CPACE Confidential
CPACE Confidential
Episode 3: Will Hutton
On this episode we learn about the biggest #CPACE deal in history, from the man himself, Will Hutton!
Will is the Director of Acquisitions and Capital Markets at Nightingale Properties.
A few months ago, Nightingale and Wafra secured $500 Million of financing which included an unprecedented $89 Million of C-PACE!
This is an episode you don't want to miss!
#nycpace #capitalmarkets #commercialrealestate
It was a great team effort from literally everyone involved to, you know, educate themselves on this new innovative product or fortunately capital stack that most most people didn't know existed and everyone approached with with an open mind, I think that was part of it, you know, there's lenders out there who just didn't want to learn about it didn't make a loan certain way, not really open to certain structures, and it was a non starter for them. But like, as a lender, you know, I was told, you know, when I speak with, you know, if you if you can become, you know, educated on it, and learn how to use it in your capital stack when you're offering holo solutions of ours. You can become extremely competitive and win deals that you otherwise I'll be normally.
Adam Lipkin:Yeah. Is that accurate? Yeah.
Producer:Welcome to the C pace confidential, where you'll hear about the hottest happenings in the world of C pace, commercial real estate and beyond. We speak with the top players doing the most exciting projects and discover just how C pace has evolved into one of the most innovative financing options in the industry and how you can use C pace to be more successful in your business today. Now, here's your host, the C pace guy, Adam Lipkin.
Adam Lipkin:All right, all right. Hey, everybody. How are you doing this morning. Welcome to the C pace confidential. I'm your host, Adam Lipkin. The C pace guy got such an exciting show in store for you today. I'm really so so thrilled to have my desktop on. Gonna bring him on in just a few minutes. But let's just get started with some of the big news happening commercial real estate, also in the sea pace world. So top of the list, we heard that big news yesterday Cushman Wakefield strategic joint venture with Greystone Wow, absolutely unbelievable. So excited to see what the future looks like. I think there's a real buzz in the industry, a lot of feedback I had heard was make sense, you know, really being able to compliment in so many ways. And in in the words of the chairman and CEO, Steven Rosenberg on a scale of one to 10 how excited as everybody on it 1515 So excited about the future for that venture. So in the world of C pace, probably the big news is New York City came online several months ago, but everybody was waiting for new construction to be active, it initially came online with making space available for existing buildings, which is great. And that's where there's going to be so much activity, we're going to be talking about one of those scenarios during this episode. But everybody wanted to see it available, there was anticipation was going to happen. New York State had that available as you know, that amendment happened and made it available throughout the state and markets were see pace was alive. And it went into effect just recently in the city. So now definitely something to consider C pays for new construction, new development, you know, throughout the, the city and and then just want to give a little bit of a plug to commercial observer had such an awesome experience for an event that they put on last week in Miami called The Future forward. Probably one of the most thoughtful events that I've been to in terms of just future insights and trends. And you know, a lot of what's, you know, coming down the pike, I highly recommend taking a look at it Google Search commercial observer future forward, and also on LinkedIn, you could type that into the search. There's some really great posts about it. Some of the sessions that were pretty big highlights one in particular that I wanted to bring up fast was there was a session with Sandeep from WeWork CEO and talked a little bit about what they're seeing in the pike. I mean, we work what a story, you know, some of us don't realize, but they went public actually, right here. Just recently, this week, when you think about where was two years ago, with all the fanfare, kind of, you know, people like maybe didn't realize some of how the amazing success they've been experienced is now translated. But one stat that I thought was really interesting that I just want to share was Sandeep was sharing, they just came off of best quarter yet, in the third, they leased 9.2 million square feet, and q3. Unbelievable. I mean, I think there's an office landlord, who did that much in the quarter. And the other thing that I found really interesting was a disproportionate share of the leasing with 1% of the space, they had about 30% of the leasing activity. So certainly seen, you know, it's obviously a little bit of a, you know, you know, non normalized conditions where people are, you know, just coming in, in different arrangements, maybe taking on, you know, more shorter term leases, 612 months, 1824 months, but we think that this arrangement is just going to continue to grow. And he was talking about that, Let's ditch the word hybrid, let's talk about intentional flex. And that it really seems like we're moving into this type of both environment where there's going to be people in the office, there are going to be people at home, there's going to be like arrangements where people are coming in several days a week, coming in, maybe less in some cases, but it really seems like this is going to be an evolution of, of the office market. So we'll talk a little bit more about that in this episode. And so, you know, without further ado, you know, I'm really so thrilled to be able to bring on my guest you know, I I think everybody's heard a little bit about this major project that hit the press several months ago, 111, Wall Street with nightingale, and Ellie in the team, you know, from Wafra. And just, you know, hearing a little bit more about the plans for it. But we're gonna bring on will hon, who's director of acquisitions and investments with Nightingale. And we'll, we'll get a little bit more into his background and hear a little bit more about the project. So well, how are you my man? Good. Thanks for having me. Yeah, man, really thrilled, really, so excited to be able to get into this with you. So I thought, why don't we just kick it off, I love to be able to, you know, just have you share a little bit about your background. I mean, I love the story. You've seen so much, and in a pretty quick time been really just involved with some of the most exciting projects and so on. Once you just take a few minutes and share a little bit about, you know, background story origin where you, you know, born and raised, and then a little bit how you joined up with Nightingale and maybe a couple of projects before we jump into 111?
Will Hutton:Sure, I'm happy to. I am originally from Wichita, Kansas, middle of nowhere. Interesting story growing up, my parents always told me to get out of Kansas and not to come back and to go to the big city. I'm not going to do that. Yeah, I had my chance to do that. When I got into Cornell University, I studied real estate at Cornell. And then, you know, as with everyone, Milan, a lot of people who go there, we all kind of ended up in New York afterwards. And stayed in New York. Had a tremendous realtor education from Cornell is one of the unique, you know, undergraduate programs that has, they offer master level coursework to undergraduate students. So, you know, fairly good, you know, are well informed to start from there. I started my career in the just distressed real estate space. So I was predominantly buying Oreos and distressed nodes that were the fallout of the GFC. So call it Oh, six own OA originations goes much in originations and OA, probably more. Oh, 607. Before Paul Newman, that's kind of how I cut my teeth in the business, I was literally buying properties that people were hanging the keys back to the bank and the business plan was figure out what's wrong with them and fix those problems and add the value in Psalms quickly as possible. I was probably the best education I could have ever asked for, because it was real deal seasoning with some of the hairiest product that, you know, that's out there in the market. I mean, it was, you know, CMBS loans that borrowers weren't even willing to work out. They're like paper keys. You know, I'm gonna send the kids via UPS instead of FedEx, because, you know, I want to save save on shipping.
