Q&A Highlights

Transcripts

Today we're joined by Pace Loan Group CEO Rafi Golberstein and Head of Loan Structuring, Jerry Ellis. Deals are complex, especially when involving unique assets. This episode explores a wide variety of hospitality projects and how space gets the sponsors the most efficient structure to achieve their business plan. All right. So we're going to talk generally about hospitality. There's a lot to unpack there even in terms of what is hospitality because it's not just a traditional hotel.

This year specifically, our fourth quarter was bonkers busy with a lot of different hospitality deals that range from like a vanilla asset class in Orlando, Florida, and that as a Hyatt house with a super complicated capital structure to a super high end boutique luxury lodging in upstate New York to what can only be really be called a water park, and a stately, beautiful five star exquisite, estate.

Right? Of a flagged hotel. Right. So, like, we go from, like, economy to ultra luxury with a water park in the middle and all of them, for whatever reason, thought that C-PACE was the answer to get their deals done. So, like, that's kind of just like the context for what we want to talk about here, right? I guess just to like Jerry.

Like what? Like why? What the hell do these four have in common? That was like, why? Why do they all want C-PACE? Well, I would say the commonality is in the capital stack, C-PACE works very well. It's very efficient. Because we can get more eligible improvements, particularly in some of these, various states. That's number one. Number two, it tends to work with different types of capital, in the capitalization, meaning it may not necessarily be traditional first mortgage debt, but it could be mezz and pref, and other items.

And and in these examples that you've used, in two of them, we were really the senior debt, acting as a senior, pretty unusual. Unusual right now in the case of the which we called the vanilla, which is the Hyatt House, which is a really vanilla, but it's, what's unique about that is the capital structure was that we acted as a senior.

There was very complicated ground lease proceeds that went in a sale of the dirt. It was actually related party. So they created some equity that way to put into the deal. There was a mezzanine loan, a pref loan. So all the way through the stack, we ended up being 39% of the total cost and 33 LTV. So it was it was very unique.

Just to that end, Orlando is a different kind of market because if you go back, you can go back 35 years and look at that Orlando demand and supply trends and the demand in Orlando, really, with the exception of maybe six years over the last 40 years, has gone up every year. So the the only thing is that there's supply growth.

And so you have to be careful as to where you where you go. What was unique to that situation is that the Hyatt House is connected via a skybridge to the convention center. The convention center does, you know, 1.74 million people a year into that convention center, 170 events. So the demand has been there consistently, right? So that's different.

Jerry, what's your favorite park in Orlando? What is my favorite park? Probably Magic Kingdom, I would say. Yeah, I have luckily, my kids have had zero interest in going to Orlando so far. So I have not had to go to any of the parks yet. I did go to Universal and Harry Potter at one point, and that was all right.

That's the one that I would want to do. Yeah, I would think that was one that would fit you. That would be very on brand. What's the drink they have? What do they drink with butter. Butter beer. So they have you can get them there. Yeah. Yes a good Hufflepuff like myself would fit right in there. Yeah.

So. So that deal, Orlando, ground lease, C-PACE, mez from the franchisor. Well, mez sponsored by the franchisor. Preferred equity, common equity, and key money. Yeah. So lots of layers. Yeah. From from our perspective, if we were effectively financing, you know, between 38 and 40% of the project cost of LTC.

Yes. And it just kind of worked. And I guess they could have gone to a different they could have gone to a bank. But my guess is the bank's head would just explode. So the two things on that, well, when we first talked with the sponsor about the deal. They were unsure about whether they're going to do a senior or not do a senior.

They raise the idea of, you know, effectively a related party buying the ground and enter into long term ground lease and thus those proceeds going into the cap stack. And so we talked through that and I went through it and said that is very efficient for us because A. we'll look at that because of the way the assessment goes on the property.

We'll look at that as capital behind us, not withstanding the fact that it's a ground lease as opposed to a senior where we'd have to have a consent, it just was something that we structured and it worked for them. Right. And the cost of the the payment on the ground lease, you know, via the rent, was something in the neighborhood of 7% so cheaper or as cheap as first mortgage essentially.

And the mezz there was was 7.5%. It was very efficient capital supervision. I think the key is like it worked for them. Like, yeah, this is like this got them what they needed. And they still got the same non-recourse long term financing through the C-PACE vehicle. And we also when we first signed up the deal, we were, lesser proceeds than we ended up with.

And we were able to go back through the energy audit and pick up another $4.5 million of proceeds. Yeah. So walk us through. I forgot about that. Like upsized. And this one was interesting also because it was a tranche funding. Right. It was our first or second, a couple closed right around the same time.

Yeah. But the idea was basically this was this was a true ground up construction deal, and they didn't have a whole lot of interest in paying negative ARB on, you know, $30 million that was sitting in a reserve and so we came up with the structure, largely you to Jerry to chop this up. And how many tranches? Seven. Four for this one.

Only four. Yeah. But we did end up some part of it was they were forced to take, some of the other capital into the deal before us. Right. So we had to structure it so that we back then did. So we were like, you know, at closing, that was month zero. We had a smaller amount. And then the next funding was month nine.

So it was then 9, 12 and 15. Okay. So we basically were able to leak our dollars out through construction. Yeah. They saved more money on interest carry. And again just it worked for them. And that was kind of the theme. And so that's like that's one, great sponsors too. So we have, there you had two sponsors both New York based that combined have you know developed over 10 billion in real estate.

