Fly Away With Me

“My regret is that I didn’t move to the U.S. earlier. Here, entrepreneurial spirits get recognized.” - Albert Behler, Paramount Group

Private real-estate firms are hotbeds of self-dealing and nepo babies 🐣 . It’s your capital on the line, and your blood & guts that built the firm, so who’s going to question whether that jet is actually a business expense, or whether your just-graduated son w/ reverse charisma is the right person to woo lenders? But when you’re a public REIT that answers to outside shareholders, the bar is supposed to be higher.

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Paramount (Cont.)

Paramount Group, a REIT that controls 13M sf in Manhattan and SF, just disclosed that it made millions of dollars in payments to outside firms controlled by its longtime CEO Albert Behler: $3M+ over 3Y to an aviation co. 50%-owned by Behler (who also uses a ✈️ from the co.); $1.6M to a Behler-owned consulting firm, $200K+ to a design firm owned by Behler’s wife; and $12K for wine from Behler’s vineyard in Germany 👏 👏 👏 🍷 🍷 

Paramount disclosed this stuff in its latest annual report (P97) and had the chutzpah to issue the following statement to Crain’s: “The information provided in our 10-K [annual report] reflects our commitment to transparency and enhancing our disclosures.” The payments came on top of Behler’s hefty comp ($20.2M in ‘23). Shareholders are miffed: One, per Crain’s, wrote to the board accusing Behler of “improper self-dealing at the company’s expense.” 🃏 What’s amazing to me is that this is all going on even as Paramount’s portfolio is facing existential challenges: like other major office landlords with older stock, building valuations have nosedived, defaults are looming and leasing has slowed. Paramount’s share price is 70% below pre-pandemic levels, so you’d hope that leadership would exercise prudence - like, if you’re Jane Street or Citadel, no one’s going to give a damn about how you spend a million or two, because you’re making so much money. Not the case here.

In one of those glorious coincidences that’s journalistic catnip, Behler had once discussed working for his dad’s homebuilding co as a kid in Germany. Papa Behler had put him to work on some of the toughest and most unglamorous tasks (roofing in the summer etc.), Behler recalled, because “he wanted to make sure that no one thought there was nepotism.” 🫡 

Fannie’s Secret Condo Blacklist

Agency blacklists aren’t just for concerns of mortgage fraud: In the wake of the Surfside condo collapse tragedy, Fannie greatly expanded the list of properties on which it won’t do business, and the dynamic has led to a lot of stranded sellers. From just a few hundred properties non grata pre-Surfside, over 5,000 properties are now blacklisted for inadequate property insurance/disrepair, per WSJ, w/ Florida (1,400) 🌴 and California 🌊 (700) most acutely impacted. Being on the list can make getting mortgages pricier and harder to get, and has put a chill on condo sales in those properties. (Side note: To understand just how dramatically insurance has jumped on older condos in Florida, read this)

A Fannie rep told WSJ that its requirements “help protect borrowers from physically unsafe or financially unstable projects,” and took issue w/ the blacklist being described as a blacklist. A rep for Freddie, which has similar insurance requirements, said it has no such list. Meanwhile, the insurance industry is lobbying the FHFA to soften the requirements – “whoa, whoa, whoa, [the guidelines] will destroy an entire marketplace,’” is how trade group rep Jimi Grande put it.

Private Credit’s Manifest Destiny

Is the goal of capital to fuel productive growth? Or is it increasingly mostly to fuel itself? The evolution of private credit seems to lean toward the latter, as laid out in this fascinating new essay in American Affairs Journal by friend of The Promote Hunter Hopcroft. The biggest alt investment managers have been moving to build private-credit origination capabilities in-house (BlackRock-HPS etc. etc.) The game, Apollo co-prez Scott Kleinman said at a Barclays conference in Sept. “really is built around, ‘can you originate enough attractive assets to meet your needs?’ That's why we have been so focused, some might say maniacally focused, on really making sure we are building the right type of origination in the right volumes.”

Hunter explores Apollo’s reimagining (and that’s the apt word for what they’ve done) of the once-unsexy field of insurance (Athene, Athora) as a source of equity that it can then feed into its PE machine:

To address the origination constraint, Apollo has used the equity that “falls out” of the insurance structure, then raises outside capital in the traditional private equity model to capitalize, purchase, or otherwise finance captive debt origination platforms. Apollo, in effect, leverages their insurance equity via the private equity structure to earn fees and carried interest on the debt those platforms are originating. The portion of that debt origination that qualifies as investment grade can be fed back into the top of the insurance capital stack, dropping down new equity that is used to equitize further debt origination. 

Why does this matter to us? Well, asset-backed debt (ie CRE) is an essential piece of the puzzle for these money managers, as it’s more likely to meet the investment-grade criteria of the insurance 📘. It’s part of why you’ll notice that lifecos are playing a bigger role in the CRE capital markets, taking down deals that would previously be destined for CMBS; lifeco deals used to cap out at $150-$200M, but are now roaring 🦁. With Athene, Global Atlantic (KKR) & others popping up w/ more frequently in CRE deal stories, it’s important to understand what’s fueling them.

Quickies

• Ep 2. of The Promote Podcast is live! (Discussed: Chetrit, Reed Hastings, Cohen’s Fortress of Pain). Listen, rate, review, give us feedback 🙏 (Apple Podcasts link here)

• 🎥 HUD lending in the mud (though there’s hope)

• Couple more Blackstone guys join the billionaires club

• 🎞️ RXR loses “digital” building to lender Barings (if you’re confused about why I’m using weird camera language, read my sit-down w/ Rechler here)

• Goodwin Procter 💼 nears 200K+ sf lease at BXP’s 200 Fifth 

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