Adam Lipkin:Let me just let me just talk for just one second. Because I think there's, there's such like, unbelievable insight in how you just see things. If there's like any one takeaway that maybe came from that looking in retrospect and saying, Wow, I really started to see things in a new way. And any big highlights seen these, like, just really hairy deals, jumping in figuring it out, and anything that you kind of, you know, realize, like, I started to see things and expanded the way I, you know, view situations curious about that.
Will Hutton:Yeah, so that's a really good question. The reason why I say it was the best education for me was, you know, a lot of these properties didn't go REO or the keys and go back the bank. Because they were over levered. Yes, a handful were over levered. But a lot of it was because there was identifiable flaws that you can point out, you know, it was a 50% occupied office building that 100% of the parking spots, were leased out to the, to the tenant, that least 50% office building, so you want to lease up the vacancy, but you have no parking to offer, you know, the balance of the vacancy in a suburban office setting, you're not gonna be able to fix that problem. So what I always say is, if you see upside or see a problem, try to understand why it's a problem. And if it's, if it's a solution that you can fix a parking problem like that you can't fix and first ribbon office, that's extremely important. So yes, small, small items like that.
Adam Lipkin:Got it. Got it. Alright, so yeah, let's keep going with it. So you So you saw some of these like just really hairy situations, cut your teeth. Fast forward, maybe talk a little bit about how not yell in that stage of your life. That chapter got started?
Will Hutton:Yeah, so I I've known Ellie through the years through, through friends that knew him in that community. And, you know, he's he's a younger guy and wasn't necessarily, you know, looking to grow a team but more or less kind of convinced him. You know, I had the tools to help him grow his business. And now, I've been you know, it's been a pleasure to work with him for five years and we've grown company, you know, incrementally over the past five years and really, you know, expanded, you know, our business lines, you know, not only into different asset classes, different deal sizes, different capabilities. And in the process, we built up a very large, vertically integrated operating platform. So in addition to just, you know, call it your being a typical acquisition shop, we have in house property management, construction management, development, asset management, in house leasing, you know, legal investor, like relations reporting, it's a full soup to nuts, you know, well oiled machine that we've been able to build over here.
Adam Lipkin:Yeah, it's just a really incredible operation, I just am so impressed with some of the major projects you've worked on. So you have you had this, you know, this personal relationship, you essentially pitched on the opportunity to be able to take things to the next level, let's talk about, you know, maybe one or two of the big deals that you guys worked on together, once you joined, you know, I'm thinking Philadelphia, I'm thinking a couple, but maybe you could pick one, and then you could share a little bit more about what it was like to, to really, you know, play a real, real active role at that level, being able to navigate some of these, you know, stressful situations through like this third deal process.
Will Hutton:Yeah, so I guess the first one to start would probably be our acquisition of 1500 market and Philadelphia 1020 17. Owned by equity Commonwealth as part of what was their Philly portfolio strategy, which was own class a Class A plus class a minus and a Class B. office building. If you know, if you under market Elsa notes at center square in Philadelphia, it's effectively the GM building. Affiliate, you know, everyone there knows, it's not the newest, you know, shiny has new construction tower, but it's their gym building. It when we acquired it, the rents were far below market. And it was a value add, you know, renovation play. If you've been there, it has a absolutely massive three storey lobby with mezzanine and a basement level. It's two office buildings, 1.7 million square feet, two towers. That was my first deal and I and gal and still probably one of the most exciting ones just because of what we're able to do to the building, and really reposition and transform it. This, you know, as an office buyer, I like I love going in situations where, like, I know I can improve it. And I know I can make a difference where, you know, a tenant comes us after we finish our laundry renovation and say, Wow, this is absolute incredible. You guys put your money where your mouth is you guys have invested in invested, you know, in improving the building that shows commitment by you as the owner, and we're thinking about extending our lease early. So it's, uh, it doesn't go unnoticed. When you do the right the right thing in this business that yeah, for
Adam Lipkin:sure. I mean, it's, uh, yeah, it must be extremely gratifying to be able to, you know, see, like, Hey, this is the feedback I'm getting, you know, you're able to see this for what it could be. I mean, I think it's amazing. You're even just taking a blank canvas, like a new development and imagining what could look like, that's, that's one thing. But another level is you have something that already exists, everybody is just so stuck in seeing it the way it is. But to be able to be seen that in a new way, it really takes something you know, and I'm just thinking about the kind of space, you're in 1.7 million square feet of office, okay, now, it's even crazier, you know, people are thinking like, you know, what are you going to do with that, but, you know, even few years ago, people were, you know, still you hear the same things as you do with retail, like, what's the future look like such and such? And so, I'm curious, like, you know, what are some of the things that come up for you, when you see that opportunity that maybe has other people say, you know, can't figure this one out past? And you say, this is exactly what I think we could do something spectacular with curious a little bit about that, what comes up?
Will Hutton:So it's a good question. One thing I'm a firm believer in and this was even pre COVID, is, there's always going to be a flight to quality, there's always going to be unless you have a ton of numbers and, you know, back office call center operations that wants you know, the best deal on the market. Sure, there's always going to be a flight to quality and that was true pre COVID and COVID, more or less proved that to be entirely 100%. Correct? No, it's really, I said before you put in, you know, your money where your mouth is, and, you know, improving the quality that's, that's there, you know, that, that's what tenants want to see. And nine times out of 10, they're willing to pay the freight on that. I see that all the time, especially in some of the, what I call a Class B product that you know, somebody thinks that they can go in there and do a light lobby renovation, not touch any, like another inch of the building. They know they're like, Oh, well I spent, you know, five bucks a square foot here. I'm gonna call this a Class A building and, and command class Iran's when I attendants who are in place and they're 30% below market and they're like, alright, you touched a lobby, but the elevator cabs are still 25 years old. It's not like I said, Surely one of the things where it, I don't say if you build it, they will come. But like, if you do the work and prove that you're doing the work, good things will certainly follow suit.