Yeah. And I think when when you told me about this deal originally, I think it was like sponsor check, location check, flag check. Capstack like yeah. That's right. Yeah. And then but it worked. And like, you got to dig through it. It's complicated. But like, that's kind of what's fun about these deals as you I mean in hindsight is fun in the moment.

It's awful. But, you know, you figure it out. And, I mean, the only thing that matters is we talked about is that you have so many different capital sources in the deal, and it becomes it's a little more complicated. You got to negotiate with all these different ones, and they all want, you know, some recognition, as it relates to our, our financing and, also kicks up the legal fees.

So ours, were pretty moderate compare. Ours were fine. Yeah. Ours were very cheap. I mean fun and funky deal. Right. Like you, you've done a lot of fun and funky deals and we'll talk about all of them here. How does this deal come to you?

Oh, yeah. How do they come to you? So one of the sponsors, I have known for 35 years, and we've been and we actually he's we'll talk about another transaction, Black Creek Barns. And he's a friend and, longtime, hotel investor, been very successful. And also has a management company, which is managing the Hyatt House.

And so it just came to me, he came to me, and there was one other, lender that was in the mix. But we we won the deal based on relationship. Really? Yeah. And probably ability to execute. Yeah. With ease, I forget. Yeah. We forget so quickly. Like the story, the whole story on some of these deals.

But Bali you mentioned kind of or Jerry, you just mentioned the other deal. So yeah, that's a good segue. Yeah. So we can we should talk about you could well, yeah. So we'll say, you know, we'll go from Orlando to upstate New York. Is it really Upstate New York? I don't know, it's definitely upstate. Yeah. It's not the city.

People in Syracuse would take great offense to that. Ulster County that's upstate. Yeah. Relative to New York City is upstate. But relative to Buffalo, it is way downstate. Yeah. Hudson River Valley. So this is a deal that we had seen on multiple occasions over multiple years. For a part ground up development, part adaptive reuse, I'm pretty positive was like a Civil War historic site.

Yes. Beautiful part of sort of the Hudson River Valley in New York, which sort of post-Covid has just exploded in popularity, really high end type stuff. And we were approached to effectively come in and close the C-PACE component of the capital stack, which I think was actually pretty straightforward. There was a mortgage lender and it was C-PACE.

The complicated part was that the mortgage lender was going to be a USDA because it qualified, because it was rural nature for USDA. And I think as the story went effectively, the USDA lender for any number of reasons, kind of fell out. Right. And the owner was like, we've been working on this for like three and a half years.

We need a mortgage loan. And your buddies were like, oh, right. The JV partner in the Hyatt House deal. Also, he's not only equities, he kind of a structured guy, right? So he does mezz and pref and first mortgage loans and and other things. And so I called him and said, look, we get it.

If we lost a lender here on this Black Creek Barns, but it seems like something you're a New York guy, you'll understand it. And I knew that. He looked at, a comp, in the market to buy. So I called him and he was very interested, and we ended up filling out the capstack with him as a senior lender.

Right. And that deal, I mean, different than Hyatt House and that it's, unflagged. You know, average, you know, ADR is north of $800 for the, for nightly rates for, it's like a very different kind of asset class. Super nichey. And this one, you know, the sponsorship was strong, but in a completely different way than a traditional hotel sponsor.

I think, like, you know, they were not they didn't have like 3000 keys under management. Right. You know, they were a collection of people that were independently had unique experience in hospitality generally, specifically in food and beverage. Yes. Very strong food and beverage. And that would be a positive at this at this site. Right. You're going to have obviously the rooms in the inn and they're going to build a building in addition to some of the existing structures that you talked about.

They were then going to build individual like cabin units. Yeah, like prefab stuff. Right. And then and then they were going to have, you know, event space, which is kind of where it would really work given their history and reputation. Right? Yeah. This is the type of thing where what, what also matters is curating the experience. Right?

If you're paying 800 bucks a night, the experience matters a ton in these folks know how to curate an experience. Yeah. So those folks. Yes. And it'll get a lot of the, you know, the, the market for that, you know, the greater New York area, they know these once they go out, potential visitors know who the sponsor is.

And so when they get press, it's going to work. Right. And that deal I'm trying to think about like issues that were with that deal. I mean, in some ways like the deal was like really, once you can understand the high end nature of it and, you know, believe the story of daily rates north of $800 a night, which I think was a pretty easy question for us.

Yeah, the deal itself was it was pretty straightforward. The asset classes was a bit more nuanced, but the deal was, you know, pretty easy in my regards. And so that was a fun one to get done in New York. And you know, when it gets built, you know, I look forward to staying there.

Our first New York deal that was our first deal in New York State. Yeah. Which is an accomplishment. The accomplishment. Yeah. New York's been just wonky because it's the largest market in the country. And it's like one of the slowest for C-PACE in the country for a variety of like, political reasons, but like being able to get a deal done in New York.

Most people cannot actually say that they've done that yet. So and this was about a $19 million financing. And, you know, it wasn't easy, but it it was done. And, you know, it was just good to be able to plant a stake there and say, you know, we're in New York and can't wait to spend $1,000 to go spend the night there.

Money well spent. Right.