CPACE Confidential
CPACE Confidential
Episode 5: Nick Barbaria
On this episode, we speak with Nick Barbaria, president of Arriba Capital.
Nick has been doing what has long been thought of as impossible…
Hotel Construction financing up to 80% LTC with #CPACE during COVID.
Find out how Nick and his team are getting these deals done.
I think in the coming years if you're not doing C-PACE as a lender, you're not going to be competitive.
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 to see pay sky, Adam Lipkin.
Adam Lipkin:Hey everybody, welcome. Welcome. Welcome to the CPAs confidential I'm your host, Adam Lipkin, the CPA, Scott, we're in November, it's wild mazing kind of rounding out this last quarter of the year. weather's amazing down here in South Florida. It's nice to be able to see it cooled down a little bit was uh, was at a really fun in person event last night. I want to give a shout out to you know, the group that just did such a tremendous job, but it's nice when invite everybody from out of area good time to take a trip down to Miami and South Florida for the holidays for sure. Whether it's getting into the 60s Paradise season, as I call it, but just want to kick off the show with an announcement and then and then we'll jump into some news and our guest today. I'm really excited to have on the show. So I just want to kick it off. I want to give a major shout out to profile Miami, we got Katya and Dimitri, you guys did an absolutely tremendous job last night at your kickoff event had such a great time it was hosted by Rodney Finbar, who's just really, really iconic down here, completed his Palomar on like such a key destination spot on the beach like right at Alton Dade. I mean, absolutely. Such a cool design. The event was on the rooftop, and it was just tremendous. We had Gil dezer, we had architect Kobe carp. And Ronnie said some words, his attendance was it was just great. You know, it was really, really awesome. Well done. I feel like we need more more of these kinds of events. So I want to really give a great shout out to profile Miami, guys, check them out. If you haven't already, you can subscribe on their site. Really great content. Rodney actually just had an awesome interview, talked a little bit more about the project and also the Thompson he's doing over on Washington 17th. So highly recommend checking it out. And, and just kind of jumping right into the news. I'm always like checking out what's happening on LinkedIn, Twitter, like some of the feeds, and certainly industry and a buddy of mine. I've known for several years in the industry, Nick, who we're gonna have on in just a few minutes, I am on my feed. And I see him post this it was a week ago. And he's talking about doing an 80% Hotel construction loan with CPAs during COVID. Like, oh, my God, you're doing the impossible. We got to have you on the show. We got to hear what you're doing in this space. And he was awesome to be able to jump on today. So we're gonna have him on in just a few minutes. But I asked a question last week and I said, you know, some call C pay super senior debt, some call it replacement equity. Which one is it? And it's how do you look at it? Is it debt equity, I purposely wanted to word it like that, because I also added the option neither. And so it was interesting to see the responses, I got roughly half called it debt. Pretty much all the lenders I know and a number of advisors put it in debt, there were just a couple guys that call it equity. And then the remaining I'd say almost half called it neither. And that was most of the guys I know in the space industry and a number of advisors I knew too. And I just thought it was interesting, like the makeup of how people view it that are familiar with it. I mean, I would definitely put it more in the camp of neither just being an assessment. And I see how it has certain properties that could resemble debt, and certain properties that can resemble equity. But I really make it a point to differentiate it is something that's neither and I think that it's important to know how to introduce things that are new, but I but I definitely get how folks call it debt. And I think it's challenging when it's called equity. I think that's actually something that needs to be revisited. I'm good with neither. But I think equity is a little bit of a stretch. So anyways, on that note, I want to I want to bring on Nick Barberia who's the president of areeba capital and Nick and his team, just awesome in the industry. I really got connected with them several years ago and was was impressed with how how scrappy they were. They were like real hustlers. I felt like when it came to hotel financing, they just would know about a lot of the innovative things happening. They you know, when I was talking about C pace a few years ago, you were aware of it knew the challenges with it just see a lot of unique ways of structuring deals and specific expertise when it comes at Hotel. So I wanted to get Nick on I wanted him to share a little bit about background, some of the creative things that they're doing in a really, really tough time, just how it evolved and COVID from LA Last year probably been worst ever, to now just this incredible bounce back in momentum in a lot of markets. So looking forward to having Nick on. So with that I want to bring on my guy, Nick Barberia, President RIA capital, how are you, my friend?
Nick Barbaria:Thanks for having me, I appreciate it. Man,
Adam Lipkin:this is great. It was a really nice opportunity able to catch up with you too. And, and just kind of get a little bit of a perspective from what you're seeing what you're doing. And, and, you know, kind of get into it a little bit. So, look, I think I got connected with you guys. Three years ago, I was I was basically introducing pace to all my guys, I know, the industry. And I kept on seeing the group coming up a lot over hotels, I was spending so much time in that space. And I just, I really felt right away, you guys, you got it. You know, you were seeing how through best execution as many options as you can, you could really get client needs met. Right? So you're looking at everything, you know, all sorts of solutions. And see pace was something that, you know, I felt like was was interesting. So fast forward, it's probably been I mean, since COVID, right? That's like the conversation these days with a lot of us where it's like, haven't really talked to you guys much. I think I talked to one or two of the guys on the team, maybe beginning of the year. But maybe you could give us a little bit of a background about Nick and kind of how you got started with a ribeye, I think is such an awesome story. When you take a company founded and you grow it, and and maybe just then we'll jump into like, what's, what's happening now and what's been like your COVID. So tell me a little bit about background.
