Today’s guest is Ran Eliasaf
Ran Eliasaf is the founder and managing partner at Northwind Group, a real estate private equity firm with $3+ billion in AUM of debt and equity investments. Join Sam and Ran in today’s show.
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Equity in NYC stopped making sense [00:00:00]
Opportunity in office conversions [00:03:40]
Scarcity of senior debt [00:06:10]
Private Debt Fund Structure [00:08:27]
Capital Raise Lessons [00:12:06]
Changes in Underwriting Criteria [00:14:12]
Building a strong team culture [00:16:48]
Avoiding the mistake of forcing a deal [00:18:16]
Summary of the interview [00:18:55]
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Connect with Ran:
Linkedin: https://www.linkedin.com/in/raneliasaf/
Connect with Sam:
I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns.
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LinkedIn: https://www.linkedin.com/in/samwilsonhowtoscalecre/
Email me → sam@brickeninvestmentgroup.com
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Want to read the full show notes of the episode? Check it out below:
Ran Eliasaf ([00:00:00]) – We keep asking ourselves, does it make sense? Does what we do doesn’t make sense on a risk adjusted return? And then when the answer is no, or eh, maybe, then okay, what should we be doing? And in 2017, for example, for US, equity in New York City stopped making sense. Hmm. Because of pricing, because of risks before, because of regulation. And, and we started lending. And, and I’m very happy that we did because it was, you know, in hindsight, a very good decision.
Intro ([00:00:28]) – Welcome to the How to Scale commercial real estate show. Whether you are an active or passive investor, we’ll teach you how to scale your real estate investing business into something big.
Sam Wilson ([00:00:41]) – Ron Eliasoph is the founder and managing partner at North Wind Group, a real estate private equity firm with 3 billion in assets under management of debt and equity investments. Ron, welcome to the show. Thank
Ran Eliasaf ([00:00:52]) – You for having me, Sam.
Sam Wilson ([00:00:53]) – Absolutely. The pleasure is mine. Ron, there are three questions I ask every guest who comes on the show in 90 seconds or less. Can you tell me where did you start? Where are you now, and how did you get there?
Ran Eliasaf ([00:01:03]) – So, I started just before the financial crisis in 2007. Um, I was, uh, the right hand of, um, local businessman that did a lot of real estate investments. He kind of taught me the ropes. Uh, I started as his driver slash secretary and kind of became his right hand man. Unfortunately, he passed away, uh, very suddenly. Uh, and after helping his clients deal with, with, you know, uh, what was left, one of them introduced me to his family office. They invited me in. I ended up launching, uh, my first fund under that family office right in the middle of 2008 in the financial crisis. We started buying distressed debt, uh, secured mostly by grocery anchor shopping centers in the southeast. Did that between oh eight to 2011. Sold that portfolio. It was about five minutes square feet, or my stake in it, I should say. Uh, and then started investing in New York initially on development deals, then income producing value add, uh, and then stopped buying in New York City in 2017 and started lending. And ever since we’ve been lending, uh, and that grew to be a, you know, pretty large, uh, business for us.
Sam Wilson ([00:02:11]) – Wow, that’s a lot of, uh, that’s a lot of transition there. I, I love, I love the starting as the driver and now you got 3 billion in assets under management in commercial real estate. Was that, was that the dream all along or was this just the path that you seem to fall into?
Ran Eliasaf ([00:02:29]) – You know, somebody, somebody told me that my initials re is real estate, so I guessed I was destined to do it. , but no, you know, it just, I was a surfer. I mean, I, I opened up a surfing school before, before I went to work for, for, um, time. That was his name. Uh, I opened up a surfing school in Dominican Republic. Lived there for a year, almost never made it back. Wow. But I went to law school and then when I started law school, uh, you know, my first year of law school, I told myself, I don’t wanna finish my line degree and have zero experience in business. Let’s work for somebody while I’m in school and at least get some experience.
Sam Wilson ([00:03:03]) – Yeah, absolutely. Do you surf still?
Ran Eliasaf ([00:03:05]) – Yes, I do. Good
Sam Wilson ([00:03:06]) – For you. Good for you. What’s
Ran Eliasaf ([00:03:08]) – Lately? Lately mostly on the internet though. But, uh, , I take the family and kids. We go at least three times a year to a surfing trip.
