John Azar Explains Why Forcing Weak Real Estate Deals Kills Debt and Equity Terms

John Azar (00:00)
⁓ you know, not disclose something about themselves or the deal. That’s always how it is. you know, we don’t make us find out something as we get closer to closing. You know, please tell us if there’s something that is amiss or something that didn’t get uncovered or something that is wrong. You found something wrong with the deal last minute. Don’t just shove it under ⁓ the rug. Please share it with us because we’re going to find it.

We’re going to find it, you know, because we continue to do diligence on deals and sponsors themselves.

Scott Bursey (02:03)
Welcome back to the real estate pros podcast where we help real estate pros stop being busy, start being effective and achieve true scale. I’m your host Scott Bursey. And today we’re diving deep into the world of capital markets with a true expert. Joining us today is John Azar, the founder and managing principal of Peak 15 Capital, a firm dedicated to structuring complex capital stacks for real estate transactions.

John, welcome to the podcast.

John Azar (02:32)
Thank you so much, Scott. Appreciate you having me on.

Scott Bursey (02:34)
It is wonderful having you here. And before we dive into the how, I want to talk about the who for those just meeting you. Tell us about the path that led you to real estate and the core mission that drives your work today.

John Azar (02:48)
Sure. Yeah, real estate kind of found me, to be honest with you. It wasn’t the other way around. ⁓ My partners and I used to be equity traders, or Morgan Stanley, ⁓ on the equity and bond desk. We worked on structuring a very complex deal back in 2004, 2003. ⁓

The deal didn’t work, but the owners of that deal told us that if we ever struck out on our own, they’d love to work with us. So, later, we, after a year or so, we ended up hanging our shingle and ⁓ launched our first company, my first company in commercial real estate, which was essentially a structured finance shop that we provided ⁓ investment banking services to large scale mixed use development owners and developers.

up and down the East Coast, major cities like Boston, New York, Philadelphia, Miami, and transacted some pretty complex deals between about 2004, 2005, and 2008, 2009. And as you can guess, at that time, something very, very challenging was happening in the market, which unfortunately led to us closing that company in 2010. So we both had to, we all had to

go back and regroup and lick our wounds and put some band-aids on our boo-boos and lift ourselves back up again. And a few years later, launched another company specifically in multifamily based in the Southeast with my brother Tony. And we transacted multifamily apartments between 2013, 2014, pretty actively until 2020.

and end of 2020, 21. And then we I launched and then I launched Peak fit. We started sunsetting a good portion of that portfolio and then I launched Peak 15 Capital and end of 2020, 2021. So here we are.

Scott Bursey (04:45)
Exciting. So John, let’s jump right in. With so much volatility in interest last year, what is the single biggest shift you’ve observed in how institutional and sophisticated real estate capital is approaching commercial real estate deals today?

John Azar (05:50)
Very cautiously, very, very cautiously. The folks who are allocating, who are still allocating out there are allocating with very calculated trepidations. Rightfully so, because a lot of deals are, and obviously geopolitical environment and the capital markets environment are certainly…

changing on a day-to-day basis, some to the good, some to the bad sometimes, but you take the good and the bad. But again, I think I said that to you earlier, this is where you also find opportunities. So among the instability and the chaos comes sometimes the unicorn deals that you can find and you go, my goodness, I found this amazing deal because nobody else is either looking at it or people passed it or nobody’s man enough to step up to it.

and figure out a way to structure this. at the same time, and that happens all the time, I think, again, I said that earlier, in challenging markets, that’s also where you find amazing deals because ⁓ for the same reasons that people are backing away from those deals are the same reasons that make them viable sometimes and creative to those who are looking at the right numbers and have the right capital to deploy and have the right partners to work with.

Scott Bursey (07:10)
That’s a fascinating perspective. So if an operator is looking to execute their first or next major acquisition in this environment, what’s the most critical piece of advice you’d give them right now about securing favorable debt or equity terms?

John Azar (07:28)
Yeah, I mean first thing is obviously the deal has to work. The deal has to be, it doesn’t have to be just passable. Right now passable deals are just not getting funded. Just because a deal comes in at the low bottom rung of our acceptability buckets, it just barely passes mustard, those deals are not working. ⁓ Those deals would work if there’s plenty of deals abound and everybody’s finding profits and everybody’s is happy.

Those will work, but in an environment like this, a barely passable deal, just not gonna work. ⁓ So you really, you know, don’t, you my advice is don’t waste your time on deals that are barely passable just because you think that you’ll love this deal or it’s in the right market that you want, because people make that mistake all the time. They fall in love with the deal itself, with the, you know, I love this market, this is a great market. This technically should be a great deal, you know, so therefore let me see if I can make the numbers work.

