trying to buy Asia real estate?

[A]

The Perry conference and some of the

[B]

stuff people were saying, very timely. Some of the quotes I thought were really, really on point. On stage speakers noted the war was already having an impact on sentiment, even as many said it was too early to judge the long term ramifications. People are, quote, very scared.

[A]

People are very scared. Yeah. Hamish McDonald, BlackRock's Asia PAC guy.

[B]

Yeah. And he said political risk is now front and center, although adding that Asia is, quote, relatively safe, but nothing is locked in on the capital raising or deal front. And that really says it all. You always want to have a minimal time in the market because only bad things can happen if you're in the middle of raising a big real estate fund. This is something that you've got to

[A]

contend with when you're raising money. LPs are looking for a reason to say no. Right? The success to raising money consistently is just barrel through each reason. This is a pretty damn big reason to say not yet. Right? And not yet is as good as no.

[B]

Not yet is as good as no. Because it takes so long for these wheels of the big institutional allocators to turn. And also how many deals in the last week that just got retraded or dropped because the 10 year went up 25 basis points in a week. It makes it really hard for transactions to happen. We've had low volume of transactions because of a bid ask spread and now there's going to be more potentially because of uncertainty.

[A]

And we also have no real endgame in sight here. The administration's kind of sending mixed messages about A, what the goal of this war is, B, how long it could potentially last.

[D]

We could call it a tremendous success right now as we leave here. I could call it. Or we could go further. And we're going to go further.

[B]

We also have the dueling forces of the worst jobs report since the pandemic.

[A]

Our guy JP has something spicy on that.

[B]

He did. On a jobs report like that, you would have imagined that rates would have come in pretty significantly. And in fact the opposite happened because people were overwhelmed with fear that oil was going to increase in price and drive further inflation. You generally think in a war, especially a war where there's a bad job market, everyone's piling into safe assets. That's not been the case at all.

[A]

You typically think about real estate allocation and the ensuing investment as he who has the gold makes the rules. Right. Maybe we need to modify that. He who controls the nuclear codes makes the rules.

[B]

Yeah, and I think this final quote from Perry kind of says it all. Offstage, fund managers were even more candid. Some of the participants said their major worry is that a prolonged war will drive up inflation and borrowing costs, which will not just dent returns, but may also weaken investor appetite for new deals. And that is what this entire industry is built on. We've seen what's happened over the last year to date essentially with kkr, Apollo, Blackstone on private credit fears, fears that AI may not generate the returns that we thought. What happens if investors stop allocating to new funds or looking to do new deals? These things are a flywheel that requires constant motion. And if that motion, God forbid a white boy gets a little motion. But if that stops, these things could be in for a world of hurt.

[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 least favorite?

[B]

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. Ugh. My spreadsheets were beautiful. But at what cost?

[A]

Sounds like you had good roi, but your ROIBD return on invested brain damage, not so good. So what changed?

[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, a 10 but the one click DSCR testing every lender adjustment, every unique requirement Automated oh my God.

[A]

No more getting surprised by your own capstack listeners. Check them [e-mail] that's loanboss.com and tell them the promote sent you.

[B]

There's just fewer students going to school.

[A]

Seems like a pretty basic nothing insight, but I think it defines the problem here. Taking the skyrocketing price of tuition and the amount of obscene debt you have to take to even just go to a normal school nowadays. Combine that with the feeling that some of the youths have.

[B]

The two youths to what?

[A]

That higher education isn't really the path to a higher career.

[B]

Now when I talk about things that keep me up at night, like this is. This is really it.

[A]

This.

[B]

And like the declining birth rate, the

[A]

maxim has always been meds and EDs, right.

[B]

Every single investment committee memo you see for a multifamily deal talks about or office or retail, talks about meds and ends. Like we are really focused on meds and ends, which are medical and education. Those are the stickiest jobs. They're good paying, but they're also people who are generally going to rent. And it's not just the students, it's the college professors, it's the folks who work at the university, it's the researchers, it's the hospital workers, it's the administrators. And these are tens of thousands of jobs throughout pretty much every major city in America.

[A]

Not to mention the catalyzing effect that a higher education campus can have on all the real estate around it. Right. You think of NYU and how that area has been transformed. Or even more dramatically, Harlem is now Morningside Heights because of Columbia. Yeah.

[B]

And they just tend to expand over time. It's important to say who said that there are fewer people going to school. Like in what city is he from?