Nick Barbaria:So like most people, you know, coming out of college, they don't really know what they want to do with their lives. And I had a lot of friends that were kind of already in, you know, commercial real estate financing industry. Some, you know, want to call it some Bennett. And I was just intrigued. It seems like, you know, they were doing all right. And, you know, I kind of just jumped on the bandwagon and, you know, went to firm, went to work for a firm that really kind of, you know, taught me a lot about it. And, you know, after a couple years, I thought I knew enough to, you know, start my own firm and kind of go out on my own. You know, I think that was because of you know, we were seeing the deals that were getting done. And then the paid my paycheck at the end of the day that just didn't didn't match up. So
Adam Lipkin:what year did you make the move?
Nick Barbaria:Oh, God, this is probably 12 years ago. So we've been Riva has been in business for about 11 years. Now. It's,
Adam Lipkin:I mean, it's an interesting time, we're talking like 2010, right? 2000 ish, right? Like you're coming out of the recession, you're starting to see movement, but it's, it's interesting. I felt like it's very similar to you hear the trend with the Great Depression, how so many businesses get started in these real tough times, just being you know, resilient, and you know, everything that you need, and how I felt like, there's a lot of guys that took that time that you almost had like a reset to get creative, and did some really unique things like starting platform. So it's an interesting time to get it started. But you've clearly grown it. You're you said 10 years
Nick Barbaria:in? Yeah, 1010 or 11 years. We went from, you know, two guys to six guys now, you know, doing a, you know, one or two loans a year to you know, one or two loans a month now. Yeah. Yeah,
Adam Lipkin:it's amazing. It's a great, great story of growth. So, you know, you got the company started, you've grown it over, you know, now over a decade, I mean, I don't know what they say the stat is that what is it like 90% of businesses after the first year, don't make it and then another 90 within five years, so you know, you're you're in a you're in good company and being able to get something 10 years, so that'd be proud of really awesome. It's, it's
Nick Barbaria:definitely not easy. You know, starting your own commercial real estate, you know, mortgage business, and we had a personally, I had to learn the hard way, you know, I didn't really have a mentor to kind of, I think you've coached me along the way like a lot of people do. But you know, I think I look back on it now. And I laugh because I think I've I've learned a lot of a lot of good from some of the mistakes we've made in the past.
Adam Lipkin:Yeah, I was gonna say is that what you think? You know, one of the one of the you know, kind of things that you could attribute is just trying a lot, you know, just kind of failing forward, you felt like you found yourself just going for trying a lot of things and not like kind of holding back wondering what's gonna
Nick Barbaria:go Yeah, I mean, you don't succeed if you if you don't fail a few times, you know,
Adam Lipkin:for sure, for sure. So let's talk about I mean, so you've been at it for a while. I feel like I saw a lot of activity you know, 1819 show 20 comes along and we probably been talking well let's talk about even a little bit about sea bass history with it like when did you first see see pays show up? On Your Radar?
Nick Barbaria:I would probably say like 2017 years. I mean, you With your
Adam Lipkin:worry, like, you know, here's this guy, you know, he was telling me about it. Yeah. I mean, that happened a lot. I feel like if there's one thing I could claim, I could say I introduced a lot of people to it for the first time.
Nick Barbaria:Yeah, I mean, at first I thought it was a fad. You know, it's a, you know, it's another thing that's gonna come and go, You really didn't pay much attention to it probably like a lot of people. And you kind of fast forward today, it's becoming much more mainstream.
Adam Lipkin:Let me ask a question. Go back to that, like when you thought it was a fad, like, so imagine somebody talks to you bought it the first time? And they tell you all the sales point, oh, you know, you're gonna, and it might have oversold it to like, I don't know, depends on I think it also depends on how it's introduced. But at some point, you make some, like, assessments about it, right? You kind of are like, Okay, this is kind of how I'm hearing it. Do you immediately say, I don't think I could do anything? Or did you like have like a stopping point? Like, maybe you try to run it by a lender or a borrower? Or somebody, you know, like, what did you What did you come to that conclusion? Like, at that time? I don't think this has anything to spend time on?
Nick Barbaria:Well, I think once we found out, you know, from a client that they did the page deal, and they, you know, kind of told me, you know, how they got it done? And you know, the benefits of it? I said, Well, wow, you know, this is something that we can definitely, you know, kind of blow up and, you know, announced to some of our other clients and get them in the same, you know, financing structure that our one client that I just mentioned, had, and I think it's very, you know, advantageous, and it's kind of outside the box, and not too many people are doing it. So, yeah, I mean, it's, it's definitely in benefits, or it's definitely beneficial. Yeah, today. So it's interesting.
Adam Lipkin:I, it's always like, you know, because you see a lot, right, you see lots of products, you kind of have to play a little bit of a filter game to know like, where do I invest my time, I only have so much time to spend on, you know, that there's certain things that have higher probability of hitting the not right, so you kinda have to go through that. And I imagine one test for a lot of people are, have I seen somebody I know doing it, right? Like, I imagine that comes up for people. It's like, somebody comes, you're like, hey, you could do all this great stuff. And you're like, why haven't I seen it? Right? Or why haven't any my clients mentioned it? So right? I imagine there must be something like that comes up, and it sounds like you're aware of it, but maybe one this one client of yours. And maybe tell me a little bit about that backstory like when that happened. And you know, how you kind of, like, immediately connected the dots and said, Oh, you know, what, if I know they're doing it, everybody would at least be interested about it.