Don’t do that. If the deal is a good deal, don’t look at everything else. If it’s a barely passable deal, don’t try to force feed it into somebody else’s mouth because you can’t force feed the deal into anybody. So a deal has to be great, like more than great. The numbers have to be fantastic almost in order for deals these days to work. The other thing that’s challenging is obviously very older vintage deals. Older vintage deals are just

are hard to begin with, but these days they’re even super hard to do. We do not even try to engage on deals that are below, I’d say, a 1985 vintage from our perspective. If we see a deal that’s 60s and 70s, as great as the numbers might seem, we just pass on it. It’s just not worth the trouble. It’s not worth us trying to fit a round peg in a square hole.

There’s no reason to because I know if I pass it, I’m gonna probably find other deals that are much better that are 90s and 2000 and even 2020 vintage that we can pick up without having to put up with deals that are in the 70s and 80s or 60s. So older vintage deals also, be very careful on trying to be too wetted for. Yes, can you find some good deals like seemingly good deal on paper when you come across 70s deals? Sure.

There are seemingly some good numbers coming up, but don’t just think of the numbers of the deal, think of who’s gonna be buying it and who’s gonna be partnered with you on it and how are you gonna exit it in five years. A 70s or 80s deals that have about 40, 50 years, 60 years of obsolescence on it is gonna have another five or six years on top of it when you go to sell it in the marketplace.

Think of adding that extra years of obsolescence to your deal and what is that gonna make it look like on the buyer’s end five years from now, four years from now, seven years from

Scott Bursey (10:54)
Tremendous advice. Thank you for that. John, what non-traditional financing sources are you currently gaining the most traction as you see it sitting in your chair today?

John Azar (10:59)
Of

Financing sources, mean, you’re having to look for non-traditional sort of finance sources. mean, some of those traditional stuff like your normal, obviously, senior debt still works in certain deals, Pref debt players are certainly having challenges these days. Pref debt is still viable option for the right deals. ⁓ You have to make sure your numbers support pref debt because that’s a… ⁓

not something that you can expose yourself to if the numbers are eh, know, teetering on okay. And that goes back to my earlier comment. Don’t take a deal if the numbers are barely passable because you’re also gonna decrease your options on what kind of capital comes into it. If a deal is barely passable, you really can’t put on prep. The deal’s gotta be a screamer of a deal in order for prep to work. These days, anyway. So.

So you can look at graph, but again, you’ve got to look at the numbers, make sure that they’re great. Senior debt is still working. In fact, a lot of senior lenders are doing great business right now. Bank debt is going gangbusters right now because a lot of bank lenders are, as opposed to non-bank lenders, such as the Arbors of the World and other guys, ⁓ they’re having a great time as well because they’re finding ways to underwrite.

quicker, delivering better, going a little higher on the LTV. the proceeds are a little bit more juicier. So just depends. And then on the equity side, have ⁓ your normal sort of LP equity that’s a no deal. That’s probably the most challenging type of equity. A lot of the other types of equity like ours, for instance, ours is GP equity. So when we come in on a deal, we have to take part of the GP.

of some sort. we don’t just come in and put in passive LP equity. We have to have some kind of GP economics or some kind of GP votes or some kind of GP share. It just depends on what we’re bringing to the table and how much we’re bringing to the table. That’s how we structure our capital. ⁓ But that’s the kind of capital that’s kind of working these days. And yeah, and people are being very creative in how they look at deals and who they partner with. ⁓

And as long as that partnership makes sense, again, be very selective and very careful on who you partner with because they’re gonna be with you for a while and you better make sure that the synergies work between the two of you, not just today, but in the future.

Scott Bursey (13:42)
That’s an interesting shift and very intriguing. In this high rate environment, what capital stack structure is proving most resilient in your eyes, John?

John Azar (13:55)
I mean, again, we specialize in GP Capital. you know, lot of the ideas when we come into them, whether we bring in LP Capital or not.

we’re still participating somewhat on the GP side of the equation. But also LP Capital or technically JV Capital is also working ⁓ well as well on certain type of deals. So even though it’s technically LP, but when we work with our institutional partners, when they come in on a deal, even though technically their capital is LP, but it’s really JV. Because it has a lot of caveats and has a lot of…

⁓ rights and privileges into the deal and ⁓ so it’s that. ⁓ You obviously have your normal LP capital that comes from retail investors or whatnot and that still works great but you just really have to make sure that ⁓ you are delivering to those retail investors what you are.

not just promising them to deliver, but being realistic on what you can deliver to them. Don’t make the numbers work how you want them. Make the numbers work like how they should be. Because listen, everybody can underwrite the numbers and you can make the numbers underwriting and you can make the numbers sing however you want them to sing, but don’t do that. Make them really sing the correct song or the most conservative song, not the most…

optimistic song, because if you start singing the most optimistic song and you don’t hit those notes on your executions, then everybody’s gonna be unhappy with you. you know, under-promise and over-deliver is always our motto. So when you underwrite and you stress test a deal, when you tell investors what this deal is gonna possibly potentially deliver, be very conservative and underestimate what you’re gonna be potentially could be delivering for them.

