JF1956: Raising Capital & High Level, Complicated Deal Structures with Adam Finkel
Adam has been involved in over half a billion in debt and equity placements. We’ll hear details on some of the more complicated structures he’s worked with, what he learned, and what he can share with us. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“Start small and build your track record” – Adam Finkel
Adam Finkel Real Estate Background:
- Adam is the Founding Partner and Principal at Tower Capital
- Since 2015, the firm has been involved in over $500 million in successful debt and equity placements on behalf of investors across all major asset classes
- Based in Phoenix, AZ
- Say hi to him at https://towercapllc.com/
- Best Ever Book: Anything that Malcolm Gladwell writes
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Adam Finkel. How are you doing, Adam?
Adam Finkel: I am well, how are you?
Joe Fairless: I’m doing well, and looking forward to our conversation. A little bit about Adam – he’s the founding partner and principal at Tower Capital since 2015. The firm has been involved in over 500 million in successful debt and equity placements on behalf of investors across all major asset classes. Based in Phoenix, Arizona. With that being said, Adam, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Adam Finkel: Absolutely. I grew up in Boston, I went to Arizona State University for school. That’s how I ended up out in Phoenix. While I was in college I didn’t really know what I wanted to do, and I knew a couple of guys older than me that were in commercial real estate. The market was pretty good at the time – this was 2003-2004 – and I decided to check it out.
So I went and got my real estate license, got an internship going into my senior year of college. I was working for a boutique, full-service commercial real estate firm based in Scottsdale, Arizona. There I was representing landlords and tenants with their office leasing, doing some office, industrial, retail… A lot of smaller deals, but a lot of transactions and a lot of great experience, understanding what motivates tenants and landlords, and just how commercial real estate operates in general, getting exposed to some different asset types… And then I joined up with a larger, regional tenant rep firm called Travers Realty Corporation based out of L.A. They’ve since been acquired by Cresa. When I was out in L.A, I was only on the tenant side I was representing. A lot of law firms in San Fernando Valley, a lot of surgery centers in the Beverly Hills area, and then a lot of creative companies in the West L.A. and Hollywood area.
Well, I started to get burnt out on tenant rep leasing, to be honest, and I segued back to Phoenix and found myself a position over at Johnson Capital, where I was a commercial mortgage banker. I had known the partner that I was working with over there for many years, a guy named Neal Churney. He was president of our Central Arizona CCIM chapter, and he really mentored me and taught me the skills and underwriting, evaluating commercial properties, and I was financing mostly apartments while I was at Johnson Capital.
Then a large publicly-traded company out of Bethesda, Maryland called Walker & Dunlop, who specializes in Fannie, Freddie and HUD loans for multifamily properties – they acquired Johnson Capital at the end of 2014. That’s when really the stars aligned for me to start my own structured finance firm that we named Tower Capital. And along with my best friend, Kyle McDonough, who I met at ASU, and we’d always wanted to do something together – he was on the private money lending side, and we joined forces and created Tower Capital… And that’s what I’m doing today.
Tower Capital is a boutique commercial real estate structured finance firm based Phoenix. We finance a wide variety of different types of assets, whether it’s multifamily, office, retail, industrial, and from stable properties to transitional properties, ground-up developments, we financed large masterplan communities… Doing deals pretty much all over the country, but our footprint is mostly West of the Mississippi. I would call ourselves a regional firm, and we let our clients take us to different markets.
Joe Fairless: I wanted to talk a lot about Tower Capital and what you are doing, but just to ask a follow-up question or two about your tenant rep leasing experiences… You were representing tenants like law firms and surgery centers – what are some tips that you have for tenants when negotiating leases with landlords?
Adam Finkel: Well, I think that when negotiating a lease you really need to figure out what is most important to you. That maybe be getting the lowest rents, that may be getting the right buildout that you want, that may be having flexibility with having options to expand, or get out of your lease early…
I think sometimes what people try to do is they make the mistake of over-negotiating and not picking out what’s the most important to them. So what I would say is find out what’s most important to you and then really focus on those areas, because it’s always a give and take. You can get a little here, but you might have to give a little someplace else.
