Do you have what it takes to grow your business and scale in the real estate industry? The founder of Tower Capital Adam Finkel is here to discuss debt and equity in an informative way to help you further understand the real estate market. Tower Capital is a Phoenix-based commercial real estate structured finance firm specializing in debt and equity placement for most commercial real estate asset classes. They handle the financing of all different types of real estate assets. In this episode, he joins Sam Wilson to explore various aspects of it. Adam emphasizes that you need to have the equity figured out first before going to get the debt. Tune in for more insights!
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Understanding Debt And Equity In The Real Estate Industry With Adam Finkel
Adam Finkel is a proud father, husband, entrepreneur, investor, and Cofounder of Tower Capital, a Phoenix-based commercial real estate, a structured finance firm specializing in debt and equity placement for most commercial real estate asset classes. Since the firm’s inception in 2015, it has been involved in close to $2 billion in successful capitalizations on behalf of investors, developers, owners, and operators throughout the country. Adam, welcome to the show.
Thank you very much. I appreciate the invitation to be here.
The pleasure’s mine. There are 1,000,001 ways we can take this conversation. Obviously, the debt and equity portions of anybody in commercial real estate, outside of the deal itself, are the two other drivers that make the deal make sense. We always say in this business, “You need money and a deal.” Outside of those two things, you don’t have a business. I’m looking forward to jumping in on those items. Before we do that, can you briefly give our readers where did you start, where you are now and how did you get there?
I grew up in Boston, originally transplanted out to Arizona in the early 2000s to go to Arizona State University. Coming out of school, my first job out of college was as an office and industrial leasing broker for a boutique firm based in Scottsdale. I cut my teeth dealing with a lot of different types of commercial transactions, large and small. I had segued over to Los Angeles.
During the recession in 2008, I was with a regional tenant rep firm handling corporate clients, big law firms in San Fernando Valley. I was handling the leasing for some surgery centers in Beverly Hills Golden Triangle. I’m facilitating some creative office leases in the West LA area. I segue back to Phoenix and fell into finance.
I was looking for a different opportunity and basically found a mentor out here that was working for a company called Johnson Capital at the time, which was one of the largest independent commercial mortgage banking companies in the country. In the Phoenix office, we had four originators. We were one of the more prolific offices in the company, and then they were acquired by a publicly-traded firm out of the East Coast.
That was at the end of 2014. It’s when the stars aligned for me to team up with my best friend at Star Tower Capital, which we are a commercial real estate finance firm based in Phoenix. Our office is in Scottsdale. We are facilitating financings for all different types of commercial real estate, hotels, and apartments. The new single-family build for rent asset class has been gaining a lot of steam throughout the country, retail, industrial, both on acquisitions, refinances, and ground-up development. We’ve definitely been keeping busy lately. That’s for sure.
Multifamily is a very sought-after asset right now. A lot of markets in the country see a huge undersupply of housing.
I can only imagine, especially being spread across a lot of different asset classes, give us a state of the lending environment, in your opinion.
You have to look at it asset class by asset class. There are some asset classes that lenders have more favor for than others. Multifamily is a very sought-after asset right now. A lot of markets in the country see a huge undersupply of housing, hence, why vacancies are so low. The rents are so high. Housing prices are through the roof. Multifamily, the single-family build for rent which is a sub-asset of multifamily and industrial.
Those are the asset classes right now that the capital is chasing both on the debt and the equity side. Some offices, depending on the market, are open to some retail. Hospitality, people are still shying away from, although before, financing for hospitality was practically non-existent. Now we are financing hotels again through various different types of capital. That is coming back, although, still a lot of hesitation with that.
With the hesitation in some of those asset classes, is that the time when buyers should be looking even more heavily at those?
That’s what they say, “Buy low and sell high.” Real estate is very local, and so you need to understand that particular sub-market. Being able to do deals in your backyard and knowing that market is important. I see investors start to get into trouble when perhaps they’ve reached some success in a particular market, and then they start to branch out. They don’t necessarily have boots on the ground there.