Nick Barbaria:Exactly. I mean, this was a very well respected client. So I had an issue of, you know, taking a good client, and having him be the guinea pig CERCLA for a transaction or something like
Adam Lipkin:that, let them ask for it. Right? Yeah, I'll help them if they want about
Nick Barbaria:it, or face, you know, I'm going to be the bad guy.
Adam Lipkin:It's a completely valid concern. I think it's like that with a lot of either a new lender, or all sorts of those things where you got to really balance that you want to introduce innovative ideas, but you don't want to have somebody trust in something that might not have a track record and have it really, you know, be an issue. So I get I get it, I just think it's good to hear perspective about what it's like when you start to make decisions around innovative things, new things, because we, you know, especially with technology and a lot of things that we're seeing more and more possibilities of being successful with, you know, all sorts of things and innovative ways, and you just kind of have to really know, how do I determine where to spend my time? You know?
Nick Barbaria:Yeah,
Adam Lipkin:so So you So you saw, okay, we got a we got a guy that has a lot of respect, who's already getting a lot of things that he's asking for? Did that change your perspective on? Oh, interesting, like, these guys are now doing it or asking about it, like, what happened when it came to when that conversation came up?
Nick Barbaria:You know, he told me about it, and kind of told me how it came about. And I always hate learning from clients. Right? I like clients to learn from me. Yeah, that was kind of a role reversal. Right?
Adam Lipkin:So yeah, so tell me if you could tell me a little bit about you have to name the guy but just tell me a little bit of background is this is somebody you've done business with already, or somebody that you're trying to do business with? How your
Nick Barbaria:guy on 2025 hotels, you know, some somebody that we've done, you know, a loaner to for in the past and yep, you know, so it's a if this this guy is knows what he's talking about. So if he's telling me it's legit, then it must be legit.
Adam Lipkin:Got it. Let me let me come back to that. But just for a moment. Let's talk about also like last year when COVID first hit, and it really had the whole industry get shut down. I mean, obviously, some industries got hit harder than others. Hopefully got hit. I feel like as hard as it gets, I mean really took a hit when it comes to real estate asset classes, retail hotel, were the ones that everybody was like, Oh, my God, what's what is happening? We have no idea no playbook for this. What was that? Like? You know, I don't know what percentage of business was hotel at the time. But I know for me at least there was a time, I mean, maybe 80 plus percent I had active business that was see faced with a hotel, further development or some kind of transition. And it was like, it was just done. You know, it was just done in March. And there was just no, like, no movement I felt so tell me a little bit what was what was it like in your world? Did you have situations where it was just kind of on hold? And then I'd love to hear how that evolved?
Nick Barbaria:Yeah, I mean, it was a rude awakening. I mean, we had 100 plus million dollars of active deals, you know, under application and in various closing stages, and everybody just seem to get, you know, cold feet. It was, hey, you know, we need to wait another week to see how this plays out. And, you know, in that week, turned into a month. And then finally, I think we just realized it, these deals aren't getting, you know, done the world junk wire, all the lenders are pushing the pause button. And yeah, I mean, it was a it was strange times.
Adam Lipkin:So it's, it's like, basically just on hold. And then when did things start looking like there's possibility again? And what did you when did you guys start kind of getting smart about? Here's what we could do. Here's how we're going to position ourselves? Because it seems like there's been a real like, certainly this year, ton of momentum. Seems like you guys have been really active. When did things start to shift? With you in the group?
Nick Barbaria:Yeah, I mean, we've been really active on the construction front, I would say probably, I, we saw the light at the end of the tunnel, probably the start of this year, maybe more.
Adam Lipkin:Okay. And when I did makeup, was it was it more like multifamily? Like, what did you find you were getting done earlier in the year?
Nick Barbaria:I mean, we had a few like storage and multifamily deals. I mean, they were kind of the Darling asset class that everybody would still do. But our our biggest asset class that we financed is hotels, I would say it's probably 70% of our overall business every year.
Adam Lipkin:So I so let's talk about how that evolved. Because I saw last year, it was just every every hotel lender that I was close with, basically was just like, run hold, and it was all focused on the existing portfolio, definitely through second quarter, probably even third in some cases. And then I felt like towards the mid second quarter, third quarter, you know, maybe September, maybe earlier, but probably around September, October, it was, hey, we're going to look at low basis for existing. Nobody was touching construction. Everybody would say the same thing. Oh, we'll do existing, you know, maybe help things get, you know, just through the next year or two, whatever the ramp up period looks like but nobody was doing construction. I was I was like constant getting these requests for hotel construction. And I'm like, I could do the sea bass. But i Who's your lender? Right? I mean, it was like, and nobody was really stepping in. So when did you start it? Well, first of all, did you see that? Or do you see that there was still hotel construction options last summer or fall? Tell me tell me what was showing up for you
Nick Barbaria:know, there, there really wasn't any hotel construction options last year. As far as you know, maybe some acquisitions or refinances. We saw some getting done at very, very low leverage, like 40% leverage, right? It's like under 50%. Right. Yeah. Or they were like SBA loans. You know, the government increased the guarantee from 75% to 90% on the SBA loan, so that kind of incentivized lenders to, you know, start lending to the hotel. Business again, because they had that higher guarantee.