Joe Fairless: Hm… Know what you want going into it, where your priorities are, and where you can give a little bit on the other side, with regards to those points. You mentioned rent, flexibility, buildout – another name for that is tenant improvement (TI)? Any other major categories to consider?
Adam Finkel: In what regards?
Joe Fairless: Just negotiating points, like “Hey, I wanna know what’s important to me, so here are some things to consider, and then I’m gonna pick and choose in order of priority which ones are most important.” You mentioned three of them. Are there any other major categories to consider?
Adam Finkel: Well, I’ll tell you one thing – one of the negotiating tricks that we used very often was extending the lease term. By committing a longer term to the landlord, they can justify quite often providing additional TI dollars, maybe additional free rent, that sort of thing. So sometimes people will go in and maybe they’re only thinking about doing a three-year lease, but if you can do a five-year lease, then you’re typically gonna get a lot more out of the landlords… So that was something that we utilized quite often – tenants have the ability to stay in the space longer.
Joe Fairless: And from a landlord’s perspective, is it the same thing – know what’s important to you? …or are there any other nuances to it?
Adam Finkel: Well, I think for landlords – they’re always trying to create as much stability in their properties as possible. Typically, unless they believe that we’re in a situation where rents are going to be increasing at a very positive [unintelligible [00:07:58].23] at a fast rate, they may want shorter-term leases, so that as the tenants roll, they can replace them with higher-picked tenants. However, quite often the landlords really want stability, so they’re pushing for longer terms. That’s really what I saw… And again, it comes down to just basic skills of negotiating, of knowing what’s most important to you and where you can give a little to get a little.
Joe Fairless: Let’s talk about Tower Capital. How do you all make money?
Adam Finkel: We make money when we successfully facilitate a loan funding. And we get paid by the borrower, out of escrow, upon closing of the loan, typically anywhere from 0.5% to 2% of the gross loan amount. That’s how we get paid; pretty simple, pretty standard.
Joe Fairless: What’s a typical client who comes to you? Who are they? I’m not looking for names, but just in general – who are they and what’s their scenario or situation where they then come to you and you offer the solution?
Adam Finkel: Absolutely. Our typical client is an experienced, high net worth investor; whether they’re a private investor or they may be part of a company, they have experience, they generally have several properties under their belt, and they’re looking to go out and either refinance or acquire additional assets.
Generally, our clients are based on the West Coast, many being located here in Phoenix. We have a lot of clients from Arizona, a lot of clients from California, and also Canada – Toronto, Vancouver… Arizona is a very desirable place for investment, because of the warm weather, the population growth. We’ve really expanded our economy out here since the downturn.
I believe that Phoenix is supposed to have the highest rent growth out of any other market. For the next five years I think that they’re predicting 5% to 6% rent growth… So it’s a very strong market, where a lot of people wanna be… So we seem to draw a lot from folks from the West Coast and Canada, where it’s gotten very expensive, and cap rates are very low… And people can still get more bang for their buck.
I don’t know if we’re considered the secondary or primary. I think we’ve been considered the secondary [unintelligible [00:10:15].10] primary, but the folks from the primary markets are chasing yield, and seeking higher yield, and secondary or tertiary markets is where the cap rates are higher.
Joe Fairless: And I see on your website that you have services that provide preferred and joint venture equity. Can you elaborate on that?
Adam Finkel: Sure. Being a structured finance firm, we are able to capitalize entire stacks. That’s going to include a debt piece and an equity piece. Typically, on larger projects we will assist our clients where we’re basically going out to one institutional equity source and we’re marrying them together and introducing them to our clients… And whether that’s general partner, or a limited partner situation, or a preferred equity situation… There’s a lot of ways to structure the deals, and typically you’re going to have the senior debt, and there’s gonna be a mezzanine financing piece or B-Note, and then you have your different equity layers.
We can get very complex when you’re really trying to push either loan-to-value or loan-to-cost, and there’s different types of capital sources that we can mix and match to find the best structure, that’s gonna be most in line with our client’s objectives.
Joe Fairless: Can you tell us a story of a project that you’ve worked on that was a complicated structure, and just walk us through it a little bit?