[A]

Philly, the cradle of higher education in

[B]

the U.S. this was Anthony Bracalli, the associate vice president for planning, design and construction at Drexel, which is like one of the expanding, previously expanding universities in Philadelphia. A major, major shift. And it's going to require a change in how firms underwrite investments because you can't rely on. Well, you can like this again, these things can last longer than you. People are still. AOL still makes like a billion dollars of ebitda. But you can't just sort of bank on a no name college or even like a mid tier college driving economic value right now.

[A]

Let's put some numbers to it, right? The total number of annual US high school grads peaked in 2025. It's expected to decline by 13% by 2041. I mean that's significant.

[B]

And there was an uptick of students born prior to the 08 financial crisis and that's been keeping this train going. But that boom is burning off in the form of lower college enrollment. And yeah, that 13% is tectonic.

[A]

It's huge. Yeah.

[B]

Can't even express how massive that is. All of these ancillary services that are necessary to support campuses, those are going to get hit. What happens to all of these jobs? It's emblematic that we're looking at this massive paradigm ship between AI, how entry level jobs work. This type of stuff happens. I mean, it changes everything.

[A]

Spare a thought for my guys at the student housing operators. How are they going to kind of grapple with all this?

[B]

They already are. You're seeing schools go bankrupt, you're seeing campuses get sold on 10.

[A]

There's been some lower level consolidation in

[B]

some of these schools and that's happened at schools you've never heard of, in towns you've never heard of. But it's coming, it's coming for the lower hanging. Super expensive, but don't really get you a brand name, degrees. Yeah, those schools are really tough. Like if you're Ole Miss, you're going to crush like you're University of Georgia. Like you're going to do great. If you're Prince Princeton, no problem.

[A]

You're basically going between places that have an elite reputation, right? The Ivies and the West Coast Ivies, so to speak. And then the schools that give you that kind of rich, full 360 college life, everything else where you were going there to potentially get a job that pays you 50 grand to start and then kind of work your way up, you might as well go to whatever the new equivalent of University of Phoenix is. Right? That's the thinking here.

[B]

All of these things, you don't need that much of an internal difference because everything's about like the marginal renter, it's the marginal tenant. Those are the people that drive the market. And if you just have that little bit. Go away, man. Like the softness. Literally every memo I wrote at Starwood and Carlisle, this is a strong meds and EDS market with like the stickiest tenants. And it's just the things you could rely on for decades, really, maybe just aren't there anymore. Real estate's always going to be there. All of these things change. But the way we use space changes, the use of space doesn't. So again, if you're just myopic about how you look at one of these things and how you underwrite, or there's only one way to do it. No, absolutely not.

[A]

How quickly do allocators and the biggest fund managers catch on to this kind of thing? The language we're talking about, the meds and EDS language, how quickly do you reckon it starts being asterisks? Just a little bit.

[B]

It's like a weak leasing season, then it's two, and then it's like, oh, well, actually this market's really cheap. We never thought we'd be able to buy in at this type of basis. Or this operator didn't know what he was doing. All of a sudden you're like trying to Cat falling knife.

[A]

Just seeing the. Seeing the auction sites with campus sales, that's a little.

[B]

Think George Washington. Very expensive school. Yeah. And you're like, these guys, they're not hurting for cash. They just sold their Virginia science and technology campus to Amazon for a Data center for $427 million.

[A]

I don't know, dude. That might have just been very smart business on their part.

[B]

It might have been. But at some point, like, if the endowment was big enough, if they felt good enough about enrollment, they wouldn't have cared about. It's like how Hemingway said, you go bankrupt if you were just relying on one of these types of demand generators. Like, you can be in trouble.

[A]

We had an unusually macro episode so far. It's just. We couldn't help it. There's such big things happening right now we needed to talk about. But let's go micro here. This is the kind of thing we live for, baby.

[B]

This is great. So you flagged this, so why don't you kick us off?

[A]

To quote the immortal Alonzo Harris, it's

[B]

not what you know, it's what you can prove.

[A]

The real estate soulmate to that is it's not what you owe. It's what your special servicer lets you get away with. We're seeing this as special servicers are becoming more and more main characters in the CRE capital market story. The kind of deals they're striking in the background with sponsors are getting a lot of scrutiny because again, the ones that are ultimately holding the bag are bondholders. But the ones who have control over what happens is not necessarily them.