They don’t necessarily understand the nuances of that particular market. It’s much more challenging to be successful. It’s important to understand the economic drivers. What growth is going on? Are there businesses and companies moving there? Is their population moving there? Is it the opposite? Those are important things that one needs to consider.
I would absolutely assume that’s the case. On these now being financed hospitality transactions, what are you seeing cap rates looking like? Are they trading it? What are the higher rates maybe they were before? What’s that look like on that front?
It’s broad, depending on what part of the country, the vintage, the flat. Are we talking to Marriott? Are we talking about an IHG product, the choice products? I think probably what you’re going to see for cap rates is a range from maybe like 7% on the low end to double digits in some places.
Let’s switch gears a little bit. Let’s talk about the equity side. You guys said that you help bring equity to these transactions. What does that mean and how do you do that?
When we’re involved on the equity side, it’s on the larger transactions, typically larger development deals. We’re utilizing institutional equity. You have these equity funds. They don’t want to write a check less than $5 million or $10 million. The deals need to be sizeable enough. We’re marrying one sponsor with one equity group for a partnership.
We’re not going out and chasing down a lot of small investments to put into a fonder or anything like that. It’s deal-by-deal bringing a qualified, experienced sponsor to the marketplace and then bringing them a qualified equity partner where the investment goals and objectives between the two are aligned and matching that.
How did that work out in the beginning? Let’s say you’re starting your business. Maybe you already had these connections, but the curious side of me says, “Wait.” How did you end up forming those relationships to say, “I think I can marry you as a potential private equity firm with borrowers?” What did that look like when those conversations took place in the beginning?
I’m going to put on my business owner hat. When I first started the company in 2015, I was coming out of Johnson Capital. I was a commercial mortgage banker. I was financing a lot of apartment buildings utilizing Fannie, Freddie, banks, life companies, credit unions, a lot of conventional perm debt. My business partner was running a private money debt fund.
They were basically hard money lenders locally here providing acquisition capital to sponsors. Back in 2012, ‘13, ‘14 when we were in the heart of the downturn, a lot of people were very scared of the Phoenix market for quite some time. We had some synergies there where he was doing the acquisition financing, and then when they stabilized the property, I’d come in and take them out with the perm.
Equity placement is very complex.
When we started Tower Capital, we thought we were going to be more of a private money lender and utilizing our network of high net-worth contacts. What happened was I still had a lot of deals going on with the regular brokerage and financing all this debt. We ended up going in that direction. What we found was that debt is a commodity. There’s a lot of different places where people can get loans from. Within each space, there are a million banks and credit unions. Do you want Fannie or Freddie? You’ve got all of these different seller servicers at DUS lenders you can choose from. Everyone’s throwing cheap money at people. How do we differentiate ourselves?
What we were thinking was we can differentiate ourselves by being able to bring equity to the table because that’s valuable. By bringing the equity to the table, we would then be able to control the debt. What we found was, at first, we weren’t able to get any traction with the equity placement because equity placement is very complex. There are a lot of moving parts. Especially with construction and development, there are a lot of moving parts.
There’s a lot of people in the finance business that don’t understand how to structure equity, the developing construction process, and all that goes into that. My partner and I have, at the time, had experience with a lot of different types of assets, but we didn’t have experience doing equity and ground-up construction. It was challenging for us to get traction in that space until fast forward a couple of years later when we hired one of my colleagues who was the director of finance for a large Scottsdale-based developer who has developed award-winning master plan communities and mixed-use projects.
His acumen when it comes to equity, structuring, and the whole construction process is second to none. That allows us to be a true advisor to our clients, not just going out and slapping some terms together, but going out, understanding the nuances about what they should be looking out for. Making sure that the proper language is in there to protect them, the deal is structured properly, helping them with their own internal analysis and spreadsheets and all of that. Being able to provide that level of service has helped to grow that side of our business. That’s the most growing side of our business right now for the past few years.