Adam Lipkin:Did you guys get that machine going? I know, some groups that were just like, going crazy with that, just Yeah, I mean, like, just like a machine literally, like
Nick Barbaria:your share of SBA loans. I think it was through the incentive was through September 30, where they had that 90% guarantee. And I know there was a mad dash to to get those loans closed before them because there was a much bigger premium in it for the the lenders and a much higher guarantee. And, you know, if you're telling me I'm a lender, and I only have 10% risk on the loan, I mean, you bet I'm gonna be making some some, some hotel loads.
Adam Lipkin:I felt like that philosophy is go where there's a hot pocket of capital and almost back into who would be able to best use that. Like, I felt like because I'd been in the industry, you know, I guess it was probably oh five that I really jumped in and just spent a lot of time looking at, you know, what are interesting capital sources. And this is also like back in the last cycle when people were doing some very unique things, converting condos and having certain lenders that were jumping on that so there's just different profiles for different people. I think with pace what was interesting what Could you find like a hot bucket where there's the lender with pays, or they do the whole thing, and you get the higher leverage, and you just run with that for a scenario. And for a while it looked like that was gonna be hotel. I had some success doing that with hotels, and then it really shut down with COVID. So what I was really intrigued, and I'd love for you to share about it. What was like the high mark early this year that you had gotten done with construction for hotel without pays what was like the highest leverage point that you were achieving, or that you saw was available? Realistically,
Nick Barbaria:probably 60 to 65. But I mean, those lenders that were doing it, whether it's a bank or a debt fun, I mean, they wanted to get paid for it. They were taking advantage of the times probably just like anybody else, if I'm going to do
Adam Lipkin:a 10 10% or so nine 10%. Yeah,
Nick Barbaria:there abouts, maybe? No, well, I mean, I'm in a maybe a little bit cheaper, you know, okay,
Adam Lipkin:maybe eight or so eight and a half. So you have the guys initially early in the year, having gone from doing hotel to multifamily to then coming back to open to hotel, but lower leverage, and 60% was maybe what was showing up maybe 65. But that was beginning of the year, right?
Nick Barbaria:Yeah. Again, most of the lenders, I think they wanted to be kind of the trailblazers, and said, Hey, we we either think the hotel world's gonna come back, or we don't. And if we do, you know, we need to be out there booking these quality clients, that we wouldn't have had the opportunity to a year ago, you know, the, let's say, Wells Fargo client or somebody else. And if we're going to do it, you know, we're going to get paid for it as well.
Adam Lipkin:So what do you guys do at this time, like when you have clients that are sitting on projects that they're just kind of on hold for these months? And I imagine you're constantly testing your core 1015 20 lenders that are your go to is like, each month or every week, even? Hey, how's it looking? What can we do? Like? I mean, I imagine it was who's going to step up first? Somewhat? Right.
Nick Barbaria:Right. Yeah. I mean, the lenders that we work with closely, yeah, knew that we had a stable of quality business, it's just, you know, let us know when you're going to turn the spigot on and right, for sure. And, you know, finally, we got a couple of those calls. And, you know, we ended up getting some, a lot of construction deals done, you know, so let's,
Adam Lipkin:so let's just jump into that. So let's talk about some of those profiles. So that happened in March,
Nick Barbaria:April. Yeah, I would say March, April ish,
Adam Lipkin:spigots are back on my friend, and you start getting your deals done. And what were some examples that were getting done, like in April, May, like, give me maybe one that stands out for you, when you're like, we're back?
Nick Barbaria:Well, yeah, we had a construction completion deal. Um, you know, up in the Bay Area, that lender pulled out due to COVID and just kind of left our client high and dry. And
Adam Lipkin:it's like, 70% 50%, mid construction.
Nick Barbaria:Yeah, I think it was 65 70%. You know, the shell was up and yep, still needed to do the drywall and everything on the inside, but really kind of left our client, you know, high and dry. And, you know, we stepped into the construction completion loan on that deal. You know, a few other ground up deals where, you know, we, like I said, we had some banks that, you know, only want to do quality deals, Hilton Marriott, quality locations, quality sponsors. So we were able to get some banks on board at 6065 leverage, and they were, you know, PACE friendly. We didn't have to educate him on on pace. And
Adam Lipkin:so let's talk about how was that working out? It was a ground up construction. Yeah, ground up construction. And it was and it was the bank was in 460 5%. Yeah. 60 65% and then we are let's fix it for 60%. What's his like, a $30 million
Nick Barbaria:deal? No, I'd probably 15 $20 million loan. Okay.
Adam Lipkin:But on the total product size, it was like 30 or so. Yeah. 25. So $30 million round of hotel Bay comes in says they'll do 20 million about like, like around 65%. Right. And you have pace come in to go higher, or what ends up happening there?
Nick Barbaria:Yeah, pays to go higher up to 75. Even 80%. I think we've done, you know, a handful of deals and 80%. I know that you just saw the the one in Northern California that we did the a lot. But I mean, we've done a handful of those deals prior to 80%. Yeah, no issue.
Adam Lipkin:So let's talk a little bit about like the underwriting on that. So this is the bank and again, you have to reveal your sources. Who's the like bank profile? And I guess really the question is, is this a bank It's pricing in the threes or fours, like under a pace rate?
Nick Barbaria:No, no,
Adam Lipkin:no is the private bank?