Adam Lipkin:Sure, I get that. I think elevators are a good thing to touch. And I feel like that's a great go to especially when you look at how technology has evolved over the last 1020 plus years, a lot of these buildings, they really benefit tremendously. And it's something that I feel like tenants just really appreciate, it's a much better experience, you know, you're getting in and out throughout the day, multiple times a day, what's like one or two things that you found, at least in Philly, then maybe like a, you know, maybe like if you have a playbook and you picture, these are things that we know make a big impact when we're doing our deep work and buildings. What was one in Philly that you found, you know, really made a big impact.
Will Hutton:So one thing I guess, in Philly and nationally, and as an owner, this holds true everywhere in the country. It's it's certainly one of the things where when a tenant tours a building, the first thing they see is a lobby entrance. Second to that, the second thing they see is that actual lobby, and their elevators, before they even get to the space, you're already got renderings of the space. So if you're looking to improve something, it you want to attack it from the point of view of what's my kind of going to see, and what's the first thing that they're going to see in the building, because, you know, you win or lose deals and buy deals, I mean, decent deals based upon first appearances.
Adam Lipkin:Totally, totally, that's a great, that's a great takeaway. It's a great insight. Talk a little bit about how you historically had financed a building like that. And then we'll kind of segue into some of these more creative things you've looked at. But you know, let's use that example. What did you typically look at as like a go to scenario when it comes to your financing.
Will Hutton:So for financing, it really depends on the business plan, our partner, and really our whole period, and how quickly we think we're gonna we're going to be able to, you know, enact that business plan. Now, we've done everything from CMBS CMBS, six rated CMBS, floaters. SASB, you know, typical bridge financing debt funds, where, you know, we're gonna have to get it put some sort of under a bridge on it, you know, temporarily, but once we get to a certain hurdle that we can put on something a little bit more long term, we've also done, we've also done balance sheet, yeah, we've done every type of debt, you know, under the sun, I always say like, look to tailor your debt to your, you know, your business plan, and always go go out with optionality, I can't tell you how many times I've spoken to other owners or other borrowers that are like, I'm on this deal, I only want to do CMBS financing, because that's gonna give me the best best rate and, or the best rate for the highest amount of leverage. That's probably true. You know, most most of the time, however, there could be that outlier debt fund that on that certain day, they're really bullish on this product, and they can give you some sort of bridge solution with, you know, pretty favorable extension options, maybe at the same rate as a CMBS that could allow you to put on more more attractive permanent financing, you know, in three to four years, versus trying to get, call it 80% of the financing that you want to put on it in the future. So I always recommend, you know, think about optionality it never hurts to expand, you know, the universe, of who you're trying to get financing from.
Adam Lipkin:I talk a lot about that. I think best execution comes when you have more options, right? You know, when you're not locked into one option, you don't have that, you know, that feeling of like, you know, the stress that comes with it, but you have to make that work, when you know, you have three to five options, there's there's a lot more freedom to be able to act in a way that is optimal and effective. So I love that you're saying that, when it comes to how you actually do it? Do you find that you're oftentimes going to like a best in class advisor and you're having them really give you a bigger picture of who are the players and also making a market how have you typically approached it?
Will Hutton:I would say every situation is different. We always like to run a competitive process. Yeah, you know, certain situations, you know, we we hire mortgage brokers, other situations, we we've done a lot of deals with a lot of lenders over the years. And we know who can execute we know who's a good fit for the deal, we know provide certainty of execution. So it's really a case by case basis. You know, some borrowers say they always want to go to their, you know, long term, you know, relationship lender and that's fine. Yeah, that's 100%. Okay, I always say try to make somewhere in the market to see if you can get the best room available. But, you know, it really comes down to everyone's personal preference.
Adam Lipkin:I mean, I got to think that on a on a very challenging office transition deal, that's where it probably makes the most sense to be able to have like an advisor that really is just there out there, because you kind of need to make that mark, this isn't like a no brainer deal, right? These are, these are things that really require the right framing, you know, sometimes looking to new sources that might not be as known, you know, and so I feel like in those scenarios, it really creates just another level of execution, having more options when you when
Will Hutton:you're 100%. Correct. On that note, especially if you're at the more transitional opportunity is, you know, the more you're going to need an advisor to really guide you and show you the market. I can also tell you, I have a close friend who is a hotel advisor. And he said, You know, I had lunch with him yesterday, he said ever since COVID, he said, there's been more new participants in the hotel lending market in the past 1218 months than the past 10 years of his career. And he said he had a bunch of hours, I say, I'll only go to these three banks. And he's like, Well, here are two dozen new shops that have always funds that are extremely competitive. And he's doing new business with new banks with the same clients. Yeah. So you know, another benefit of, you know, going through a process is there's, you know, new players coming to this market, you know, every day, because there's so much capital being raised. And so much of it is being deployed that, you know, I've been in situations where lenders are making loans, at spreads that are a lot tighter than you think that they were going to do. And it's a function of they raise capital needs to be deployed. And they really like to store in the situation, and they can allocate a good chunk of end, do you know, a certain property, and something that you thought was gonna cost you three half percent now cost? You know, 3%? That's pretty premium, pretty meaningful?
Adam Lipkin:Yeah. I mean, I think that there's so much money, that's it's only continued. It's flooding the US commercial real estate markets. And I there's not the transparency that you have in other products like an equity is, it's like, you just don't know something, especially as you're doing these more complex deals that we're talking about that it's not like, you know, you go in the Google search and say, Oh, what are the lenders doing for, you know, transitional 1.7 million square foot office building, and I mean, you, you really need to create the market. And so I think that it just serves you. And to your point, there are just so many more players coming in the market. So many different people have different preferences. Some people are bullish on one asset class, some people are bearish. I mean, you really need to, to leverage the fact that you can't know everything, you got to lean on the right, who, you know, the right people that that are just in the market constantly for certain things are doing so. Yeah.