Your business partner comes on. He’s got the experience from the development and construction side, but what about marrying that experience with the PE firms themselves?
It’s a matter of understanding what these different groups’ parameters are. Some of these groups are going to want to be out of the deal in 2 to 3 years. Some of these groups want to hold for ten years. Some of these groups are looking for twenty-plus IRR. Some of these groups are looking for low teens IRR. Some of these groups want to be in primary markets. Some will go to secondary or more tertiary markets. Some of these people will go down to a $5 million check. Some want to write a $15 million and up check.
Some have very specific requirements about the sponsor who they’ll work with. How many deals have they done? Have they done deals in this particular market? Have they done deals in this particular asset class? Who is their GC? Who’s their architect? Have these people work together before? What is the balance sheet of the sponsorship?
It’s understanding all of these different parameters and then matching the people together. That’s what keeps me in business is understanding all the different capital sources, whether it’s better equity. The capital markets are changing more quickly. It seems like more quickly and more quickly every year. It’s crazy. They’re being able to keep up on that.
That’s why we go to all these different conferences. We’re part of a larger network of independent, very successful, active commercial mortgage brokers and makers throughout the country where we do information sharing and all of these things. That’s what’s made Tower Capital successful. It’s having this knowledge and being able to utilize it for the benefit of our clients.
One of the things you said was that you guys were, I butchered the way you said it, but some of the effect of understanding or using equity so that you can control the debt. What does that mean?
Oftentimes, the equity partner is going to dictate what type of debt and what debt parameters that they want. They might say, “We don’t want anything over 60% loan to cost,” because maybe they’re more conservative or they might set for a certain parameter. You need to have the equity figured out first before you can get the debt. If you’re trying to do the debt first, it’s going to be backward. It will end up being a big waste of time.
When you can bring in the equity partner, they’re the controlling partner. You have a relationship with them. You say to the sponsor, “If I’m going to bring in the equity, I also want to handle the debt,” because the two hands need to talk to each other. It’s much smoother when you’ve got one group handling it than two separate groups trying to do two separate things.
Let me give a comparison. Maybe if you’re a standalone syndicator, you raise all your money from private investors, those things that go along with that. How does that change when you start working with a larger PE firm, people writing single checks? What are some things to consider when moving in that direction?
It all comes down to control. When a syndicator is going out, and you’re putting together a bunch of friends and family money or other money, you’re bringing it all together, and everyone’s writing smaller checks, you have total control over what happens. You’re bringing in a private equity group or some other institutional type, equity life insurance companies will provide equity on deals as well, and there are other groups that will do this. There’s going to be a lot of stipulations that, as far as budgeting goes, decisions being made on, if they’re going to take on more debt for the project, if there are overruns or when they’re going to sell the property for how much.
Start small and not try to do too large of a project, if it’s new to you, rather than jumping without experience into the unknown.
If a developer who’s used to having full control can be an adjustment, dealing with some of these private equity groups and they want to see their reporting. How do they want to see it? It can be a little bit more cumbersome. Yet, at the same time, when you do find a good partner and through the process once because the first time is always the most challenging. When you know what to expect, you can create a well-oiled machine where you know you’re not reinventing the wheel every time.
It can create a nice, smooth transition, especially when an investor, developer, sponsor, whatever you want to call them are in a growth mode, being able to have that one source who’s going to commit $250 million to your next five projects, it takes a lot of time and energy off their plate than having to try to recapitalize with a bunch of people on every deal. There are certainly benefits, but there are also some negatives that need to be considered as well.
You’ve alluded to this early on, but when it comes to experience requirements, I would imagine the bigger the check that someone is writing, in this case, these equity groups, the bigger the check they write, the more experience they want out of that operator. Yet, at the same time, you would think that the more experienced an operator has, the less likely that they need that PE firm. Where’s the sweet spot on that?