Nick Barbaria:I know they're there. And they are private bank, excuse me, they're not they're not publicly traded, they're a pretty good sized bank, I'd say below $5 billion in assets. You know, we work with a couple. Yeah, and depending on the location, you know, some are kind of, you know, regional players, some are national players.
Adam Lipkin:So when it comes to like, how they're like, so this is how I thought a lot of times of what should be doable with pace. And what we'll get your take on this to see if somebody looks as it is like, this is super senior debt. And again, my take on it is more, it's a super senior tax, which is what a property tax is anyways, with no rights, I think you have to take it into account, you got to still be aware of basis, you got to still pay attention to coverage ratio to make sure you have income to cover ultimately pays assessments. But it you know, there's some folks that really just say straight up, won't do it, other folks say we'll replace our dollars with it, which I think is at least just, you know, look, and candidly, that's maybe we're at work. Now, I do think at some point, you'll start to see folks say, you know, I'll run this up to a combine scenario, similar to where I would run up a pref, or Ms. And as long as my detachment point is sufficient to get me to take out, I'm okay with going a little bit higher to I do think it's going there. But for now, I found that over the last several years is more and more private lenders that are praised that eight 9% or more that typically are basis driven and might say, look, okay, um, okay at 7075 80% of cost, because on value, that's 65% of value, or whatever it might be 70%, probably closer to 60 or so. And I'm willing to lend it a combined level between my loan and pace at x, wherever that is, let's say 70%. If you want to bring in pace, I'm just going to replace ally dollars. And so you want to bring in pace for 20%, I'll do my loan at 50, you come in for 20, we still stay at 70. So I'm curious, like how did that play out with this one lender that you're talking about? That? Basically you're saying they did 65%? Is it more they did 80. And they just paired it back to 65? To get more, you know, competitive price wise, like how they determine like, what's the basis? And how much pace they'll allow? Yeah, I
Nick Barbaria:think they were comfortable at 80 on all these transactions, and one of your questions at the onset was, hey, as is pays, you know, debt or equity or neither? I'd actually say it's, you know, from from the, you know, lender standpoint, you know, they look at it as dad because you know what, it's it's a payment and you know, they think it Prime's their mortgage, but to, you know, some of them look at it as well, the same way as, hey, it's not my dollars, so it's not my dollars, and it's its equity. Yeah, yeah,
Adam Lipkin:you know, it's and it's interesting, like when you think of other products that are just, you know, kind of been around for the last decade more actively, like EB five, like how some lenders just don't like any EB five, some, like a certain amount, they maybe want to have the borrower team have some minimal noun, and there still needs to be a total amount of equity. But I do find that there's a variety of ways of underwriting it. So there's maybe more of a coverage test in some cases, but let's go back to this example. So it was a it was a roughly $30 million deal. Right? And you had 20 of pace, and was it five? I'm sorry, 20 of debt and five of pace? Is that what it looked like?
Nick Barbaria:Yeah, I was about five $6 million of pace. So yeah, I mean, as long as it you know, pencils out the pace and, and the senior loan, you know, at 80%. I mean, we can get those deals done, was the
Adam Lipkin:lesser of 80%. Or like, 60 of value, or how do you like when you saw the underwriting? And it sounds like is this is this, the lender kind of pays combo that you've done now a few times is just like a go to that you have a good handle on what the underwriting looks like. Right?
Nick Barbaria:Yeah. They actually just took a little pause on on hotel construction lending, because we've, we've filled them up with a, a couple 100 million bucks, and they need to digest some but good problem to have. Yeah, yeah. So I mean, they're looking at, you know, a combine, you know, debt service ratio of, you know, 1.3 1.35, something like that.
Adam Lipkin:So they'll basically look at the pace as above the line, they'll call it an operating expense and say, as long as your combined coverage with the pace is still north of 130135
Nick Barbaria:Yeah, and you know, from a loan to value, like a stabilized loan to value, they probably want to be in that 70 75%, you know, stabilize on devalue. So you got to imagine if you're building something 80% of costs, you know, that the stabilized value is more than the cost, right?
Adam Lipkin:Oh, yeah, for sure. The question is, is it is that you're gonna be 10% lowers at five and I would think for hotels, like, you know, I guess depends on how people are, you know, there's very conservative valuations last year for sure. I don't know that maybe that's a question for you, too. Have you seen valuations come in better now, last year? Are people more optimistic than when you're not as much activity last summer? But yeah,
Nick Barbaria:we haven't had a shorter appraisal this year. Let's put it Yeah. Yeah, a dozen deals.
Adam Lipkin:So it sounds like really the lenders that are most friendly, are focused on a coverage test and a stabilized to value test. And they're not as concerned necessarily about the loan to cost if your values there, and you still have sufficient coverage,
Nick Barbaria:right. And most of most of the co pays lenders that that we work with, I mean, they have, you know, an interest only period for a couple years, anywhere from three to five years, and they'll capitalize the interest for, you know, three years. So most of the construction loans are three years, you know, to get you built and stabilize, and then you go to a long term, you know, fixed rate financing. So, from the eyes of most of the lenders that we work with, you know, if you have three years of inches capitalized, you know, that gets them through the whole term, before we go sideways, you know, on the seed pace on their loan, they're out of it. You know,
Adam Lipkin:it's such a good point you brought up because that's, I mean, that's such a big component of the risk for construction is making sure the thing gets complete, because once it's complete, there's value. Nobody really wants to do with it. Yeah, amid finished projects. So I think when you have the completion guarantees, when you have the pace payments covered for the entire period, even another year cushion, if you needed it to have maybe a ramp up period cover, you're too flexible. I think that definitely helps a lot. And then the other thought, I know, I'd be curious what you structured here, but I find that from when I initially had gotten into the pace role till now acting more as like a major lender that is able to see where pace could step in across the range of products that we have, I found that it's only gotten more competitive rates have come down. When I was looking at this in 17, it was still like in the right around seven high sixes, it's come down into the fives, I'm seeing deals that are really big, maybe even high fours. I mean, there's a lot of flexibility in that pricing. So I've definitely seen it come down. I've seen flexibility on exit. So on these deals where you have a three year term, are you finding pretty pretty much the sea PACE providers able to burn off any kind of exit fees by the end of your construction loan?