Sam Wilson ([00:03:15]) – Oh, that’s cool. Good for you. Good for you. That’s a skill I’ve never mastered, but it’s one that’s, it’s beautiful to watch when you know what you’re doing. So
Ran Eliasaf ([00:03:22]) – That’s never too
Sam Wilson ([00:03:22]) – Late. Never too late, I guess. So that, that’s fantastic. Let’s talk then, uh, really about two separate things here today. I know we kind of talked a little bit off air, uh, about how the, um, office conversion, there’s opportunity right now in office conversions. Can you, can you give us some insight onto that?
Ran Eliasaf ([00:03:40]) – Sure. I mean, I think everybody understands right now. Uh, there’s a lot of, uh, supply sitting out there, mostly of Class B office buildings in a city like New York where I’m in. Um, you know, right now a lot of these buildings are sitting half empty and some of them could potentially be converted. It’s much easier said than done. Not every building can, can go through a conversion cause you need the light and air and certain requirements, you know. Um, but definitely we’re, we’re aware of at least five to 6 million square feet of office space in New York City that’s being converted right now to resi. Most of them has been converted to rentals, which is good cause the city needs rentals. Um, and I think it’s gonna be the trend for the next two years probably. Uh, but not every owner, not every building can do it.
Sam Wilson ([00:04:26]) – Yeah, that’s it. That’s really, really interesting. Yeah. I was speaking with someone here recently, uh, on the show, I think it was the last couple weeks. Uh, and they were talking about the opportunity in office space, especially there in New York City right now. And they were saying they’re picking up stuff maybe three, 400 bucks a square foot, which maybe was trading, you know, three and a half years ago at eight, $900 a square foot. Is that something similar to what you guys are seeing right now?
Ran Eliasaf ([00:04:48]) – Yes, but again, it’s mostly the Class Bs, right? Uh, uh, and it’s mostly on deals that have been slightly over leveraged, obviously. Uh, I mean, they’re making a bet probably in five years. They look very smart with that bet. I, I think office office will rebound. Uh, right now. Nobody wants to touch it. It’s kind of like a four four letter world right now. Right. Nobody wants to touch office, but I think that in two years, um, the demand is back. You ask any c e o where, where he prefers to have his team, he’ll say in the office right now, the job market is still strong. So, you know, employees can still kind of say, Hey, yeah, you know, I want three times a week and maybe, you know, twice from home, but that’s gonna end. And when it ends, you’ll see a rebound, but it’s, yeah. Not gonna happen this year.
Sam Wilson ([00:05:37]) – Right. No, completely understand. Yeah, there’s nothing like the camaraderie of, uh, face-to-face meetings. And even, even with our kind of team distributed here in the Memphis region, it’s, uh, and we don’t get together face-to-face often enough. And I’m like, man, I just wish we had more face-to-face time. Uh, and I think that’s probably, I’m not, not alone in that sentiment, but let’s switch, uh, switch it around then and talk about the commercial lending environment. What you guys are seeing right now, you guys are lenders. I’m sure that things, things are shifting daily. So where, where are we right now?
Ran Eliasaf ([00:06:10]) – Right now, most banks are on the sidelines, uh, and are not extending loans in general, maybe to ex specific clients that, you know, very deep relationships. But in general, what we’re seeing as a, as a private lender, as a private debt fund that we’re providing now loans to top tier sponsors, operators on great assets that typically would be extended by a commercial bank. Uh, and we’re doing those loans now and there is a scarcity of senior debt out there. Mm-hmm. Now there’s a lot of capital for the BP or the mes, you know, the risk piece, what we call, but there’s scarcity of, of true senior, uh, lenders out there. So we’re doing those loans and we’re very excited about it. But it’s also, I would say a bit scary. Cause you look at the systemic risk, it definitely increased post the crash of, you know, S V B, Silicon Valley Bank, then signature lately First Republic, and everybody’s asking themselves who’s next. Right? Right. So, um, we’re extending loans, but we’re underwriting very carefully the basis the sponsor. And, and, and for the most part we’re lending on residential. Cause it’s slightly easier to underwrite right now resi than it is other asset classes.
Sam Wilson ([00:07:27]) – Right. And when you say residential, obviously I think we’re talking large, uh, commercial multifamily assets.