Will Hutton:And on that note, you know, what do you say that certain certain groups are bullish on one versus the other builds up to think about allocation and timing, you know, everyone has certain mandate that they need to get certain a certain amount of capital out the door by Sure, between one and 22. And say they need to get, you know, half a billion dollars out by the end of 21. And they can't afford them 5% In any one asset class, and they put the Arielle get everything in multifamily art out there already maxed on multifamily allocation or industrial exposure, they're going to be really aggressive on office, because that's pretty much the only loan that they can make to the rest of the year.
Adam Lipkin:Yeah. Yeah, it's like you can't possibly know that if you're I mean, if you're in the business of really identifying good opportunities, and then execute on a business plan, that's full time. And then when you add the other leg of the stool to say, now I have to constantly know who's in the market, which allocations, you know, have people, you know, Hot or Not on different sectors, it just, it definitely, to me seems like it's like a good practice to make sure you have the right people on your team, whether it be in house or that you're working with very strategically to be able to help you out with that I think it just such a such a layer when you know how to be able to access SMART Capital. So let's let's use that as a segue into some, some innovative capital solutions. So so it looks like you know, from what I can tell, I mean, we've had some good conversations about this already. You seem like you're constantly interested in just you know, what's happening, what technology is being used, what's innovative, and so I'll put C pace in that category is an innovative financial product. Most people still haven't even heard of it. You know, very few people have executed with it today. It's wild. When you think about this as an industry. You know, I had been involved now for about four years. The industry has been around for 10 years, but realistically, I would say it's probably only been in the last two and a half, three years. haven't even had these major markets active until recently. I mean, New York City, just with your deal activated, Chicago was just not too long ago, I guess less than two years ago. And so it really is it hasn't been the radar, the volumes have grown tremendously. But it's still coming from such a minimal amount annually that had been getting done. It was like, you know, five, six years ago, maybe in the 10s of millions of that, and now you're starting to see exponential growth. But even exponential growth is still a maybe 200 300 million as an industry, maybe 400 million. So there's a lot of room to grow. But tell me, tell me what, when did you first hear about CPAs?
Will Hutton:We've we've had we've had conversation before, it's interesting that we first heard about C pays, probably 2016 2017, we were actually approached by a vendor in one of our Philadelphia properties when we were putting on or we were installing a new boiler, okay. And they told us that they have an interesting financing solution for the boiler. And at the time, we're like, alright, this is actually really cool. But for a $300 million loan, trying to convince our lender to, you know, allow this new, innovative financing for $3 million of that $3 million loan. We thought at the time, we're like, that's not worth the headache and the brain damage involved in convincing somebody to do that. But we always had in the back of our mind, like, this sounds really interesting, and it definitely has the right plays in the future. We just need to learn more about it.
Adam Lipkin:Let me ask you a question on that note, do you know initially, we're going to get pushback from a lender like so you have the group that's saying, Hey, listen, we could finance 100% of the cost of this 3 million boiler, no problem kind of gave you a sense of the terms. What was so what happened from there? Were you like, sounds great. What's the catch? Or like, how do you like, you know, what did you do from there? I imagine he must have said, that's interesting. Let's explore that. Right? So tell me about how that happened.
Will Hutton:Yeah. So I mean, it was a situation where we already had financing on the property. Yep, we had no need to refinance it, or try to work out something with our existing lender. But we, you know, we asked for more details just to kind of understand how we work. And you know, we thought to ourselves, like on a much larger scale, or on a scale where that C pays is a larger portion of the overall capital stack. This can be very interesting, you know, 1%, not, you know, 1% of the Gospels, not so interesting. But if talking 25 30%, this can be extremely, extremely meaningful. And so we always had in the back of our minds, that there's this innovative product, we're trying to learn more about it. It's been around for a while, but trying to track down someone who's really like an expert in it. Always in the back of our minds, trying to find the right fit for them in the future.
Adam Lipkin:And with regards to that project in Philly, were you like, let's just see if our lender would do it, or you didn't get to that point did it? Did it occur? You're like, you know, what, we don't even want to like, you know, introduce it. We think it's like, like, did you know that all there might be pushback, or were you like, like, oh, like, I just don't know if it's worth it to bring it up? How'd that happen?
Will Hutton:It was one of those we were so far down the road of the business plan. Our boiler bids actually came in well, under a budget that allowed it not worth going down that road. But this is something that we definitely keep them back in
Adam Lipkin:our minds. Sure. Sure. Understood. So you had it there. You know, maybe maybe you spent a little bit more time after that plan out a little bit more about the landscape. What were you hearing in the market about CPAs? That was interesting. What was surprising to you about it, give me a little bit of like, you know, imagine you're interested in financing that could be maybe cost effective. Maybe something might be able to, you know, improve returns? What did you think in terms of, okay, here's the challenges. Here's the opportunity, what came up for you?
Will Hutton:So, I mean, the biggest challenge at the time, was learning more about it. Because at the time, there had not been a whole lot of CPS loans done. Sure. Yeah. You know, it wasn't approved, you know, as many states as it is today. So the biggest challenge of the time was learning more about it, trying to understand where we can, where we can use it, what situation and what states and everyone knows about local law 97 in New York, and we thought to ourselves, or like, there could be certainly a situation in the future where this this, this could really come in handy. It just needs to be a situation where that amount of C pays is a meaningful portion of capital, Zack, is the way I explained it, maybe I'm oversimplifying it, but that's the pace has cost me 5% whereas you know, traditionals were financing was gonna cost you, you know, double digits. And if it's a large portion of the capital stack It's extremely meaningful to the return to equity.