Nick Barbaria:Yeah, everything's questionable. You know, that's, that's what we found, I mean, more and more players are coming into the space, which is driving down pricing. It's largely dominated by non bank lenders, but there's a couple bank lenders that are starting to kind of dip their toes in the water, they either lend to these non bank lenders, and you wanted to kind of replicate their own, or they're just, you know, kind of getting ahead of the times, you know, entrepreneurial banks and see this as kind of the future. Because, you know, a couple years ago, I think, you know, pace was very taboo, right, and not too many people were knew what it was or open to it, but it's becoming more and more mainstream. And I think that's evident by, you know, a lot of these municipalities and states, you know, launching the seat pays programs.
Adam Lipkin:So that's a great point. And I think that in retrospect, I mean, when you think about it being active, just recently, New York City, I mean, it really hasn't had such exposure until I mean, that's a big move to now have a lot of the, you know, capital see it in their town. But when you think about it, I mean, it was out in California in 2009. I mean, it's wild when people like, you know, it's like, how long has it been around, it's been over a decade. So I do think, though, that in terms of availability, and then now what I think will be the next lever is more lenders saying, Hey, we could probably do something with this and have it be something that there's some playbook for it. Because that right, I feel like that happens too is sometimes if it's something new, it's like, a lot of times just like we don't have a you know, playbook for it. So like, you know, we kind of like how do we how do we have to look at it, right, like when you have a new product come along. So
Nick Barbaria:I think in the coming years, if you're not doing see pace as a lender, you're not going to be competitive.
Adam Lipkin:Nice, I'm gonna use that quote. But in all seriousness, it was funny, I actually just saw, it was a guy that runs a sustainability group for another major international platform. And he said, banks are so regulated, it's unbelievably important and it's only going to get more to make sure you have an ESG strategy and Net Zero strategy that is at the minimum compliance but um, you know, something that stands out as a positive. The the comment was, don't you think real estate is good? To require, like when you have lenders that are going to be now looking at where to make loans they're going to be looking at, is this something that I could look at that's net zero, or at least checking a box for ESG? I think that's coming down the road. I think that's going to be over the next several years, you're gonna have much more of a push from. It's not even just regulatory. I mean, you have a bunch of cities like New York City is a perfect example, local law 97, there's a penalty if you don't get to a certain decarbonisation goal. I think other cities before they do that will require transparency. You know, like, they'll require that buildings are open about their metrics around environmental risk, you know, decarbonisation goals. And I think what's happening certainly on the commercial, but I'm curious if you're seeing any trends on the hotel side, definitely you're finding the tech tenants, a lot of tenants looking at not not even to look at it to stand out, but almost just to be in the concept of where they could locate their their space in a building that has some, you know, in line ESG goals that's doing the right thing around decarbonization. Otherwise, you're not in the comp set. So I'm hearing that on the commercial side for tenants, like, you know, businesses that are looking for that as like, I mean, a lot of these brokers I talked to were saying that's like one of the top three questions that you get asked now. And I'm curious if you're seeing any trends, or any of the hotel brands that are saying, listen, we're going to differentiate, not just because we know our guests are looking for that more, there's a lot of segments of the population that like to see that the hotel is more sustainable, has a lot more those features. But that even then there's equity and capital that might be more readily available for that niche. Have you seen anything that's interesting to share about any, like, any, any of the groups, any of the, you know, guys that you work with in your sector doing anything in that regard?
Nick Barbaria:I think most of our hotel clients are very concerned about, you know, does this, you know, add to my bottom line? And if so, you know, how much and what's the kind of cost benefit analysis? Yeah, once one thing that most of our hotel clients, and I think it's pretty customary, they do charge a small green tax or see paste tax, you know, per night, per room, you know, of a couple of dollars, and that, you know, helps drive a little bit of incremental revenue, you know, to the property.
Adam Lipkin:Let me ask you, because that's a really good point. And I talked about that a little bit when I was in CPAs. And then I was a little weary because I didn't know how it'd be received by lenders. Like, I was like, Look, you could do this as the borrower, like, you're totally entitled to this. There's resort fees, there's all sorts of fees that people charge, why not charge a green fee for making a hotel, something that's sustainable, and energy efficient? And safe? Right, I get it and you're entitled to? I'm curious, has that conversation evolved? Where lenders will underwrite that as just part of the actual rate? Or are they saying, I don't know, we're not going to count that? Have you found that response to be?
