CrowdStreet’s Ian Formigle is joined by Malcolm Davies to talk about what’s happening in the capital markets: office reopening protocals, the Main Street lending program, potentially growing deal flow, and more.
Ian Formigle, Chief Investment Officer
CrowdStreet
CrowdStreet
Ian is a real estate professional and serial entrepreneur with 24+ years of experience in real estate private equity, startups, and equity and options trading. At CrowdStreet, Ian serves as the key decision-maker for all investments on its Marketplace, totaling over 400 offerings and some $13.7 billion of commercial real estate. Ian is the author of “The Comprehensive Guide to Commercial Real Estate Investing” and he is a contributing author at Forbes.com.
Prior to joining CrowdStreet, Ian was VP of Business Development for ScanlanKemperBard Companies, where he managed the firm’s alternative investment platform and served as a senior acquisitions officer on a team that acquired some $500 million of commercial real estate assets during his tenure. Previously, Ian co-founded and served as CEO of Clarus Property Ventures, a regional real estate private equity firm that focused on multifamily acquisitions. Ian began his career as an equity options market maker and member of the Pacific Exchange. Ian holds a BA in Economics and a BA in Political Science from the University of California at Berkeley and has held numerous securities licenses including Series 7 and 63.
Malcolm Davies, Founder & Sr. Managing Partner, Way Capital
Way Capital
Way Capital
Malcolm has over 25 years of experience as an award-winning capital advisor and developer, having advised and been involved with over $15B worth of total capitalizations, both in the equity and debt markets. Davies has utilized his expertise to lead developers and investors to structure and capitalize billions of dollars-worth of commercial real estate ventures. He has extensive experience in structuring transactions across the capital stack, including non-recourse senior and stretch-senior debt, mezzanine and preferred equity financings, and Co-GP and LP equity financing solutions for development, value add and stabilized projects.
Malcolm has vast experience in structuring various scenarios within the capital stack including non-recourse senior debt, mezzanine debt, and preferred & JV equity financings in the construction, value add, and permanent finance marketplace. Malcolm’s expertise as a developer has been instrumental in advising his clients through his real-world experiences in various stages of the real estate cycle, including the Great Recession.
00:00:06 Hey everyone. I'm Ian Formigle, Chief Investment Officer here at CrowdStreet. Welcome back to StreetBeats for June 2nd. This is our ongoing series of short videos intended to keep our community up to date as to what's going on out there in commercial real estate. As always, for this weekly segment, I'm happy to have Malcolm Davies, principal and managing director at George Smith Partners back with us again. Malcolm. Thanks again for joining us.
00:00:31 Thanks for having me again, Ian.
00:00:33 It's always a pleasure, Malcolm. So, as our typical format, we are gonna walk through what happened last week in the commercial real estate world, in our world in general, and how that might be affecting capital markets. We're gonna talk about some things that we think are relevant for this week, and we're gonna look forward to the weeks ahead. Uh, so Malcolm, I think, uh, just to address the, the, the huge thing that happened this last week, let's dig right in and kind of start talking about some of the civil unrest out there, the protests and the riots we saw across the country. How do you think that's affecting your world right now in commercial real estate capital markets?
00:01:08 Yeah, and I'll, and I'll just say to the commercial real estate capital markets, it's, um, you know, it's a tough year for everybody, right? We seem to have a lot of things going on, so they're all very important. But as it relates to commercial real estate, retailers and retailers have just opened up. Um, and many of them, you know, are currently have boards and car, you know, um, wood in front of the windows and definitely not, are not open. So, you know, how that is perceived, how that's going to be looked at, how the financial markets, that's still fluid. Um, we were in this bit of, uh, reopening, so we may have a little bit of a, of a delay, uh, particularly for our retailers, but, um, you know, just have everybody stay safe out there and hope that we can all get this, uh, through together.