Adam Lipkin:I think that's a great way to look at it, I feel like there's kind of been this challenge in terms of how it's to be perceived. Most bars I feel like are being told hate can replace equity. And when you really dive into it, you start to see like, hey, it's at this position as a tax lien and assessment. And so most lenders say, Well, this has a priority. And you know, you can make all the arguments, you know, it's it, but it's a passive tax. But more often than not, I find that a lot of lenders look at it as something that's more senior, so they don't just look at as replacing an equity however, to your argument, it's not really debt either, but yet, it could replace out more expensive debt, right. So if you have a lender that just more expensive than five and a quarter, you know, I find that especially on these big projects that you guys are doing, and we use this as an example, rather than having, you know, 100 million at like, you know, mid teens or low teaser rate, maybe you have 50 million, and it could be both right, and it could still be able to, you know, take down your your overall capital costs. So I do think that's a good way to use it. And I feel like there's going to be such an opportunity for those projects that you know, that you guys are involved with, where you could blend down because you're typically looking at some higher cost options in that transitional time period. So I mean,
Will Hutton:it's certainly a very optimal solution. Yep. For a construction redevelopment development type of situation. If you're buying something that's triple net lease to Amazon for the next 15 years, I don't really know how it's going to make sense. Unless you can somehow get the get the cost of building up building, you know, to be included in co pays. But with that being said, you know, the credit markets out there for you know, for you know, a Amazon lease associate anyways, exactly. Signs, but it's certainly a tool that you're gonna see a lot more developers use it. Yeah.
Adam Lipkin:Yeah, so let's let's kind of fast forward so you were aware of it, you know, kind of had on the backburner, you know, you know, working on some other big projects. So let's talk about how 111 got started, you know, flying the wall, you know, you get the call. This is you're gonna make a run at it initially, was the leasehold, but let's talk a little bit about that. How that got started, you know, back up a few years back, you know, I know initially came down to play, what was that? Like when you first saw this deal? And you guys, hey, we're gonna we're gonna take this on 1.11 point 3 million square feet office building, right, vacant. You know, around the time you guys are gonna acquire it right though
Will Hutton:one of the Wall Street was built in 1968 as a bill to suit for First National Bank, which was later acquired by Citibank. It had been a bank building ever since it was built, you know, late late 60s construction. And what's interesting about it, so in 1999, or 1990, in 1999, Citibank, or not Citibank, Zurich, and the Zurich Insurance Company, get this massive sale and leaseback with, like 20 City Bank buildings where city city owned them this older than the Zurich and then they leased back for 20 years. They're all master leases. So 100% Triple Net Zero landlord obligation, it was effectively as if city on the building even though you know they had to pay rent to somebody else. It the leases weren't effectively as like a self amortizing mortgage. So it had been at one point a show me occupied Citibank building. They moved everyone out to their headquarters out there at Greenwich over the years, which is funny, because when we were buying the building, we talked to our friends at City and like everyone had done training in the building. We all knew it. Yeah. Yeah. They all know very well. But the issue is because it was, you know, everyone knew is a city building. It wasn't on anyone's radar from olisi perspective. And everyone knew that one day it was going to be vacant. We had the opportunity to acquire the leasehold interest from Zurich in 2019. Which, you know, is a big undertaking at the time, you know, even even pre COVID Knowing that you're buying a building that is going to be vacant, you know, by the time you close, but nothing in downtown Manhattan had existed like that, especially at the price point that we were able to buy for this we have to keep in mind we were able to buy it for you know, we're able to buy the leasehold I was there for like$200 a square foot and we knew is spent another two hours working on it. But we really liked that that basis
Adam Lipkin:even though and just by comparison, I mean a lot of people have a sense of what that is what's like today, you know if you could even make it work a new office building at like, what would you say that?
Will Hutton:I want to say 100 Pearl is in contract to be sold for 900 square foot even though that's a redevelopment? Yep. Effectively, like, not new construction, but very, it's considered to be very close to it.
Adam Lipkin:Yeah, so 200 a foot even After doing like a massive upgrade another 200 You're still in an incredible basis. Correct? Still, it's still 1.2 or 1.3 million square feet that you got to still say, we got to figure out how to get this thing. Leased man. It's unbelievable. Yeah, it
Will Hutton:has these 45,000 square foot floor plates. We really like and our leasing broker really like because, you know, it's a great offering for a tenant. And so we closed on that in January of 2020. We closed on the leasehold interest, the building was vacant, city vacated and their lease ended three days before we close on it. So because when those begun,
Adam Lipkin:tell me tell me a little bit about the process that because that was also I mean, a pretty big undertaking, imagine to get financing for leasehold interest in the office building that was empty. What was that process like when you were out there in the market and how that go over.
Will Hutton:So at the time, we were out for a pre development loan, because it naturally took you know, six to 12 months to heat up our plans and permits work with our architects on the renderings and the designs, you know, that that that was extra takes time in the process, everyone thinks that like, I go hire an architect, and they're gonna have plans for the entire building and CD is done in like 90 days, which just isn't feasible. We obtained a pre development loan for our acquisition financing from so green, great to work with Alan says low leverage is 55% loan to cost Yep. Great experience with the team over there. And then, you know, a few 30 days into, you know, our, our planning stage to you know, work on our CDs, and our final design COVID. And so we had to go back to the drawing board and redesign everything. But in that process right after we closed, we had a meeting with the fee owner at the time, more of the introductory meeting, hey, you know, we're your new tenant, it's it's nice to meet you. And at the time, we the thinking about approaching them to do some sort of extension or up a payment for more term because there was just about 50 years remaining on the leasehold from when we closed on it and 19 years until another f&b reset. And the prior f&b Reset was in 2009. So we've kind of said at the high the GFC. And it was a really good deal for the leasehold owner, not the best deal for the theater. And so we had a launch introductory introductory launch to get the ball rolling. We were there at the lunch with Ellie. I was I was not at the lunch. Okay. And on the way out. I forgot it was Ellie or Mike Mike. Mike Walker had asked her I think it was Ellie said if you're if you're interested in selling the fee would be more than happy to buy it. And the funeral
Adam Lipkin:kind of like half joking a little bit. Yeah, half joking and the like very interested but like, I don't know, but go for it was one of those like toners off the never gonna say yes. But if
Will Hutton:you know if you don't if you don't ask you don't get right. Exactly. Yeah, that's it. Yes, it'd be something that we would be very interested in. Meeting and that was call it right, a week or two after we closed. So still January of 20. No, no thought of COVID really inside. And then we quickly signed a contract to acquire the V position collapsing both of which would you know, before the cost of the renovation and TI and LC and carry all that was a basis of like 300 bucks. So we went from 200 foot leasehold to 300 foot fee simple, amazing, cool, we still thought about that as a really big deal. And few months go by COVID heads everyone's scrambling to try to figure out you know, what's the best you know, space plan for the building at the time because we have to drastically redesign the interior of office building to take into account COVID And and the design modifications that we need to attract employees in this new post COVID world as things are rapidly evolving. And Marsha, you know, April and May of 2020 briefly explored doing some sort of multi family conversion didn't quite work because the four blades were just too large and it just would not have been a very efficient altogether building. You know, move forward with our final design, you know, for the call post COVID modification and then needed to get financing because not only do we have to close on the fee, which we never thought we're gonna be able to do by collapsing the family so it was like, one of the things were like, never thought you're gonna build pull off almost two good to be true. And I kinda have a gun to your head, and we need to get financing for it sure, in time, our, you know, our construction doxford on. And we also needed a construction loan. We went out for our financing in September of 2020, when, you know, New York City capital markets, they're more or less. Yeah, for, you know, call it spec wood off speculative office, September 2020, was around the date that a lot of companies said that they were going to be bringing people back to the office, and then they delayed it for a whole year. And it's interesting to see, or at the time, how responsive Oh, a lot of lenders out there were just to work from home plans, it was, Oh, we're interested in this, oh, XYZ company is pushing their return office date back, you know, 12 months, you know, this isn't gonna be for us. And so, we, you know, attempted to get, you know, our financing at a very interesting time in the capital markets. And we knew it was gonna be a challenge. Going into, it's gonna be a challenge. And then I, you know, I had the idea randomly. I was like, why don't we think about sea bass here? Because one of the interesting things that one of our MEP engineers told us is like, A, your utility bill is going to go down and like 75%, like, once you're done with with the renovation? Because this is a extremely energy efficient building.