Scott Bursey (16:24)
Crucial insight for today’s market and John what’s the key? Mistake you see operators make when approaching institutional equity partners if you could elaborate on one or two mistakes that you see

John Azar (16:38)
⁓ I think, know, listen, operations and know how is very important right now. So when we partner up with somebody or when some of our institutional partners come in and partner with us and go and we partner with someone, the expertise and execution and operation of that.

of that operator, of that sponsor is crucial to the deal because we want to know that they have their stuff together. We want to know that they know about that market. We want to know about their particular asset type. We invest in multiple asset type, not just multifamily. So our portfolio in the fund has anything from industrial to BTR to multi to ground up development to land deals. We even have a portfolio of car washes in our portfolio.

You know, we have to be adept to various asset types, but no matter what asset type you’re looking at, the common denominator is good execution on the ground. And good execution on the ground only comes from, you know, if you vet the right operator that has the right pedigree in that market, know their stuff.

That doesn’t have to mean that they have a huge team. It’s not about having a huge team on the ground per se, but it’s about knowing how they’re handling their business and their growth. If somebody has 500 doors today and you’re partnering with them, that’s fine. And if they want to go to 1,000 or 2,000 or 3,000 doors, we want to know that they have the scalability and the know-how to take that scalability. If they go from 500 doors to 2,000 doors,

Do they have the infrastructure, the internal infrastructure and more importantly, the game plan on what it’s gonna take for them to manage 2,000 doors as opposed to 500 doors. ⁓ Because that tells us they’re thinking about the future and they’re thinking strategically about the holistic growth of their company. ⁓ More importantly, some simple things like.

you know, legal, how they’re handling their investors, what communications they’re giving. Communication is super, super, super important. ⁓ You know, we don’t want to be knocking on your doors in order for us to get information after we partner up with you. That’s the wrong vibe. That is the wrong vibe in any deal. We want you to be proactively sending us information and data and updates on the deal after we close on it with you because that’s what good deal denizens are.

Because we have to, and it’s not, we’re not asking this because we are doubtful of your information or doubtful of your execution. A lot of times people are like, you know, why do need all that information? We need that information because we have to, we have investors we have to answer to. We communicate with our investors on a regular basis. We send out quarterly reports. We send out quarterly financials. And we ask our sponsors and partners.

to give us information because we need it to establish these reports and communicate that to our investors. We’re not asking that information because just for fun and and giggles, we’re asking information because it’s important for us for our reporting environment. And if they are not, again, if they don’t have mechanisms to provide those kinds of financial and data updates, that’s a red flag for us.

Scott Bursey (19:43)
Absolutely. And on that note too, John, what is the most common mistake you see smart, ambitious real estate investors make when modeling their capital stack that could literally make or break a deal in the closing room?

John Azar (19:59)
⁓ you know, not disclose something about themselves or the deal. That’s always how it is. you know, we don’t make us find out something as we get closer to closing. You know, please tell us if there’s something that is amiss or something that didn’t get uncovered or something that is wrong. You found something wrong with the deal last minute. Don’t just shove it under ⁓ the rug. Please share it with us because we’re going to find it.

We’re going to find it, you know, because we continue to do diligence on deals and sponsors themselves.

⁓ You know, if there’s something wrong with their background or something like that, like you, I don’t know, you had a lawsuit before, you had something going on that we didn’t necessarily uncover right away, please tell us because eventually it will come out. And it’s just not a good look when it comes out, you know, with

with people uncovering it rather than you sharing it with us. So I would say that’s the biggest thing is if something happens with the deal and that was not shared or something that got missed about the sponsor or the operator themselves that did not get shared. So always share, always be transparent, always communicate on a regular basis. If a deal goes from

you know, 90 % occupancy to 80 % occupancy two weeks before closing, we got to know this. You got to communicate that with us. A, because that’s going to present a huge problem with the lender, because the lender’s going to probably freeze the process. And B, it’s going to be a trigger for equity as well, whether it’s our equity or one of our partners’ equity. So I’m just saying that as an example, but anything, any changes or anything that you think was missed,

please share them because that is the biggest kind of biggest stumble block on any deal.

Scott Bursey (21:46)
Transparency. That is solid advice. Absolutely. And John, we’ve covered a lot of ground here today. I know people are going to want to tap into your brain. For the listeners who want to build with you or just follow the play-by-play of your journey, what’s the best way for them to reach you?

John Azar (21:49)
Correct.

Correct.

I’m easy to find man, I’m on LinkedIn. I’m very active on LinkedIn. Under my name, John Azar or Jalal John Azar. Under Peak 15 Capital, you can find our website at peak15cap.com. I’m also on Instagram, JJ Azar is my handle. you know, any of those sources would be great. And if all fails, just email me directly. My email is [email protected].

Scott Bursey (22:30)
Thank you for joining us today. This has been a great conversation, John.

John Azar (22:35)
You’re very welcome.

Thank you for having me. I appreciate you having me.

Scott Bursey (22:38)
And for our listeners who see you, we see you and we appreciate you. If you got a vibe or found some gems in today’s episode, do us a favor, hit the subscribe button. We’ve got heavy hitters coming up just like John very soon. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.