Ran Eliasaf ([00:07:33]) – Correct. We, we, we lo we land on, on multifamily assets, we just gave a hundred million dollar loan on a, on a hotel that’s actually being converted to multifamily rental. It’s gonna be about 400 unit multifamily rental on, on near Columbus Circle in Manhattan. Uh, and we do a lot of also, uh, condo inventory loans. So we provide inventory loans to developers that recently finished or are about, about to finish their condo project. Mm-hmm. And we’re providing a loan again, against the unsold inventory.
Sam Wilson ([00:08:03]) – Wow, that’s really, really fascinating. I’d love to kind of dig into more of the mechanics of the private debt fund, how it works, what you guys are doing on the underwriting side, how that, how that stuff has changed. Can you kind of just give us the high level overview of really just, I guess the, the, the function of the debt fund, how you organize it, and then also you’d be some underwriting criteria and how you guys are really protecting the fund.
Ran Eliasaf ([00:08:27]) – Sure. So obviously commercial bank, which is, I, I wouldn’t say the opposite of us, but they have deposits from, from clients and they then extend loans based on their deposit base. Right? Right. And the bank is essentially leveraging the de deposit, the deposit base, 10 to one. And it’s highly regulated because they, it takes mom and pop and people’s money and then it extends business loans. I’m obviously generalizing a private debt fund like ours, uh, is, you know, we don’t have deposits. We don’t manage, you know, mom and pop money. We have LPs, investors, uh, institutions, and, you know, ultra high net worth that give us a commitment. So our fund is a closed ended fund. It’s on a commitment base. So we have investors that provided us commitments, and then we have the discretion where we deploy that cap. So it’s less regulated than the bank.
Ran Eliasaf ([00:09:12]) – Uh, we have a little bit more, uh, freedom into making our decisions on what we want and don’t want to do. And we’re governed by our L P A by our limited partnership government that says what we can and cannot do. Our funds, for example, is 70% focused in New York City. Everything else is in major gateway cities. And at least 80% of our loans are in first position, senior secured loans, uh, mostly on residential. So I’ll just give you an example of a deal. We, we did earlier this year. We gave a 313 million completion to condo inventory loan on 1 25 Greenwich. It’s a super tall resid building downtown. It’s about 88 stories. Um, it’s a project that got stalled during covid, you know, with all the construction delays and shutdowns. Um, the prior owner ended up defaulting on its debt. Uh, a large company named Fortress Group, which manages 45 billion, ended up buying the debt.
Ran Eliasaf ([00:10:07]) – And after a long process, ended up becoming the owner and we gave them a fresh new loan that will enable them to complete the project and then sell out the units. It’s about 292 units. You know, our basis is a slightly under a thousand a foot. Uh, those units should sell it around 2000 a foot, uh, maybe more, you know, you know, you know, and, um, you know, we think it’s a very interesting position to be in as a lender. We’re, we’re at about half the basis of what we think the, the units will sell at.
Sam Wilson ([00:10:41]) – Wow. That’s fantastic. I love that. And I guess on that o on the, uh, debt fund side of things, you guys obviously just raised all of that in equity. One of the things you’d mentioned there was that you have a commitment base is, did do these funds function where it is you and I talk and I say, okay, Ron, you know, I’ll commit whatever it is, a million dollars to the fund. And then when you’re ready for the money, you guys call it, or is it something where I say, I’m gonna commit a million dollars to the fund and then I go ahead and just make that, make that, um, commitment and give the money right then and there? How does that work?
Ran Eliasaf ([00:11:10]) – Uh, so it’s, it’s, it’s on a drawdown basis. We basically call the capital as we deploy the fund. Now, it depends when investors join the fund. If they joined when the fund was formed, then the initial capital call is small. If they joined in a subsequent capital raise, when the fund is a bit more deployed, then sometimes you already deploy, you call almost 50% or more. Right. As soon as they join. It really depends how much the fund has deployed. Today we’re, we’re currently, just to give you a sense, we’re over 80% deployed in our funds. Got it. Are we raising, you know, we’re probably gonna raise the next funds during the summer.