Adam Lipkin:Yeah. Well, you said it was built in the 60s, or when was it? I mean, think about that. It's 75%. It's almost like really, is that I mean, you know, I hear like 30 40% in some cases, when you do some of this deep work, but I mean, I'm sure you hear that number. It's like, wow, like, this is a really interesting,
Will Hutton:yeah. And we're like, alright, that's a big enough number that like we should order report and study and understand, like what exactly that means. We think that's very meaningful to the value of the building and also the offering to our tenants. And so we knew what the base was, we weren't experts on it at the time, then our partners at Wafra was familiar with a sea bass lender, that they looked at doing business with, you know, a number of years ago. And then I think middle he said, like, I don't know enough about this quite yet. And that was that was, that was Petros and awesome. So we call Petros and we said, we're doing this massive, you know, fee acquisition plus construction, construction loan. We think we want to do sea bass here. I don't know enough about it. You know, what do we need to do in order to, you know, see if this is feasible here, and they said, well, it's not approved in New York, it should be soon pristine, you need to do is order a engineering report. So we can tell you how large the sea bass you can put you can put on the property, we thought we're gonna get 20 $30 million, the sea pays engineering report came back and said we qualified for like, upwards of almost $90 million. And then the next question was, what kind of rate, you know, is an NGO dollars come out, we thought it was gonna be like 14 50%. And I want to say our spread out of being, you know, sub 5%. And we're blown away. Because if you look at the size of the loan that we're trying to get, you know, that slugga See, PACE is almost 20%. Yeah. And so then we actually pivoted and went back out to the capital markets and said, we have 90% of the capital, or we have a $90 million slug of capital stack, it's gonna be co pays. You know, as a lender, if you want to provide a whole loan solution as part of the sea pays, more or less need to be need to become comfortable with it. A lot of loggers dropped out, because they just weren't educated on sea bass. They didn't know what it was. A lot of a lot of firms thought C pays was a new form of EB five. They thought, green energy EB five. No, no, that's that's not what it is. And it was really an educational process.
Adam Lipkin:Was it? Was it you educating them? Like, tell me a little bit about what that looked like? Because I find that is, that is the thing that needs to be done is anything new to education, and then it's first getting the attention to even have that audience? I think you guys had the background reputation to get that attention. But then to have that engagement and have people look at this, which I didn't really have a playbook for it was like a new product. How did that come about? Like who was involved in those conversations? I know one point we also talked about part of the lender consortium played a real role. But what was that like? And tell me some of the conversations that came up early they said they said to green EB five that was one thing that came up what are other things that came up?
Will Hutton:That was one of the questions from more letters to pass on? They thought it was green EB five financing.
Adam Lipkin:And what right I mean, I know you know,
Will Hutton:a lot of it was you know, inner creditors sand, standstill and subordination. What exactly is it? Is it you know, met cheap meds with less peace Is it super seniors? You know, that's more expensive. In reality, as we all know, it's just a tax assessment. But, you know, I explained it as, you know, less Harry or she mess with less you, there's no CC, it's not a mortgage, it's effectively a tax assessment. It was really just a kind of open book conversation on what is this? And, you know, as a lender, you know, you know, how do I how can I get screwed? You know, how does it work for me, it really kind of came down to, you know, a private debt bond, who didn't really have the difficult bank regulations that were willing to have open mind, an open mind to educate themselves on what exactly the face was. And that's kind of how the lender consortium kind of came about with one lender who spoke through the whole loan with CPSP involved and then bringing other lenders into the capital stack. And then as Iran capital stack, it was an educational process on really explaining what it was, I'd say the business folks or the Yeah, the loan originators were probably the first ones to really understand what it was and how it worked. Sure, it makes the largest educational process I'd probably say, going through the ringer on it was probably from a lot of words involved.
Adam Lipkin:Because what was what was the what was the conference call? Like? How many how many attorneys are on some of those conference call?
Will Hutton:Well, when you have, you know, multiple lenders
Adam Lipkin:for four sets of lenders, it was it four or five,
Will Hutton:four, I
Adam Lipkin:believe your lender, more counsel and see pace
Will Hutton:and see pays
Adam Lipkin:40 people on a call.
