To further Leverage.com’s mission of democratizing knowledge about commercial real estate, we started an interview series with all kinds of CREF pros: everyone from multifamily and medical to cannabis and construction. This time we connected with Brandon Perdeck, Vice President of National Originations and Business Development at Aries Capital, a diversified, commercial real estate banking and investment firm headquartered in Chicago.
If you’d like to be a fly on the wall during our phone call, check out the transcript below:
Joseph Rauch: The first question I want to ask, more for people like myself and some of our beginner and intermediate level readers, is just to help me understand where Aries touches on what I see as the three major roles in the CREF industry, which are investor, lender and broker. Because I was looking really in depth at your site, and it seems like you guys have a lot of capabilities — like you’re not strictly an investor. But I want to know if I’m right about that.
Brandon Perdeck: Yeah, absolutely. We have two lines of business right now. Commercial Real Estate capital markets (both equity and debt placement) and we recently launched a net lease industrial fund focused on middle market opportunities between $5m-$25m, we just acquired a 25,000 sqft industrial building leased to Lyft in Atlanta, we’re very excited about this asset and the overall platform.
On the equity side, we are very active raising equity for sponsors nationwide, for both acquisitions and developments, check sizes typically $10m and up. On the debt side we are doing permanent, bridge, construction and mezz for all asset classes nationwide.
JR: Cool, that’s great. And before actually, I get to the questions I asked you before over email, I want to see if you have a take on just how to explain private equity and real estate to people, because I’ve noticed that the more advanced people in the industry — like the brokers at my company, and all kinds of people like that — they understand it pretty well. But I’ve noticed that for beginner- and intermediate-level people, they have trouble bridging that gap, even if they might actually be a good investor, potentially, or someone to involve.
So is there a way you recommend to explain private equity and commercial real estate to people who are struggling a bit to understand it?
BP: Sure thing
BP: private equity real estate is similar to traditional private equity, in the sense that it’s equity capital from a variety of different sources, whether that be high net worth investors, institutional funds, pension funds, or other dedicated private equity funds that have been raised specifically to acquire commercial real estate.
And then those groups go out and use that capital to acquire whatever is mandated. So whether that be a multifamily development firm, or an industrial acquisition shop, or an office investor, each group has a box or a mandate, and they go out and raise capital to execute that mandate. And then they use the equity that’s been raised — the private equity coupled with financing, whether that’s debt fund financing or bank financing — to go out and execute and acquire assets.
JR: Gotcha. OK. I think maybe that’s part of what I’m starting to understand about it. Because there’s kind of this prestige to it, I think sometimes people who are just getting into this space sort of assume it’s more complicated, but then when I’ve actually asked people to explain it, I’m like, OK, that’s not so horribly complicated. It’s like you said, it’s the real estate application of this aspect of finance that’s been around for a long time.
JR: Cool, OK. But I think even just you saying that in the interview will be really helpful for people because there are people who feel like, “Oh, that’s not something I could ever get into if I’m not XYZ.” But maybe it is, actually.
And so let me look at some of these other questions I had for you, because I think they’re still pretty good. I’d like to know about this: What kinds of clients have you worked with that have tended to prefer JV equity over debt financing, and vice versa? Because we’ve actually done a few articles on, at least JV equity, so far, but I don’t think we’ve really talked so much about what those clients, what those investors — who they actually are.
BO: Sure, so you’re saying the types of clients that are seeking JV equity?
BP: From our experience — we work in the middle market of commercial real estate, So most of the deals we do are between $5 and 100 million, we have done deals as large as $190 million but most of our deal flow is between $5-100m Once you start getting over $100 million, it becomes more institutional, And then once you go below $5 million, it’s your more mom and pop/smaller entrepreneurial real estate investor.
And with that, our clients are typically entrepreneurial real estate investors that have built up success over time in commercial, when they come to us for capital — they’re looking for a more institutional equity partner, typically a family office or private equity fund.
So for example, let’s say you’ve done a handful of apartment deals, and you’ve built up a nice portfolio and a nice balance sheet. And you have $5 million that you can allocate towards your next deal. But you need a total of $15 million of equity, or $20 million of equity to do a larger deal. So when our clients get to that stage, what they’ll do is they’ll use their initial equity contribution — the $5 million for round numbers — as, call it 10% of the required equity in a deal and the remainder will come from the partner that we bring into the deal.
Most of the JV equity deals we do tend to be 90-10 or 80-20 type deals. And what that means is the sponsor — the entrepreneurial investor — will be coming to the table with anywhere between 10 and 20% of the required equity in the deal. And then we will bring in an institutional partner, whether that be a high net worth individual, a family office, a private equity fund, an insurance company, groups like that, and they will come in and write the balance of the equity whether that be 80 or 90% of the required equity. And that’s typically the structure that we’ll look to use for our equity deals.
The other main reason as to why our clients are looking for an equity partner is due to balance sheet requirements/track record experience that lenders may require when doing larger transactions, which is typically a net worth equal to the loan amount and 10% of that number in liquidity and a certifiable track record. With this, the lender will feel more comfortable with the fact that there’s an equity partner involved in the deal that has a much more substantial balance sheet, and liquidity to backstop the deal if things were to get delayed, or to fund cost overruns or things like that.
JR: Right, that makes sense. And when you talk about some of these entrepreneurial investors or high net worth individuals, because they’re getting involved in real estate and commercial real estate, is that usually the industry where they’ve made their fortune? Or do you get sort of outside people sometimes who maybe are tech entrepreneurs or consumer packaged goods entrepreneurs or something?
BP: Yeah, that’s a good question. I’d say, primarily, the real estate investors and funds that we see tend to have either been focused on, or have made their money in the real estate space. But I’d say that’s changing pretty rapidly, primarily on the family office front.