Nick Barbaria:No, they definitely underwrite it to to a reasonable extent. I mean,
Adam Lipkin:they're not yet at$50 per seat $5 work see, like something like, you know, maybe a percentage of the room rate, right,
Nick Barbaria:I think three bucks, you know, the standard, you know, limited service like service. Right has
Adam Lipkin:to be, you know, in line with where you're at. So yeah, for sure. Yeah. And maybe I'm like an $800 Like, you know, one hotel you get, you could get away with 20 bucks. Yes,
Nick Barbaria:exactly. I mean, most of those people, they don't look at their bills, you know, they just charge it to the car and they're, they're done. But that's a
Adam Lipkin:real that's a really great point you brought up that it's almost acting like a pass through self a lender sizing, what's my coverage and they know that the pace payments are being covered by the $3 add on to this day, that makes it also kind of neutral, right? I imagine or close to it,
Nick Barbaria:oh, I would say probably covers about you know, maybe a third or four
Adam Lipkin:it's a conservative amount that still helps to net down the the annual expenses, what you're seeing in terms of like how the numbers are playing out.
Nick Barbaria:Yeah, the lenders give you credit for it. And we found that even the appraisers, they'll underwrite that as well.
Adam Lipkin:Yeah, I was curious to see how that evolves because I think that'll be a thing and then we'll come down to where's the you know, like how you make other assumptions on what's a reasonable for marketing and GNA and all that I think there might be what's a reasonable percentage relative to room stay and market for what's you know kind of market for a CPS add on three bucks five bucks, you know, depending on factors but no, that's that's a very good point that you brought up that I think makes it also interesting for for hotel so, you know, let's walk through who's like an ideal client for you right now. Let's talk about maybe like, Let's zero in on hotel guys. Where do you feel like this solution makes a lot of sense.
Nick Barbaria:I think a client that you know, is looking to do a ground up, contract. struction project, I think ground up is probably been easier for us to get it done rather than the retroactive. And why is that? Well, we haven't done a retroactive deal. And I think most guys don't, you know, trying to go back in time and get the necessary documents or items that you need to underwrite a retroactive deal. I feel like it's just not there. So I think doing it from the start, you know, ground up, you know, construction is much easier for us. You know, we get an energy report done, you really kind of figure out what the PACE loan amount is going to be. And then we kind of work around that we use that if we're going to do pace on it. I mean, we, we find out the pace on amount first, and then we kind of work backwards?
Adam Lipkin:Do you reach out to a pace provider or you go to like an energy audit service provider and say, Hey, we're looking at this project, do a do an energy audit for us? And let us know how much pace eligible stuff is in what do you typically find yourself doing?
Nick Barbaria:Yeah, we we usually either do an Energy Report or talk to a pays provider that has a good pulse? And you do kind of a back of the napkin? Yes. A what they think is is eligible based on, you know, the schedule values or the the numbers that we provide.
Adam Lipkin:So to date, has it been four or so you've done these construction deals? Like they're kind of a, you know, in that same general range? 80% of cost with pace? Is it one go to lender you've been working with? Or is it you're kind of finding, there's like a couple what's what's kind of
Nick Barbaria:there's, there's a couple? Yeah, I think we've done about six now, at 80%, round up.
Adam Lipkin:I mean, that's great. I'll tell you, I think, when was it last year, I was involved with one that was 75. And it was I think just a complete customized thing to you, as I think you know, as well as I do, if you have a very strong client and business plan, it's very different than somebody who's it's their first rodeo. Like, right. So I think that's also one of the things that everybody needs to just be aware of is that this is really, for folks that have been great experience they have been able to execute, there's going to be a demand for lenders to be able to make those loans, and then I feel like you could use the sea pace to just get more competitive with it. It's not for somebody who it's a stretch to just get a construction loan or a bridge loan for your project, you know,
Nick Barbaria:yeah, definitely. Um, you know, most of you know, the, the seed pays providers, they're, they're pitching, hey, it's a lower form of mezzanine capital, right. And, you know, it's 5% versus 12%. So it's, it's a significant difference, but most of our guys are using it just like, you know, mezzanine capital, you know, they are, they build it at 80% of cost. And, you know, their plan is to, you know, refinance, at the end of the three year term, pay off the pace and, you know, get into a long term fixed rate loan. Now, if the permanent loan is much as much higher coupon, then the seat pace and the seat pace, are assuming the permanent lenders is fine with the pace, then we might keep it on, but most of the guys, you know, when you're going for conventional, you know, straight up, financing, maybe conduit financing, you're usually having to take that out. Yeah, yeah,
Adam Lipkin:I think that's the right move is that you at least have the flexibility. So what are kind of high level terms you're seeing in the see pace world? Like, what's kind of getting done right now for the deals that you're working on? terms of rate and exit fees, let's say like a three year term?
Nick Barbaria:Yeah, three year term, you know, anywhere from four and a half percent, probably five and a quarter on the rate depending on, you know, who the lender is, and in different lenders kind of structure their prepayment, you know, differently, whether, you know, if you want a lower, you know, prepayment penalty, they'll they'll increase the coupon, you know, though, they'll get their yield one way or another.
Adam Lipkin:Yeah. I mean, I think that to your point, you know, if you have a construction lender, you know, you're working with these guys, and they're doing a 36 month term, I always thought have flexibility at the end of that term. So that if you do just need to take them both out that's at least available. And so I think what's nice about hotels is usually it's three year minimum, and I feel like there's a lot of that flexibility once you get past your two, even though I've seen that also in this space in terms of rates, but it sounds like you know, four and a half to five and a quarter zero to one point out by your three around that maybe one point? I mean, it's I feel like that's kind of feels like where we're at. Right?