Will Hutton:It was it was very complicated. I can tell you there was there was more offline calls with lawyers talking directly with you know, Petros, just walking them through what exactly everything is. It's it's the lawyers who need to cross the t's and dot the eyes. Who no offense of them. I hate to say they're kind of stuck in their own way. You
Adam Lipkin:know, it's a new thing. It's a new product. Yeah, it really be able to make sure everything is vetted out. So I got it. And it was great r&d work you did, frankly, yeah. And
Will Hutton:the biggest challenge at the time was CPAs. wasn't approved in New York. It was on the one inch line waiting from a stamp of approval from the mayor. Yep. So all alone, Dr. Don, we're gonna hang it out for 1530 days. Wow, you get to see
Adam Lipkin:everyone just waiting, right? I mean, geez, yeah. COVID is happening. And that's the priority. So being like, Hey, could you give us some attention to just move this forward? Right. Yeah.
Will Hutton:And it was a great team effort from literally everyone involved to, you know, educate themselves on this new innovative, you know, product or portion of the capital stack that Yep, most most people didn't know existed. Everyone approached with with an open mind, I think that was part of it, you know, there's lenders out there who just didn't want to learn about it, they make loans a certain way, not really open to certain structures, and it was a non starter for them. But as a lender, you know, I was hoping, you know, under zero speak with, you know, if you if you can become, you know, educated on it and learn how to use it in your capital stack. When you're offering a whole loan solution as a borrower's, you can become extremely competitive and win deals that you otherwise I'll be normally couldn't.
Adam Lipkin:That accurate. Yeah,
Will Hutton:probably the biggest impact that we didn't have the foresight to recognize at the time was more from the leasing community. As I briefly alluded to, you know, even like, Ratterree, close, it was all the headlines. You know, for CBS in New York, you know, 89 $90 million are losing brokers. Kim Dawson, listen, we're getting requests from tenants and RFPs that we never thought would be looking at downtown office. Granted, we're, you know, we're effectively delivering, you know, class, a quasi new construction product at a fraction of Class A rents. Also, all these tenants came out of the woodworks and they were extremely interested in the building because of the secret slump, because now there's all these fortune 500 companies that have these, you know, ESG requirements, which they're all very good, you know, carbon neutral by 2030. And they're difficult for a lot of these fortune 500 companies to find certain buildings, in markets where they want to be in that that can provide that you know, carbon neutral, you know, carbon negative, if you want to call it offering by the time you know that either mandate,
Adam Lipkin:let me let me stick with that for a second because it's such a big point. So I was at this event last week, the one I just mentioned the top of the hour with commercial observer, that one really great panel, it was the fifth wall guy, Bragg Rui, one of the co founders. They're probably one of the biggest prop tech companies in terms of funding. And he was talking about what he's all in on climate tech. Right. And they were talking about, there was a question that came up around what's going to lead to more and more of this movement in decarbonisation. And it was the idea that regulatory pressure, you know, having more of these local laws, you know, like in New York City, local on any seven others, but then it came up that it's actually not even as much regulatory pressure as the pressure from the companies that are mandating and and saying, Listen, we can't have you in our comp set, unless you have that right ESG strategy, otherwise, you know, you're not going to be relevant for us. So I think all the tech companies are really going to move this any company that's looking at where my ability is going to be, you know, if I'm going to be in New York City, or Chicago, or Miami, any market, you have to have an ESG strategy to your point, otherwise, you're not in a comp set. I mean, that's the pressure mind are
Will Hutton:100% Correct. We recently worked with a college, fortune 10. tech company that we're very close with, and they're looking for office space, and they had extremely strict requirements, Nabis and who they are, but because of their Eish ESG mandate that you need. And they're willing to pay the freight, but, you know, it needs to be extremely energy efficient building. And, you know, as a borrower, you know, I'm a firm believer that, like, if you spend the money on ESG compliance on and making a more green building, the rents will eventually policy, right, our, you know, coming out of this post COVID recovery, but that kind of that still kind of plays into the whole, you know, flight to quality argument. You know, ether used to be the, the the check the box item. Now, it's a, this is a requirement. And yet one of the first questions that tenants are asking on RFPs, when when they say, Hey, we're coming to market, we need to go with square feet. They asked, you know, 10 landlords for an RFP, you know, first or second page, other than the term of the lease, and the size is, you know, the ESG clients of your building.
Adam Lipkin:That is fascinating. That's That's reality right now. Yeah.
Will Hutton:It's like, the leasing brokers are becoming more educated and experts on it, when they said, like, out of necessity, I've had to ask everyone internally, our own ESG people really educate the brokerage teams on, you know, how do I, you know, guide, you know, my tenants are gonna guide my clients.
Adam Lipkin:It's a ESG is a macro theme, right? So you could you could differentiate, if you're a lender to say, we're going to be, you know, ESG friendly, and one of the ways we do that is with tools like pace, you could do that as a leasing broker to say, we really get this and we know what I'd be able to tailor to the clients that need this and demanded, I mean, you can do it across the board as a landlord and your position, you know, I feel like you guys are really differentiating, I love what I'll just share one of this cuz I know we're kind of wrapping up a little bit the hour, but you're putting some really amazing technology into the building. One that I was already familiar with these guys for several years has been in the CPA space for a little bit, but but view smart glass technology, to me, it's just mind blowing, and to see what they're doing now with some of the display technology, talk about like a shiny object, you know, I was seeing some of the press like, you know, Google sharing about, you know, what they're doing with the, you know, St. John's, you know, building and and you know, being able to see that in action is so cool. I highly recommend everybody type in view smart glass when you have a chance and look at one of the videos that just shows what the technology looks like. But, you know, tell me a little bit about, you know, what you guys are doing in the building, maybe you can highlight that, but I'm sure that you're drawing a lot of interest as well, right?