00:01:50 So let's get to some positive things. What, what are some good news? I've got some good news to share. Um, now that we've addressed the bad news, what are you seeing that's good out there?
00:01:57 Yeah, like Ian, I want, I I, I know a little bit about your good news. I want to hear about it in a second. But look, guys, the biggest thing I think everybody should pay attention to going forward right now is the main street lending program. If everybody remembers a few months ago, and then we started this, we mentioned that the P P P would be like the, you know, the, the patient got rolled into the hospital and they were being, you know, helped there. Well, you know, patient is the American economy. So the P PPP seemed to have, he has helped a little bit, helped us get through some tough times. The main street lending program is designed to get the patient out of the hospital and back into the world again. And so there are still some things we're working through, but there were some good announcements yesterday, clarification of the programs.
00:02:39 But in general, it's gonna look a little bit like, um, the P P P where it's administered by, um, you know, banks. Um, there will be a slight risk retention that the banks will hold back 5% to 15% and depend depending on the program. Uh, the government will backstop the remaining portions of it. There's up to 600 billion of this. Um, the pricing of the financing is li i b o r plus 300. Um, it's a little bit based on how the business was doing pre covid. So you're, you're basically constrained a bit by that. So what we're trying to do right now on some of the quote unquote refinancings we are trying to do for some of our clients is to pay attention to how we can get our financial institutions to pay attention and see how they capture this. Most, uh, banks took on the PPS and went for it. Uh, haven't seen a lot of announcements yet, but I think it's a big thing to pay attention to. So, plus liquidity's opening back up a bit. I think, you know, Ian, tell us about your experience so far with, uh, a deal my partner's been working on with you guys.
00:03:38 Absolutely. So this is a deal that George Smith Partners is working on right now. So, and we're obviously working on the equity side of, of the deal in that, uh, we're talking to a developer based in Chicago. This is a student housing development at the University of Memphis. And so what was interesting is that this deal, uh, showed up on our doorstep probably around the beginning of May. And the, we, we were proposed the deal with the first set of debt terms on May 12th. And so, you know, as we, as we now rewind and look at that period, that was a tougher time for the debt markets. All debt from beginning until now was all been quoted in the mid to high 60% L T C range. So, but the first quote that showed up was 9% interest rate, and, and it was, it was a non-recourse loan, but it was at 9%.
00:04:25 And at that time, our feedback was to the developer was, we like you as a developer, we like your deal, we like the opportunity here. Um, the debt right now appears onerous. And so it, it was literally an impediment at that time for us to want to put that deal in the marketplace. Then we fast forward a couple weeks, now it's May 25th, come back, the deal comes back. So our directive to the developer was, Hey, try to work on better debt. If you get better debt, we think we're there. Then they come back, debt does improve. Now we're coming back at l plus three 50, but with a five and a 5% floor and, but also going recourse. And so at that point we said, deal is good enough, we like that we're gonna move forward, but was now subsequent to that, just yesterday, got a new quote now l plus 300.75% li bor floor and same, same ratio of debt roughly, you know, mid to high sixties alone, alone to cost, uh, but recourse through construction, a step down at delivery, and then a burnoff by stabilization. So what's been interesting to see is over the last four weeks we saw a deal that had, that we liked, that had debt terms that were essentially untenable now start to look very attractive. And I think what we're hopeful for is that that's the story that's going on everywhere. And if that is the case, we're on the verge of seeing a spike in eligible deal flow.
00:05:55 No, no question. I mean, um, we, uh, we took a, an office deal, creative office conversion, basically cons, spec office, construction loan, uh, which you can imagine in on the scale of difficulty, um, in May or April would be very high. And we received our proposal yesterday at 47 million, uh, you know, basically Libra plus 400, um, you know, little bit of recourse and a little bit of deposits, <laugh>, but that's okay. It's there. It's, it's something accretive to the equity. Um, you know, that multi-family deal I've referenced in Colorado, I think I've got nine proposals on it. Um, we're at pricing that I think is more than uh, uh, acceptable and we, sounds like we're gonna sign the term sheet today. So things are getting better. I, again, we talked about this last week, you know, the reopening of society, you know, spikes in cases or not, you know, I hope that with all the, all all the folks that are out there, um, you know, and the protests, you know, it looks like a lot of people aren't ring or masked or not.