You have all these family offices out there that have had significant exits in different spaces, such as the ones you’ve mentioned: consumer goods, healthcare, technology, you name it. And then over time, they started diversifying those earnings into commercial real estate. We’ve been seeing a rise in family offices that have made their money in other industries start wanting to put capital to work in commercial real estate.
And we’ve seen it done in a few ways. Typically, family offices tend to like to stay pretty private. So what they’ll do is they’ll either make an investment into a fund or asset manager that specializes In a certain niche/sector in order to get exposure to that strategy. Some examples are investing into an industrial developer or a debt fund that specializes in originating first mortgages.
JR: Cool, that’s interesting. Yeah, I didn’t know that that was a trend that was changing. I’m glad I asked that.
BP: Yeah, absolutely.
JR: OK, now I might draw on some of these earlier questions. This is a really good one. This might be really educational for our readers. So your site mentions an emphasis on net lease assets. Well, I know what net lease assets are; I think actually a lot of our readers probably know what that is already, but especially sale leaseback opportunities throughout the south, so the concentration on Florida. What would that mean, or even just to start with the basic terms of what a sale leaseback is and the pros and cons of that over other investments?
BP: Absolutely. To take a step back for a second, there’s really two types of real estate, right? There’s owner user real estate, and there’s investment real estate. So you could either be just a real estate investor owning an asset and collecting rent from your tenant, but you don’t actually operate or occupy that space. You’re just the investor. So that’s investment real estate.
On the other hand, you have owner user real estate, where let’s say you’re a distribution/logistics company or you manufacture something; typically, a lot of these companies will own their real estate. Let’s say just for example, you’re a company that makes plastic cups. You manufacture plastic cups, you own your warehouse, you own your facility, and one day comes along, and you want to potentially monetize your real estate, because real estate is hot, and prices are high, but you still don’t want to close your business. You don’t want to move your business to another location. So a sale leaseback tends to become a good option.
And so what a sale leaseback is, is when an owner-user — someone that occupies their real estate and uses the real estate for their business — sells the real estate to an investor, but then proceeds to lease the space back from the investor. So let’s say you’re the plastic cup company. You sell your building for $10 million because you bought the building for a million and you want to monetize those gains. You sell it to an investor, but you don’t want to move/close your business, or it’s costly to move your business, what you would do is enter into a lease with the new landlord — the group that you sold the building to, and that usually tends to be on a longer-term basis, 5 or 10 years.
Investors like that because it’s a way to buy an asset and have a tenant that’s already there and paying rent, and it’s a tenant that you know needs that building. .
The cons of it, I’d say, tend to stem from the health of the business. There’s really two reasons to do a sale leaseback from the owner user’s perspective. Reason number one would be to monetize the profitability of the real estate and fuel future growth for the company. So you have lets say $9 million locked up in equity in your real estate, and all you’re focused on is manufacturing plastic cups, you could really use this $9 million to go out and grow your business. So, I’m going to sell my real estate, but I’m going to enter into a lease agreement. I’m going to still stay in the building, still manufacture and grow the business. So reason number one is to fuel growth for the company.
Reason number two — and this tends to be the con and the downside of sale leasebacks — is if the company is failing or the company is in need of cash, their reason for selling the real estate and doing the sale leaseback is to
“save” the company, or to provide rescue financing or rescue capital to the operating business. This can be a red flag for investors as the cash generated from the sale of the business is going to save the business, not fuel future growth/innovation.
For us, we want long-term tenants that pay us rent. So if that’s the case, we see that as a risk. When a company wants to sell their real estate and do a sale leaseback to save the company, or to provide a liquidity injection because they’re low on cash, that generally means the business isn’t doing well..
JR: Right, OK, that totally makes sense. That’s so interesting. But I could see that happening all the time, though. Like, you know, I imagine Amazon probably owns a lot of their distribution centers and do something like that, or, like you said, a plastic cup company, whatever it is. Cool, that’s really interesting.
BP: Yeah, there’s all sorts of companies out there that own their real estate. And for one reason or another can either monetize it to fuel growth, or can use that money to save the business. And we prefer the former where the sale leaseback is providing growth capital, not rescue capital.
JR: Right, OK.
BP: Because we as the investor, we want that tenant to be there for a long time paying us rent. So that’s the way we look at it, and we think the way most people in the sale leaseback space look at it.
JR: Cool, awesome. OK, and then let me know if there are any things you want to get into that I haven’t touched on yet.
But the last question I have to ask is just about if you have any extra info that’s not on your site about your Urban Development Fund, because it just seems like an interesting project that could potentially really help a lot of people who need it, just have more housing opportunities.
BP: Yeah, absolutely. So Urban Development Fund is one of our subsidiaries, and it’s a new market CDE. It’s a government program where we receive tax credit allocations, and then we act as a syndicate to distribute those tax credits into projects throughout the country.
Those tend to involve projects that have a social mission or some community benefit and provide jobs. We’ve funded facilities like Boys and Girls Clubs, community athletic facilities, hotels, and affordable housing projects. It’s a great program to help build projects that benefit communities that need it.
To be honest, I’m not intimately involved with that side of our business, so I don’t have a clear insight as to what some of the next projects look like in that side of our business. But it’s something that we are very proud of. And we’ve done about a billion dollars of tax credit deals within UDF.
JR: Cool, that’s awesome. Great, OK. Those are all the questions I had, but let me know if there are any new, interesting projects you guys have going on that you really want to talk about. I’m happy to just put in the question later and have just a section on that.
BP: Yeah, we’re always working on cool projects. We’re working on multifamily, storage, and industrial deals primarily, And we’re very excited about our industrial tenant net lease platform. We’re actively raising capital on a deal by deal basis for those deals.
Thanks so much for the time and for having me!