[B]

And those incentives aren't always aligned either. So why don't we just sort of get into it? This was a creative office. Creative office in Long Island City. Remember those? God, man. Like, that just brings. Sometimes you think about, like, a certain bar or you hear a song and you're like, this just brings me back to time. I hear creative office in Long Island

[A]

City, and I'm like, it's a little time capsule.

[B]

I'm like, man, this is like 2016. Like, anything was possible.

[A]

Any shitty building had a second life as a creative office. Rusting walls. All right, let's make it a tech tenant friendly thing. Anyway, there was a JV between Atlas Capital. Some of your guys here. Atlas Capital, Invesco and Partners Group.

[B]

Serious Guys. So Atlas Capital now, who are selling, selling out Zendorf's, Eddie Clarkson.

[A]

Yeah.

[B]

Invesco, who are all over the place. And then Partners Group, which is the

[A]

Swiss, they caught up for a second in the whole syndicator mess.

[B]

By the way, this deal, shockingly didn't work.

[A]

Yep. This was a million plus square feet of office, Long Island City. They got a $300 million SASB on it. So single asset, single borrower, CMBS deal. At the time of the deal, it was appraised at, let's call it half a billion dollars.

[B]

Pretty, pretty good. So they default, as any rational person would have expected. And you know what happens is you go into special servicing and Rialto, who we've talked about a lot on this podcast, and how they took over a bunch of the New York rent stabilized portfolios.

[A]

Oh, through the JV with Blackstone, right?

[B]

Yeah.

[A]

I still don't understand why Blackstone hadn't just bought these guys. They were apparently being shopped quietly in 2024 by B of A. I'm surprised Blackstone didn't pull the trigger because they were in the mix here.

[B]

I'm surprised as well, maybe, honestly, because of stuff like this. So they default and your options are really like, give the keys back, try to sell it what you can't, try to refinance it what you can't to really just give the keys back. But they didn't.

[A]

They didn't. And Rialto struck a deal with the sponsors which essentially said, all right, we're going to give you an extension. And then this $300 million outstanding debt you have, you have the option of paying it back in two years at a pretty steeply discounted payoff at what, $223 million.

[B]

Yeah. So it was a pretty big haircut. So this is interesting because first I think. Let's talk about the timing. So why did Rialto do this now?

[A]

They did the DPO deal now because the appraisal was set to come in at a much, much lower value. And if that happened, they would have lost control of the process. Basically.

[B]

Yeah. And they wanted to keep control of the process because they got this dpo and you might think, okay, well, they have first loss, so why are they doing this? That doesn't really make sense. And the borrower kicks in close to 19 million bucks. I assume that was to pay down the loan.

[A]

No, not quite. So just under 10 million of it went to a Rialto controlled reserve. Just over 2 million of it went to Rialto for the Loan mod fee. And then the rest of it was to purchase a rate cap and finish closing costs and all that. So essentially none of it paid down the principal or went to the bondholders. Huh. Think of it as like that money essentially just funds the mechanics of the deal that Rialto put together.

[B]

So essentially this is the acquisition fee of. Of a special servicing deal. That's basically what Rialto got paid. Let's just call it what it is. And part of the reason why Rialto did this is if they get the keys back, they get nothing. And then they've got to take on this albatross.

[A]

Yeah. Someone like a special servicer is essentially incentivized to keep the show going for as long as possible because they get paid their interest, their fees, all kinds of stuff.

[B]

I was so careful. I picked the wrong play, the wrong director, the wrong cast.

[D]

Where did I go?

[B]

Right, right. And then they're getting this extra juice off the top. So they're losing some of the principle. Okay, sure. But they get to keep this thing going. And then there's sort of the hope. Note that they're on background saying, wait, wait, we should.

[A]

I think it'll be interesting for listeners how this worked out. So this is a great story. Shout out to cma. Commercial Mortgage Alert.

[B]

Yeah.

[A]

So the bondholders are griping about how this was structured. There was no transparency. We just never knew what was going on. We got no justification for this process, et cetera. And this is what they said. This was a very good quote. They said, okay, great, grant the extension, that's fine, but you don't need to push through a loss with a discounted payoff down the line. It makes no sense. A B of A CMBS guy also said the following. This modification crystallized future losses while reallocating principal that could have been used to pay down bondholders into a reserve account. Rialto, by the way, Will did not comment directly for the story. They did take a different route, though.