00:06:55 Hopefully we don't have spikes in cases cuz of that. Yeah. But also, you know, just all the states that are open, we're gonna learn a lot. And if it's positive that we don't have this spike in cases, maybe um, you know, society could be really, really, you know, going forward and that means the liquidity will continue to loosen up. Yeah, look, there's some other things we should, you know, make sure we're chatting through. I think as we're seeing things happen. You know, look, Amazon's kicking the tires in JC pennies, that's not shocking. Um, you know, it's interesting, um, you know, we're doing a big webinar tomorrow with, uh, with Sam naan at C3 and and s b but about ghost kitchens and food halls and how ghost kitchens can be utilized and leveraged for a lot of the commercial space that's out there and the kitchens that are already there. So that's an interesting dynamic office reopenings, you know, we just got our office reopening from the city of Los Angeles and the guidelines to reopen the office. Put it this way, it's gonna take us probably six weeks to figure out how to exactly put everything together to really reopen the office. There's a lot of, uh, elements there that we're gonna have to partake. Um, but look, we are working towards an element of getting back to business and that's the greatest part that we're seeing.
00:08:06 Yeah, no, agreed. I think the other thing that was interesting was the announcement that just came out yesterday as well in terms of, you know, aside from WeWork, but essentially the, the remaining top 20 co-op co-working operators in the world have come together to collaborate on safety protocols for reopening their spaces. Uh, and, and you know, the note and the article was interesting was that you just said pre covid that kind of collaboration and cooperation amongst effectively competitors would've been unheard of. Um, you know, but these are interesting times and so now you're seeing them come together to essentially come out with an agreed upon playbook on how those officers are going to reopen and how they're gonna operate and that there will be consistency across the board. So very interesting to kind of see, um, you know, large co-working operators come together for a creative solution.
00:08:56 No question, no question. But look, I think for next week the biggest thing I want us to come back and we'll report to everybody is the progress we're gonna make this week on, on the main street lending program. I think there's some legs there and, um, you know, 600 billion from a financing perspective is, you know, quite a lot when in particularly if we can get a lot of allocated real estate operating companies and real estate, um, loans that are out there on the book. So, um, stay tuned for that.
00:09:21 Look forward to talking about that next week as well and learning a little bit more next week as well in terms of how that might be flowing to, you know, commercial real estate operators and developers out there. Right? Because it's great news that it's coming and then it's the next thing is, well now that it's coming, how do you get your peace?
00:09:35 Right, exactly.
00:09:37 So, alright, uh, well I think that's gonna wrap it up for today. That, that was a good series of quick hitting updates. And so, uh, Malcolm, thanks again for joining us. Look forward to doing it again next week.
00:09:48 Thanks Ian,
00:09:49 And thanks to everyone out there. Uh, we'll look forward to coming back with you to you with more updates next week. And in the meantime, everyone stay
00:09:57 Safe.
00:00:31 Thanks for having me again, Ian.
00:00:33 It's always a pleasure, Malcolm. So, as our typical format, we are gonna walk through what happened last week in the commercial real estate world, in our world in general, and how that might be affecting capital markets. We're gonna talk about some things that we think are relevant for this week, and we're gonna look forward to the weeks ahead. Uh, so Malcolm, I think, uh, just to address the, the, the huge thing that happened this last week, let's dig right in and kind of start talking about some of the civil unrest out there, the protests and the riots we saw across the country. How do you think that's affecting your world right now in commercial real estate capital markets?