Will Hutton:Yes. So I'm not going to explain it correctly. But these smart glass is the latest and greatest technology in the glass arena. And it is a extreme energy efficient measure that you can take for building it automatically tense. So you go by your standard office building in Midtown, you know, some of the shades are out some of the shades are down at night. It's not the best looking product and abuse my last building, you don't need shapes because the Windows automatically tend there. It's not Metaverse technology, but it's smart enough technology that it can react to the temperature inside or outside where the sun is shining. So it will automatically 10 tent. So So you so your building become more energy efficient. You have to worry about, you know, turn on the HVAC or turn it off. It's a it's a extremely efficient efficiency measure that I personally think is going to be you know, the future of new construction office buildings. Yeah. It's one of the things we're like, until you see a sample of it. You know, the videos Cool, like, once you see a sample of it, like you're completely sold on it,
Adam Lipkin:I know I gotta see it. I have a buddy who's been with the shop for a while, and I'm like, I got to see it, you know, you know, myself, because I've seen the videos. And I'm like, this is mind blowing. And I think to your point, like, it's like, if you have an existing building, I mean, that stands out. I mean, even if you have a new building, you typically don't have that technology because it's brand new. So you have in house other way to pull people because people like that. That's that's real cutting edge. Yep. When did you guys think that to put that in? I'm curious, when did that come up in the business plan?
Will Hutton:I want to say probably after COVID. Okay. We under like kind of, we've had to redesign a lot of the building to account for it, you know, the videos that they have, the windows don't really do a justice, you got to see it firsthand, but has, you know, amazing technology where you can have your smart glass and in your conference room, and it can effectively turn into a TV screen, or video board.
Adam Lipkin:Which is oh, so future ish. I mean, it's incredible. You see it, you really think it's like a sci fi thing? You know, you really picture like you're in this conference space, and now you're projecting on the walls. It's credible. Yeah, like something?
Will Hutton:It uh, it really is. That I would say that's probably the biggest component of the sea bass. Was we're making a ton of improvements of building but probably from, you know, the facade slash window replacement that we're doing there.
Adam Lipkin:Yeah, it's a big ticket item. Yeah. But it'll translate it. I mean, I think also, it gives you so much that the press, you know, you've got from sea bass, but also that I think it draws so much. It's like, attention is such a currency. And you're basically getting free marketing for people that are just geeking out over all the stuff that you're doing, from the view smart technology, see pace, I just think it attracts incredible attention. I'm sure you're seeing it firsthand. It's like, I was asking how many how many calls you get a day on a on a project, it's probably like pretty significant volume.
Will Hutton:It's a lot, you know, most of it's from other owners who want to know more about the view on them more about the CPAs. And then how can work with them? Yeah,
Adam Lipkin:so we're kind of wrapping this up, I'll just kind of leave, I want to just kind of wrap up with a couple questions. Biggest thing more than anything, you guys really I think you went from zero to one, you know, having that one case study now in the city with your project. And I think that's going to be where you see more and more attention for CPAs. I'm sure you got some in the works as well. I'm sure there's some lenders you're having conversation with and letting them know like, Hey, this is what we just did. We're just going to be looking for more of it. What are the conversations looking like? If you're talking to lenders right now, some are tuning in? What else? Could you tell them other than you're going to stand out in the market? And in a really busy space? How should they be looking at sea bass?
Will Hutton:How should they be looking at sea bass? I mean, like the best way to explain it is because it's a lower cost of capital than what would ordinarily probably be in that working capital stack is healthier for the overall deal. Especially on an app noncash owner lightly cashflow, and construction deal. Or redevelopment deal where there's some sort of interesting carriers are having to see based on capital stack certainly lowers the overall basis. And that's both good for the borrower and good situations and good for the lender in a bad situation. You know, I always encourage, you know, lenders to, you know, ask themselves internally or ask their credit committees, you know, how we can best use this, you know, in our offerings? Because the first step is education, really knowing what it is.
Adam Lipkin:Sure. And I think that's such a good point to just touch on that there's, there's so much r&d Now in the Prop tech space in the innovative financing product space. I think the stat I heard this is also at the conference, over 30 billion went into the prop tech r&d, talk to people talk to you talk to a CPAs provider, find out what's actually happening, because there's so much investment in dollars and showing how you can be able to do unique things a lot. A lot of building owners, it's like you're so good. You're busy with so many things already leverage folks that are really deep in this space. I think that's just it serves you. So yeah, you're out of this and cry. Awesome. So I asked a question at the beginning of the hour. And it's, it's really interesting. I want to get your take on you guys are so deep in this office space, and you've done some incredible projects. What's the future hold for office right now? What are some of the things you see happening over the next couple years?
Will Hutton:So, for starters, I think we can all agree there's certainly going to be more flexibility. You know, I do think this is this could be my personal opinion, because this is somewhat self serving, but like I think a lot of this work from home is gonna trickle away or trickle back. I think a lot of companies are being a lot more flexible to individual situations and, you know, solutions wanting and needing to have flexibility. I still think long term the future of office space, I mean, I make this analogy. Do you think you know Steve Jobs and Apple could have designed the first iPhone, you know, on a zoom camera working from home? No, I'm sure they're in a conference room,
Adam Lipkin:we're gonna be in a garage or conference or garage.
Will Hutton:Well, that's really company astounded, but I'm sure the iPhone sounded much nicer setting by being in the office, you know, collaborating, working together as a team, seeing everyone's personal reaction and emotions to everything. You know, I do think in the short term, companies are gonna be looking for more hybrid and Flex Solutions as they figure out how to bring everyone back in a safe and comfortable manner. Yeah. But still, I'm still, you know, on the longer blade or an office, you know, especially, you know, higher quality, it's one of the things where, like, you want your employees to be proud to be owned in certain building, and wanting to hang out together in a certain building, whether it's socially or professionally. So I think, you know, the office asset class is obviously experiencing some disruption as a function of COVID. But I'm extremely bullish on it, you know, rightfully so. You know, on a long term basis.
Adam Lipkin:Yeah. I think it's going to continue to evolve. And as we were talking about earlier, there's no retail apocalypse. It's evolving, just like the office is evolving. It's going to be both it's gonna be flexible. And I think there's a tremendous future for it to see how more and more tech is being incorporated to make it just absolutely spectacular. So Well, thank you, man. This is a great, really great conversation. I really appreciate you sharing all your insights. You know, you have such great in the trenches experience, and I look forward to continue the conversation. Real pleasure. All right. Thank you. All right. Take care.
Producer:Thank you for joining us on another episode of The see pace confidential. Give this episode a like and subscribe so you don't miss any of the fast coming opportunities in the world of C pace. Got a question? message us on LinkedIn. Adam Harris Lipkin. See you next time for another edition of the C pace confidential