[B]

Yeah. So they said on background this will achieve a stabilized value execution. That wouldn't be possible.

[A]

Look, there's an argument to be made there.

[B]

Yeah, there's an argument to be made that this thing is toast. Everyone takes a massive loss. Or alternatively, you buy a little bit of time.

[A]

Everyone takes a massive loss. And the sponsor's not even going to look at this asset once they know it's.

[B]

Yeah, they're never going to look at it again. They're basically trying to give the sponsor enough incentive to see the business plan through. This is Something we haven't really talked about a ton. But if you're a sponsor and you're out of the promote or you're on a deal where you're losing money, those deals don't just end, you gotta keep like doing them. And so they're trying to incentivize a sponsor here to at least like have one asset management analyst a week. Be like, hey, call the leasing broker and be like, did we sign any leases this week? You talk about Rialto not commenting directly. Like you want to talk a little bit about how like background works and like why someone would do this versus commenting through a spokesperson.

[A]

You typically would not want to comment on such a sensitive story on the record, which means Rialto is probably not going to put their name and address bondholders directly when you speak on background. Which means, hey, this is coming from an insider. There's some authority attached to it. But you have plausible deniability if a bondholder says what are you doing in the press coming up against us? So it's a really smart way to get your point out there. Give the reporter or the press outlet some credence that hey, this is real, it's coming from me, but it's not quite coming from you. So you kind of win, win there.

[B]

That makes sense. And I think more broadly though, there's a lot of these sort of orphan deals which really needed a hope and a prayer. There's a reason like Starwood bought L and R, there's a reason why Rialto is so profitable. You talk about like a rent seeking, like it's the most rent seeking thing in real estate.

[A]

Absolutely. I think a lot of non CMBS types may not be fully aware of it, but guess who gets to select the special servicer?

[B]

Enlighten us.

[A]

Right. It's the controlling class representative, which is Rialto. This tension speaks to a broader gripe and growing gripe really with special services, which is there's too much opacity. It's like a black box. They're doing something in the mechanical turk and you don't know what it is. And as a bondholder you just get that final sheet. Here are your losses, here are your

[B]

losses and you never had a say in it. And this is a very path dependent outcome that you had no choice in. You're just along for the ride.

[A]

We should say this is not only Rialto that's under pressure on these kind of things. Do you remember the case of that massive holdback on the ballasteel in SF? Yes, $164 million kind of went missing for a bit.

[B]

Yeah, for fees and costs and whatnot.

[A]

It's a dynamic that's going to get more and more scrutiny as more and more stuff kind of hits the so called wall of maturities and gets worked out. We're going to see a lot more of this stuff. We're going to see more litigation too. Your boy Carl Icahn came at Rialto over his mall trade.

[B]

Oh God, I forgot about that. Everyone's coming out against Rialto. You know, if Icahn's mad at you, you must have done something wrong. But I think broadly too, if you're a sponsor, like where do you want to go for debt? And private credit has exploded. But CMBS has always been if you want the max proceeds for non recourse, like that's the way you got to go.

[A]

Did you see Al Ofer went to the CMBS market for the first time?

[B]

I did not.

[A]

Global holdings, they did their first ever CMBS deal on 1250 Broadway. Pretty sweet proceeds there.

[B]

That's what CMBS is. But then you got to deal with all this and then you got to deal with Rialto.

[A]

That's it for the promote podcast this week. The war with Iran means that CRA's allocators and those who court them are in limbo markets like Certainty and this ain't it. Institutional investors might have to rethink how big a driver higher education will be in their future plans. And Rialto's DPO Solutions has some bondholders going. Wtf?

[B]

We'll be back next week with more CRE Insider goodness. Thanks again to our sponsors, Bravo Capital and Loan Boss.

[A]

You can find them at bravocapital.com and loanboss.com by the way, guys, write us a review. It's been a while.

[B]

We keep getting the reviews, but write them like this. Doesn't take very long.

[A]

We're both sweating it out here, trying to make the best podcast possible for you guys.

[B]

You remember that era a couple years ago before we sold the ringer, when Bill Simmons complained about I give you all this free comic content and you don't like it, you don't appreciate it. That's how we feel now. I thought it was when he said it, but now he was right.

[A]

I'll see you next week, amigo. Thank you.

[B]

Thank you.

[A]

Ciao.