It’s a situational basis. The capital markets are always changing. You’ve got new players coming into the market with new programs, lenders that are here that leave the market, or maybe they’re not doing that program anymore, or whatnot. That certainly can be opportunities that can arise. Maybe if the sponsors going to a different market or maybe jumping into a different asset class or something, what are the equity and the capital groups looking for as far as the experience salvo goes?
They want to see people that do have experience in that asset class and that market. It’s always a plus if they’re GC, the architect, or whoever else on the team has worked together before with each other on projects. There’s a lot of capital out there that needs to be placed. If you can present a good enough story and sometimes a capital partner wants to get into a certain market, “We’ve been dying to get into Texas,” and now is their chance to go.
Maybe the sponsor doesn’t have as much experience or something, but there are enough boxes that can be checked to get that comfortable. Another thing that we’ve seen, in such a strong market like this, is the equity requirements, the cash put in for the particular sponsors that have come down. The equity partners used to want the sponsors to be putting in 10%, 15%, 20% of the equity. It could be 5%, or it could be something like what’s meaningful to you type of thing. We have seen some loosening on some requirements like that because these people do need to get the money out the door. It has to be deployed.
One of my questions is, is that a result of our incredible money printing? All this money is flooding the market. It’s got to find a home. I’m theorizing here.
I agree with you. There’s been a lot of “fresh powder.” A few years now, I’ve been voted in these covers. It wasn’t after COVID or whatever. This is not in finance or real estate, but in the world in general, a lot of the trends that started to take place prior to COVID have been accelerated since. It’s an acceleration of what we’ve seen. A lot of these groups are having trouble placing this capital, but we’ll see where this goes. You look in certain markets and talk about it. There’s overbuilding, whatnot. It comes down to supply and demand in a lot of places.
I think that there’s been a lack of new products in a lot of different markets, whether it’s multifamily or hotels or whatever. I think probably that there is some catching up to do. I think that certainly, everyone is very cognizant of the additional liquidity that’s been placed into the market and keeping their eyes on the medium-term time horizon here.
This may be too big of a topic for the time we have left, but I’ll go anyway. You mentioned that a lot of either lenders or brokers potentially don’t understand the complexity, or maybe even meant this on the sponsor side, the complexity of getting financing for ground-up development projects. What does that look like? What are some of the things that differ on that? How are they executed differently than what a value-add multifamily might be?
The big difference on a development project is that if you’re going to buy an existing value-add multifamily, and you’re going to renovate the units and sell it or refinance. With a construction project, you have to have a good understanding of the timelines. When are their drawings going to be submitted to whatever municipality? When do they get their permits?
When do they get their certificate of occupancy? What’s the process? The processes can be different from county to county, state to state. Understanding what the zoning will allow. When you’re placing capital for these types of deals, what is the exit strategy? Is this going to be a refinance and hold? Are you planning on selling them?
If this is a multifamily project, maybe someone’s building condos, are they going to lease those all up for rent? Are they going to sell them? What’s the timeline? Do they have presales? With construction also, oftentimes, getting into more of the commercial, office, industrial, retail pre-leasing, that’s always very important as well. We are seeing more spec development, especially on the industrial side, happening now.
There’s always a strong focus on pre-leasing, especially if the asset classes are doing as well. If you’re trying to build an office building right now or a big retail power center, you bet your butt they’re going to want to know if there’s pre-leasing. They’re probably going to require something like the property’s 50% pre-leased before they’ll start the process.
If you dig into each of those deals and each of the asset classes, I’m sure all that stuff changes for the opportunity, but it is fascinating how those things change and what the requirements on that are. Is there anything else, Adam, before jumping into the final four that you’d like to share with the readers?
I don’t think so. Not in particular.
This has been super informative. I’ve enjoyed this because we’ve learned a lot about your business. I know we’ve gone into the weeds on a few questions, but I think it’s exposed some nuance, both to the equity side of things, as well as the debt side of things, maybe that some of our readers may not have understood completely. I’ve certainly learned a few things myself. I certainly appreciate you taking the time to walk us through that. The final four questions are these. If I were to give you $20,000 to invest in real estate with no previous real estate investing experience, what would you do with it and why?