00:01:08 Yeah, and I'll, and I'll just say to the commercial real estate capital markets, it's, um, you know, it's a tough year for everybody, right? We seem to have a lot of things going on, so they're all very important. But as it relates to commercial real estate, retailers and retailers have just opened up. Um, and many of them, you know, are currently have boards and car, you know, um, wood in front of the windows and definitely not, are not open. So, you know, how that is perceived, how that's going to be looked at, how the financial markets, that's still fluid. Um, we were in this bit of, uh, reopening, so we may have a little bit of a, of a delay, uh, particularly for our retailers, but, um, you know, just have everybody stay safe out there and hope that we can all get this, uh, through together.
00:01:50 So let's get to some positive things. What, what are some good news? I've got some good news to share. Um, now that we've addressed the bad news, what are you seeing that's good out there?
00:01:57 Yeah, like Ian, I want, I I, I know a little bit about your good news. I want to hear about it in a second. But look, guys, the biggest thing I think everybody should pay attention to going forward right now is the main street lending program. If everybody remembers a few months ago, and then we started this, we mentioned that the P P P would be like the, you know, the, the patient got rolled into the hospital and they were being, you know, helped there. Well, you know, patient is the American economy. So the P PPP seemed to have, he has helped a little bit, helped us get through some tough times. The main street lending program is designed to get the patient out of the hospital and back into the world again. And so there are still some things we're working through, but there were some good announcements yesterday, clarification of the programs.
00:02:39 But in general, it's gonna look a little bit like, um, the P P P where it's administered by, um, you know, banks. Um, there will be a slight risk retention that the banks will hold back 5% to 15% and depend depending on the program. Uh, the government will backstop the remaining portions of it. There's up to 600 billion of this. Um, the pricing of the financing is li i b o r plus 300. Um, it's a little bit based on how the business was doing pre covid. So you're, you're basically constrained a bit by that. So what we're trying to do right now on some of the quote unquote refinancings we are trying to do for some of our clients is to pay attention to how we can get our financial institutions to pay attention and see how they capture this. Most, uh, banks took on the PPS and went for it. Uh, haven't seen a lot of announcements yet, but I think it's a big thing to pay attention to. So, plus liquidity's opening back up a bit. I think, you know, Ian, tell us about your experience so far with, uh, a deal my partner's been working on with you guys.
00:03:38 Absolutely. So this is a deal that George Smith Partners is working on right now. So, and we're obviously working on the equity side of, of the deal in that, uh, we're talking to a developer based in Chicago. This is a student housing development at the University of Memphis. And so what was interesting is that this deal, uh, showed up on our doorstep probably around the beginning of May. And the, we, we were proposed the deal with the first set of debt terms on May 12th. And so, you know, as we, as we now rewind and look at that period, that was a tougher time for the debt markets. All debt from beginning until now was all been quoted in the mid to high 60% L T C range. So, but the first quote that showed up was 9% interest rate, and, and it was, it was a non-recourse loan, but it was at 9%.
00:04:25 And at that time, our feedback was to the developer was, we like you as a developer, we like your deal, we like the opportunity here. Um, the debt right now appears onerous. And so it, it was literally an impediment at that time for us to want to put that deal in the marketplace. Then we fast forward a couple weeks, now it's May 25th, come back, the deal comes back. So our directive to the developer was, Hey, try to work on better debt. If you get better debt, we think we're there. Then they come back, debt does improve. Now we're coming back at l plus three 50, but with a five and a 5% floor and, but also going recourse. And so at that point we said, deal is good enough, we like that we're gonna move forward, but was now subsequent to that, just yesterday, got a new quote now l plus 300.75% li bor floor and same, same ratio of debt roughly, you know, mid to high sixties alone, alone to cost, uh, but recourse through construction, a step down at delivery, and then a burnoff by stabilization. So what's been interesting to see is over the last four weeks we saw a deal that had, that we liked, that had debt terms that were essentially untenable now start to look very attractive. And I think what we're hopeful for is that that's the story that's going on everywhere. And if that is the case, we're on the verge of seeing a spike in eligible deal flow.