Adam Finkel: Sure. We’ve recently financed a 212-unit ground-up horizontal multifamily property – otherwise known as single-family floor rent – in the Northern Phoenix submarket of Deer Valley. That was about a 52-million-dollar total project cost. We brought in a large national bank to come in for the 65%. So it was a 65% loan-to-cost loan. Then we brought in a private equity group to come in with an additional 20% preferred equity piece, and then we also brought in a general partner as well… So really going up the entire cap stack, from the debt all the way to the equity.
Joe Fairless: And for anyone that’s not familiar with loan-to-cost versus loan-to-value, and why you use loan-to-cost versus loan-to-value, can you elaborate?
Adam Finkel: Well, loan-to-value is typically going to come in when you’re just buying an asset; usually, it’s a stable asset, you’re not doing any rehab, or limited rehab. Where loan-to-cost really comes in is on a construction project or a heavy rehab project where the loan is based upon the cost, not necessarily the value… But you will have different parameters. They may say “The loan amount isn’t going to be more than 80% of cost and more than 70% of stabilized value.” So the lenders are always going to want to know that they’re not over-levering and that the borrower will be able to either sell or refinance them out when the project is complete, and the lender will be made whole. So that’s why they set those limitations for loan-to-cost, as well as loan-to-value.
Joe Fairless: Then the second piece, you mentioned you brought in a 20% preferred equity piece. For anyone who’s not familiar with preferred equity, will you elaborate on what that is?
Adam Finkel: Preferred equity can be used in place of mezzanine debt, or subordinate or junior notes to the senior loan. What that basically means is you have your senior loan/first loan, and then if people wanna go higher up on the cap stack, quite often the senior lender will not allow a subordinate lien, or another lien against the property… So that financing has to be structured as equity, or what we called preferred equity, where typically the equity provider is receiving a preferred rate of return; call it 8%, or 10%, or 12%.
They’re gonna get that money first, before the sponsor gets any of their money. And then they may or may not have some back-end participation. Typically, most of the deals that we do, it’s really almost structured as debt can be paid current or at the end, and there’s really not (typically) a huge amount of back-end participation with the preferred. It’s really just meant to be a secondary debt piece where there’s just no lien, and they’re gonna get a set amount of yield, and that’s how it works.
Joe Fairless: And then you mentioned that you brought in a general partner… I was under the impression you all were brought into the deal, that there was a general partner in place; so is this partnering up with the current general partner that you brought in?
Adam Finkel: Yeah, so it was a co-GP that was able to provide the balance sheet that would qualify for the senior loan amount. When someone’s getting a loan on a commercial property, typically whoever is signing on the guarantees or the non-recourse carve-outs still needs to meet a minimum net worth equal to the loan amount. So sometimes when developers are out there and they’re trying to build a large project, they don’t always have the balance sheet on their own, so they need to partner and bring someone in that can provide that additional support for the financing.
Joe Fairless: So typically it’s net worth is equal to loan amount. What about liquidity?
Adam Finkel: Liquidity is typically going to be a minimum liquidity of 10% of the loan amount after the down payment. The lenders wanna know that the borrower isn’t putting every last penny into the property, and then if something goes wrong – they need to replace the roof, an air conditioning goes out – that the borrower has the funds there to complete those projects as needed.
Joe Fairless: You said “minimum 10% of loan after down payment.” What have you seen it go up to for that requirement?
Adam Finkel: It’s really kind of a case-by-case. Typically, on construction deals, the lenders wanna see additional liquidity; that could be 20% or 30%. It’s really all over the place and case-by-case.
Joe Fairless: And what are the main variables that that’s dependent on? Is it new construction, or are there other things besides that?
Adam Finkel: It’s going to be dependent upon the borrower’s experience, the property, where it’s located, and really just the lender’s overall comfort with the project in total and the borrower. If the borrower has a BK, or credit issues, the lender may require some additional liquidity.
Joe Fairless: Based on your experience, when you bring in a co-GP into a deal, who is a balance sheet person, what percent of the general partnership do they typically get for that?