For me, I’d probably throw it into some real estate development deal with multifamily or whatnot. If I was a new investor, what I would probably do is take that $20,000 and buy myself my first rental house or rental property, and start small and get my feet wet with something small. That’s what I would probably do with it in that situation.
Question number two, if you could help our readers avoid one mistake in real estate or in this case, I’ll give you the latitude to say when dealing with a mortgage broker like yourself, what would that one mistake be? How would they avoid it?
It goes back to my previous answer, but I would say for someone to start small and not try to do too large of a project if it’s something newer to them, or if it’s a newer asset class that maybe they’ve been doing office buildings. Now they want to build an apartment building, or whatever it is, if you’re going into a new market or whatnot, I think that you’ve got to get your feet wet and learn your lessons on something small rather than jump into something that might be over your head.
Question number three, when it comes to investing in the world, what’s one thing you’re doing right now to make the world a better place?
This will be a quick shameless plug. My company, Tower Capital, years ago, created a charity car rally event that we do here in Phoenix. It’s basically like a cannonball run. We’re doing it through Northern Arizona. We raise money for 501(c)(3) called Pierce Family Foundation that raises money to benefit families that have children with life-threatening and debilitating illnesses. That’s something that we’ve done. It’s a great event. It’s for an amazing cause. That’s one of the things I’m doing right now.
Adam, if our readers want to get in touch with you, what is the best way to do that?
You can go to our website, www.TowerCapLLC.com. You can find all of our contact information there. You can see all of the deals that we’re working on. We have a full team. I’ve got six capital advisors. We all have different areas of expertise, whether it’s an asset class or ground-up construction, or whatnot, that we match our borrowers with. It’s a very collaborative process over here. We’re doing deals all over the country. I definitely encourage everyone to check us out.
Adam, thank you for your time. I do appreciate it.
Thanks, Sam. I appreciate it as well. Have a great one.
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About Adam Finkel
Adam Finkel is a proud father, husband, entrepreneur, investor and co-founder of Tower Capital, a Phoenix-based Commercial Real Estate Structured Finance Firm, specializing in debt and equity placement for most commercial real estate asset classes. Since the firm’s inception in 2015, it has been involved in close to $2 billion in successful capitalizations on behalf of investors, developers, owners, and operators throughout the country. Prior to founding Tower Capital, Adam served as Vice President at Johnson Capital, one of the country’s top real estate capital advisory firms with 20 locations nationwide.
There he was involved in the successful placement of over $360 million in bridge and permanent structured financing on behalf of commercial real estate investors and property owners throughout North America. Prior to Johnson Capital, Adam was with Travers Realty Corporation, a regional commercial real estate brokerage firm headquartered in Los Angeles. At Travers, Adam was one of the founding agents of the West Los Angeles office. He subsequently took the position of Designated Broker and Managing Director for Travers’ Phoenix office where he represented organizations like Phoenix Children’s Hospital and Freeport-McMoran (ticker FCX) with strategic planning and lease negotiations. Adam began his real estate career with Levrose Real Estate and Investments, a boutique commercial brokerage firm located in Scottsdale, Arizona.
At Levrose, he negotiated over 300 commercial real estate transactions which included office, industrial, and retail properties. In 2014, Adam earned the designation of Certified Commercial Investment Member (CCIM), a title held by only a small group of elite commercial real estate investment professionals. Additional industry organizations Adam is involved with include the Urban Land Institute (ULI) and National Association of Industrial and Office Properties (NAIOP).
In his personal life, Adam serves on the Jewish Federation of North America Leadership Cabinet and National Security Task Force. He is also involved with numerous charities and philanthropic organizations. Adam graduated from Arizona State University with a degree in Business Administration and Communications and is a licensed real estate broker in the state of Arizona. He is a regular contributor to Forbes.com and has also been featured in many industry publications and nationally recognized podcasts.