Sam Wilson ([00:11:42]) – Got it. What, what have been some things, uh, I guess that you’ve learned along the way in launching such a large, and obviously this has happened over, over at least a decade, if not more than more like 15 years, but what have, what have been some things you’ve learned on the capital raise side of things, especially as it pertains to funds that people should think about that maybe are just starting out and or maybe have a couple under their belt that, that you’ve done differently than maybe what you did at the beginning?
Ran Eliasaf ([00:12:06]) – So I’ll, I’ll tell you two things that I’ve learned. And it started again. We only started raising funds about four years ago. Okay. Before that, we were capitalizing on a deal by deal basis. And what I’ve learned is, is that if you have a good deal in your hands, the capital will be there. And a lot of time when people say, I’m struggling with the capital raise, I don’t have enough investors, the real answer is, well, the deal is not good enough. But it’s hard to admit it, especially to yourself. Right. And the other thing I learned about that is that it’s easier to raise a hundred million for a deal than it is to raise 10 million. Uh, there’s just more capital. Uh, and it’s, it’s, it’s kind of counterintuitive. A lot of people when they start in the business, they start with small deals, obviously, because that’s their capacity.
Ran Eliasaf ([00:12:50]) – And I found it, it’s much easier to raise more capital to larger deals than it is to a smaller deal. And, and the last thing I’ll say, and this is probably the most important thing, and you mentioned when you said we, we had evolved during our life cycle. We started in distress debt than development, than income producing value add, then, then lending. And it happens because I keep asking myself, and I kind of, in the team, we keep saying the same. I tell ’em the same thing. We keep asking ourselves, does it make sense? Does what we do doesn’t make sense on a risk adjusted return? And then when the answer is no or eh, maybe then okay, what should we be doing? And in 2017, for example, for us, equity in New York City stopped making sense Hmm. Because of pricing, because of risks before, because of regulation. And, and we started lending. And, and I’m very happy that we did because it was, you know, in hindsight they’re very good decision.
Sam Wilson ([00:13:46]) – That’s brilliant. We
Ran Eliasaf ([00:13:47]) – Basically, we basically started selling everything we had. We had two very large office buildings in the city. We had a almost 1.3 million square feet of office building that we owned. And we sold between 2018 to 2020.
Sam Wilson ([00:14:00]) – Wow. Wow. That’s cool. What are some of the terms maybe and how have they changed here in 2023 versus what you guys were doing even maybe a year or so ago?
Ran Eliasaf ([00:14:12]) – So, I’ll tell you what we’re in, in our debt platform. Uh, versus two years ago, we have lowered our LTVs, meaning two years ago we would be at 65% ltv. Now we’re at about 55, and we actually increased the spreads. So because, you know, if we, if we gave a loan, I don’t know, two years ago at sulfur plus seven, right. And sulfur was almost nothing. Right? Or libor, now the same loan, sulfur plus seven is almost 12 and a half percent. Right? So the interest rates are higher, the LTVs are lower. Uh, we’re giving loans to bigger and better sponsors on, on, on much higher quality assets. But then I said before, the systemic risk is significantly increased. So, you know, you have an environment where you’re not sure where the takeout will be. If it’s an asset that the borrower plans to sell, great. Hopefully he sells it. But if he’s banking on a refinance, it’s not really sure where the refinance is coming from.
Sam Wilson ([00:15:13]) – Yeah. And that, that, that certainly gets risky. Uh, has it been challenging to say no to previous lenders or previous borrowers, I guess I should say, as your underwriting criteria? Sounds like it has tightened. Has that been something where you’ve had to say to, to pass clients, Hey, I can’t, I can’t work with you anymore.
Ran Eliasaf ([00:15:30]) – We, the two of the major reasons we passed on loans are either the proceeds ask for the proceeds is too high, or the interest rate is too low for us, for our capital. And, and that has been consistent of it. I think that’s about 90% of, of the reasons we passed on deals is proceeds and rate. And we had a deal we passed on a year and a half ago, a sponsor. We really liked that, that needed a 200 and plus million loan on an asset. We passed on it, somebody else did it. And then last week we ended up giving an a note, meaning we took the senior trench on that loan, a hundred million. So, uh, it ended up coming back to us, but now in the place we felt comfortable in, you know, in the exposure.