Adam Finkel: It’s really a case-by-case. I believe they’re pretty much 50/50 partners. So it just really depends on the co-GP’s involvement and what they’re doing, not only in this instance where they’re providing a balance sheet, but they are also providing a lot of back-end/office support as well… So it just really depends on their involvement and how much the sponsor needs them, I suppose.
Joe Fairless: What’s been the most challenging project that you’ve worked on in your career?
Adam Finkel: I think in general, construction, along with equity raising is the most challenging. I can’t point out one project in particular, but as far as the equity goes, there’s a lot of pieces that have to be put into place to meet the capital provider’s box. If the sponsor doesn’t have experience in this particular asset class, like say they wanna go out and they wanna do an apartment project, but they have all of their experiences in retail… Or if they worked for a company where they were involved in commercial real estate, but they weren’t actually the general partner or the key principal…
The vintage of the property can make it challenging as well. In Phoenix, when we’re capitalizing a lot of these value-add apartments where maybe they were built in the ’70s or ’80s, the equity people don’t wanna see eight-foot ceilings. They wanna see ten-foot ceilings or higher… So that can be challenging if you don’t have an experienced sponsor.
Sometimes people try to bite off more than they can chew. What I always advise people is start small, and then build your track record, and then work your way up. It gets challenging sometimes when people go in and the project is a bit too large, and they’re stretching… Those are always the most challenging situations.
Joe Fairless: Based on your experience, what’s your best real estate investing advice ever?
Adam Finkel: My best advice would be to… Really, kind of what I’ve just said – start small, make your mistakes on a smaller deal, bring in people that can help you, that have experience operating that particular type of asset, and really take the time to learn the operations, and then really just build your track record. That’s gonna make it a lot easier for you to find capital partners, whether it’s debt or equity.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Adam Finkel: I am.
Joe Fairless: Alright, then let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Okay, best ever resource you read on an ongoing basis to keep you sharp on the industry?
Adam Finkel: Wall-Street Journal and GlobeSt.com.
Joe Fairless: Best ever book you’ve recently read?
Adam Finkel: Anything by Malcolm Gladwell.
Joe Fairless: Does he have a book our recently? I was reading him 6-7 years ago, but I kind of last track of his stuff.
Adam Finkel: The last one I read was David & Goliath. I’m not sure if he has come out with anything recently. I know he’s got a podcast now…
Joe Fairless: Yeah, I know he’s got a podcast, too… Okay, cool. Just wondering. It looks like Talking to Strangers is the latest; on sale September 10th, so it’s out… Talking to Strangers.
Adam Finkel: There we go.
Joe Fairless: There you go, Malcolm. You’re welcome, Malcolm.
Adam Finkel: You’re [unintelligible [00:21:25].24] material for me.
Joe Fairless: [laughs] What’s a mistake you’ve made on a transaction?
Adam Finkel: Getting too aggressive in my underwriting assumptions.
Joe Fairless: Will you elaborate on what assumptions were more aggressive and now you’ve reined it in?
Adam Finkel: I would say probably trying to push rents, or the other thing would be when looking at a rehab deal, kind of knowing how much to really put into the property that’s gonna get you the most value, and not over-improving for the tenant base that you’re trying to attract.
Joe Fairless: Best ever way you like to give back to the community?
Adam Finkel: I do a lot of charity work within the community, fundraisers… I’m always trying to get involved in different things, especially anything with kids. We’ve done stuff with Boys & Girls Clubs, we’ve done a lot of things locally here in town to support various types of organizations.
Joe Fairless: And how can the Best Ever listeners learn more about your company?
Adam Finkel: I would say go to our website, www.towercapllc.com. Anyone can feel free to email me directly at firstname.lastname@example.org.
Joe Fairless: Well, Adam, thank you for being on the show, thank you for walking us through the 212-unit development deal, the capital stack and the nuances of the capital stack, and talking about your experience as a tenant rep leasing professional, and then some tips for anyone who is in the process or will be in the process of negotiating either with tenants, or with a landlord during whenever they’re securing or leasing a property.
Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
Adam Finkel: Thanks, Joe. You too, have a good one.