00:05:55 No, no question. I mean, um, we, uh, we took a, an office deal, creative office conversion, basically cons, spec office, construction loan, uh, which you can imagine in on the scale of difficulty, um, in May or April would be very high. And we received our proposal yesterday at 47 million, uh, you know, basically Libra plus 400, um, you know, little bit of recourse and a little bit of deposits, <laugh>, but that's okay. It's there. It's, it's something accretive to the equity. Um, you know, that multi-family deal I've referenced in Colorado, I think I've got nine proposals on it. Um, we're at pricing that I think is more than uh, uh, acceptable and we, sounds like we're gonna sign the term sheet today. So things are getting better. I, again, we talked about this last week, you know, the reopening of society, you know, spikes in cases or not, you know, I hope that with all the, all all the folks that are out there, um, you know, and the protests, you know, it looks like a lot of people aren't ring or masked or not.
00:06:55 Hopefully we don't have spikes in cases cuz of that. Yeah. But also, you know, just all the states that are open, we're gonna learn a lot. And if it's positive that we don't have this spike in cases, maybe um, you know, society could be really, really, you know, going forward and that means the liquidity will continue to loosen up. Yeah, look, there's some other things we should, you know, make sure we're chatting through. I think as we're seeing things happen. You know, look, Amazon's kicking the tires in JC pennies, that's not shocking. Um, you know, it's interesting, um, you know, we're doing a big webinar tomorrow with, uh, with Sam naan at C3 and and s b but about ghost kitchens and food halls and how ghost kitchens can be utilized and leveraged for a lot of the commercial space that's out there and the kitchens that are already there. So that's an interesting dynamic office reopenings, you know, we just got our office reopening from the city of Los Angeles and the guidelines to reopen the office. Put it this way, it's gonna take us probably six weeks to figure out how to exactly put everything together to really reopen the office. There's a lot of, uh, elements there that we're gonna have to partake. Um, but look, we are working towards an element of getting back to business and that's the greatest part that we're seeing.
00:08:06 Yeah, no, agreed. I think the other thing that was interesting was the announcement that just came out yesterday as well in terms of, you know, aside from WeWork, but essentially the, the remaining top 20 co-op co-working operators in the world have come together to collaborate on safety protocols for reopening their spaces. Uh, and, and you know, the note and the article was interesting was that you just said pre covid that kind of collaboration and cooperation amongst effectively competitors would've been unheard of. Um, you know, but these are interesting times and so now you're seeing them come together to essentially come out with an agreed upon playbook on how those officers are going to reopen and how they're gonna operate and that there will be consistency across the board. So very interesting to kind of see, um, you know, large co-working operators come together for a creative solution.
00:08:56 No question, no question. But look, I think for next week the biggest thing I want us to come back and we'll report to everybody is the progress we're gonna make this week on, on the main street lending program. I think there's some legs there and, um, you know, 600 billion from a financing perspective is, you know, quite a lot when in particularly if we can get a lot of allocated real estate operating companies and real estate, um, loans that are out there on the book. So, um, stay tuned for that.
00:09:21 Look forward to talking about that next week as well and learning a little bit more next week as well in terms of how that might be flowing to, you know, commercial real estate operators and developers out there. Right? Because it's great news that it's coming and then it's the next thing is, well now that it's coming, how do you get your peace?
00:09:35 Right, exactly.
00:09:37 So, alright, uh, well I think that's gonna wrap it up for today. That, that was a good series of quick hitting updates. And so, uh, Malcolm, thanks again for joining us. Look forward to doing it again next week.
00:09:48 Thanks Ian,
00:09:49 And thanks to everyone out there. Uh, we'll look forward to coming back with you to you with more updates next week. And in the meantime, everyone stay
00:09:57 Safe.