Sam Wilson ([00:16:09]) – Right, right. Wow. Wow. That’s a lot to keep up with, especially at those, I mean, at those, at those numbers, uh, the magnitude, you know, of a small mistake just I would imagine as, you know, uh, becomes much more apparent. So that’s really, really interesting the way, uh, the way that you guys handle this. Let’s talk a little bit, maybe, if you don’t mind sharing with our listeners. One of the things, obviously on the show here, it’s called How to Scale Commercial Real Estate. And part of that is team, I think anybody who’s found a way to build their business effectively has done it also with a, with team. Can you talk to us a little bit about building out your company team members, kind of how, how you have handled that, uh, strategically?
Ran Eliasaf ([00:16:48]) – Well, it’s extremely important. Uh, we’ve been focused on trying to bring into the company talent that we feel shares the same values. Mm. Which is honesty, honesty, transparency, and, you know, hardworking. You know, you can’t have success without the willingness to work hard. Um, and I think selecting the right team members and then, you know, also departing from those that don’t fit the, you know, the, the, the right chemistry and the right vibe is extremely important. And, and I think that, you know, the culture we’ve developed, developed is extremely open. We encourage anybody, even if it’s your first day as, as as a junior analyst to speak up to say what you think. Uh, if you think something doesn’t make sense, it’s not necessarily because you don’t understand or you don’t know, maybe it just doesn’t make sense. So, so raise your hand and say, I don’t understand. It doesn’t make sense. And, uh, I think that culture of being able to openly criticize the process, the deals is extremely important and extremely valuable.
Sam Wilson ([00:17:53]) – I think that’s great. That’s great. Yeah. And that’s, uh, that’s something that, that’s the invaluable feedback. You can’t, you can’t buy that feedback, that willingness to have a, an open communication channels. That’s, that’s fantastic. If you rewound the tape maybe the past 10 years, and there was one thing you said that, that you, a mistake that you could help our listeners avoid, what would it be?
Ran Eliasaf ([00:18:16]) – Excellent. The biggest mistake I think for me in real estate, especially when you start out, is you try to force it. You try to force the deal. Mm. Um, you need the deal to happen. Cause that’s how, you know, you pay your bills and you get your fees and, and, and the upside. And, and a lot of time you have a deal lined up and, and you’re doing everything you can for the deal to happen, which is good. But sometimes you cross the line and, and you push it and you try to force it. Even though, again, you should be telling yourself, you know what, this deal, I might be, I might be better off just walking away from it. But you’re already so engaged and you’re so invested in it and you’re kind of trying to force it. And then that’s where big mistakes happen.
Sam Wilson ([00:18:55]) – Yeah. Yeah. I can, uh, I can agree with that. That’s, that’s certainly, I think something all of us at some point, the, uh, the, the, the, the desire to get a deal done, I think all of us are deal junkies in real estate to some extent. Otherwise we wouldn’t be doing it. But that, that forcing good deal. That’s a great, that’s a great piece of advice. Certainly appreciate that. Ron, it’s been great having you here on the show today. I’ve learned so much from you both, from what your perspective is on the commercial lending side of things, how that’s changing, how you guys are changing your underwriting metrics, your loan to values, your uh, the spreads that you guys are now requiring on those, how you’re finding opportunity, uh, your switch from equity to a debt position. You got a wealth of experience and I certainly appreciate you taking the time to come on the show today and share that with us. If our listeners wanna get in touch with you and or your company, what is the best way to do that?
Ran Eliasaf ([00:19:42]) – Either on LinkedIn or directly emailing me? Uh, it’s all available there. Um, but LinkedIn is probably the easiest way to find me.
Sam Wilson ([00:19:49]) – Perfect. And we’ll make sure we include that there. Uh, in the show notes, your LinkedIn, we’ll find your LinkedIn profile and tag that in there. Uh, Ron, thank you again for coming on today. I do appreciate it.
Ran Eliasaf ([00:19:58]) – Thank you, Sam.
Sam Wilson ([00:19:59]) – Hey, thanks for listening to the How to Scale Commercial Real Estate podcast. If you can, do me a favor and subscribe and leave us a review on Apple Podcast, Spotify, Google Podcast, whatever platform it is you use to listen. If you can do that for us, that would be a fantastic help to the show. It helps us both attract new listeners as well as rank hire on those directories. So appreciate you listening. Thanks so much and hope to catch you on the next episode.