Nick Barbaria:Yeah. And usually structure you know that there's no prepayment penalty. You after month 30 You know, yeah,
Adam Lipkin:exactly, man. It's just it's definitely gotten that competitive or I feel like you're seeing that even in year two.
Nick Barbaria:Yeah, or year to year too, but it's It's kind of a moot point. I mean, I don't see deals, you know, pre COVID, like, we were taking out deals that CO, you know, no issue now, at this point in time, it's gonna be, you know, we need to see a little bit of, you know, performance and ramp up before I think a lender steps in and takes a construction loan out,
Adam Lipkin:is he I was gonna ask you on that space to like, I feel like there's a handful of lenders that don't want to do the construction risk, but they're fine to take on, you know, pre cash flow, or even just minimal cash flow, where it's maybe like, just a few months in operations. And I feel like that might be interesting, too, because there's probably going to be a higher rate relative to the CPAs. Maybe still need also a good year minimum to two. Are you looking at any deals like that, where somebody's looking for almost like an immediate take out? Right, after they're done with construction?
Nick Barbaria:Yeah. I mean, it really kind of depends on what the star report looks like. I mean, if if the storyboard, you know, is good, and you can, you know, underwrite, you know, to the perform on takeout, I think it makes sense. It's, it's really kind of just getting comfortable. The lenders that, you know, the perform on the projections that we put forth are realistic and
Adam Lipkin:achievable. Have you guys looked at all like these bifurcations? Or somebody looking to bring in a ground lease and use that as a way to get higher proceeds? Is that something that you spending time with?
Nick Barbaria:Yeah, I mean, just like C pace, I mean, we use, you know, ground leases as well, to get, you know, higher leverage we, we did a higher place in the Nashville area about six months ago. And between the, the the senior loan and the ground lease, I believe it was 88%. Total financing. It's amazing. So in saying
Adam Lipkin:what, what was what was just like a little high level on the property, what kind of profile was it?
Nick Barbaria:It was a high place? Place, you said 40? Keys? Yeah. Or so I think is about a$20 million senior loan and about a $10 million, you know, ground knees?
Adam Lipkin:I mean, that's pretty interesting. I feel like we should definitely talk a little bit more about that we're kind of wrap it up a little bit. But just high level. I mean, how did you find because that's also very new for people to do at what stage was that I was at? I forgot new construction. Was that already a new construction? Yeah, so that's also like, very, like, you're not hearing that you're not hearing that somebody splitting up the ground, and they're getting 80% with a leasehold lender for construction Hotel. Right. So I think, you know, it's, it's definitely what I'd love to do as a follow up is, we should share more about this, because that, to me, is really like between the two products he pays and ground knees. That's kind of what I'm hearing more and more popping up. Obviously, I've been more focused on sea bass, but I'm looking at both. I think that now seeing that more and more lenders are working together to get there. And there's more folks that have a knowledge and know how, like yourself that are putting that capital stack together, it just got to be aware that it's now happening, it's not being radical,
Nick Barbaria:and you have the ability to buy the ground back in a couple years. So just, you can pay off the seat pace and a couple years with with our penalty, there's a little bit more of a premium or a different formula to buying the ground back. But you have the ability to you build it, you create a bunch of value and do a cash out refinance, and pay off the ground lease, and then you own the dirt. Again,
Adam Lipkin:I think it's a really good strategy for hotels, well, because it's like, first of all, grounding has been more acceptable for longer with hotels, but even just the fact that you could repurchase it within three years, four years, it's still just so much less expensive than if you had to raise all that equity and you get you own it, it's yours. So you don't give up your destiny. So I think it's great. I think you guys are doing awesome things. So I wanted to kind of start to wrap this up. And, you know, I really appreciate the perspective. It's awesome, first and foremost, to hear your story, you know, getting this thing going and now growing it over the last decade plus and seeing how you guys have been able to, you know, do some very unique things I find a hotel space, you know, really is something that it's you know, a lot of times people say it's an operating business and it's real estate, right? So there's always a way of having a look at it. It's a real specialty I find and now being able to bring in some of these innovative capital solutions, see pace bifurcations with ground leases, definitely encourage everybody to look up Nick riba find out a little bit more about what they're doing and see if that might be something they can help you with. I think that uh, it's, it's always good to just hear about what's actually happening. And sometimes let's just be honest, sometimes people are promising things. And so it's good to really talk about what's getting done. And a guy like Nick who's actually getting these done, could kind of just tell you how it is I think that's super important in in our space and in every area when it comes to evaluating new things. So Nick, any any last closing words you want to you know, kind of Give a shout out or anything you want to let people just kind of be aware of or Noah.
Nick Barbaria:We're open for business and you know, actively getting these these complex deals, you know, done. We're one of the few shops that are, you know, have a track record and hotel construction and practically, you know, in the trenches on number of deals, so we have a very good pulse on the marketplace and, you know, happy to discuss, you know, any transactions or any deals with anybody that you know, are looking for financing.
Adam Lipkin:Awesome. Nick, pleasure. Pleasure to speak with you today. Thanks so much for having you. I look forward to talking to you soon. I wish you and the team just continued success and all the beans. Yeah.
Nick Barbaria:I pleasure. Yeah.
Adam Lipkin:Awesome. Thanks, Nick.
Producer:Thank you for joining us on another episode of the C 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