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Terra Padgett on Debt Funds, Preferred Equity & Rescue Capital in Commercial Real Estate

By November 12, 2025Real Estate Pros Show


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Show Summary

In this conversation, Terra Padgett, a seasoned real estate investor and founder of the Power Pool Fund, shares her insights on navigating the complexities of real estate investing. She discusses the importance of evaluating deals, understanding debt in commercial real estate, and the common mistakes made by investors. Terra emphasizes the need for adaptability in business and highlights the current trends in development, particularly in Houston’s dynamic real estate market. She concludes with advice on continuous learning and making informed investment decisions.

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    Investor Fuel Show Transcript:

    Terra Padgett (00:00)
    And they can’t service the debt, meaning they’re not collecting enough income to be able to pay off their debt, pay for rate caps and all the other expenses, insurance costs, everything that’s going up. And so they just have a lot more expenses than income. so the asset may be doing well and high occupancy and great tenants, but if the finances are distressed. And so they can go out and they can be able to do a capital call with their common equity.

    or they can borrow. And basically when you borrow, you’re putting that second, because they still have that senior debt, you’re putting that second loan ⁓ right behind that senior debt and kind of pushes down all the other common equity stakeholders in the capital stack. So you or we can be a part of that preferred equity where we come in as kind of that, I mean, I say quote unquote rescue capital. So as opposed to them having to do a capital call.

    Dylan Silver (02:23)
    Hey folks, welcome back to the show. Today’s guest is returning guest, Terra Padgett, real estate investor, insurance broker, collegiate basketball hall of famer, founder of the Power Pool Fund Investing Club out of Houston, Texas. Terra, welcome to the show.

    Terra Padgett (02:41)
    Welcome, welcome, thank you, thank you, Dylan. Good to talk with you again.

    Dylan Silver (02:46)
    It’s great to have you on here. ⁓ Since we last spoke and we were talking before hopping on here, real estate is an interesting space to be a part of because it’s just as much about the deals that you don’t take as it is the deals that you do take. And so I know when we’re talking about commercial real estate or small multifamily even, evaluating deals is a full time job in many ways. How has you been approaching

    you know, looking at deals, you communicating with wholesalers, are you going out and ⁓ putting in offers on deals, are people coming to you and saying, hey, is this something you would like to take a look at, or is it across the board?

    Terra Padgett (03:26)
    Yeah, it’s a little bit of everything. So, you know, once I get on either an investor list or, you know, a general partner’s list, they’ll, you know, start sending their different deals and whatnot. And it really just depends on kind of what we’re looking for at the time. So a lot, I’d say in the first year of the club, it was a lot of equity, maybe new development deals that maybe were not cash flowing out the gate. And then we started to shift our focus to some more cash flowing deals. So maybe some real estate funds and things like that.

    And then this year, a lot has been on the debt side. We looked at a number of opportunities on the debt side. so ⁓ if a new development or just ⁓ a classic value add multifamily came up, it kind of was low on the priority list ⁓ as far as what we would review. And so that shifts, that changes, just over time, like with anything, ⁓ you have your favorite food, but you don’t wanna eat it every day all day. And so you might wanna switch it up.

    And so this year it’s been a lot of depositions that we’ve been evaluating and looking at.

    Dylan Silver (04:28)
    I’m a little bit of a fish out of water in this space. And also for our audience, can you break down what a typical deal in the debt space looks like? And also too, when people think of debt, they may be thinking of personal debt. How does this look in the commercial space?

    Terra Padgett (04:42)
    Yeah, so when we’re speaking about debt in the commercial space, meaning we are the lender and we are lending to borrowers. And so that can look a couple of different ways. On the kind of personal side, that can be for fix and flippers that are looking to borrow for their project.

    you can actually loan to those individuals that are looking for money to renovate a house or whatever it is that they’re working on. ⁓ Or there’s also real estate debt.

    funds where this is you’re just you’re working with an operator a GP and they’re collecting capital and they are out there vetting let’s say a multifamily or maybe a lot of different individual single-family fix and flippers and so they are just pooling funds from limited partners and then they are doing the underwriting and vetting and and lending out money to ⁓ different either individuals or for companies that are you institutional

    operators that are buying multifamily and so you are a part of the debt fund or there’s also where you can be in a preferred equity position on the debt. So if anyone has been following the multifamily space for the past couple of years, the debt has been a huge issue for a lot of multifamily operators that may be bought in 2020 through 2022 with these adjustable rate mortgages and then you know there were two or three year terms interest only then the rate is coming due the rates are jumping up as rates have skyrocketed.

    Dylan Silver (06:41)
    Go.

    Terra Padgett (06:52)
    they can’t service the debt, meaning they’re not collecting enough income to be able to pay off their debt, pay for rate caps and all the other expenses, insurance costs, everything that’s going up. And so they just have a lot more expenses than income. so the asset may be doing well and high occupancy and great tenants, but if the finances are distressed. And so they can go out and they can be able to do a capital call with their common equity.

    or they can borrow. And basically when you borrow, you’re putting that second, because they still have that senior debt, you’re putting that second loan ⁓ right behind that senior debt and kind of pushes down all the other common equity stakeholders in the capital stack. So you or we can be a part of that preferred equity where we come in as kind of that, I mean, I say quote unquote rescue capital. So as opposed to them having to do a capital call or

    doing whatever they need money. Bottom line is you gotta, they need money to keep operating.

    they can go out and take a second loan or structure it like a preferred equity where they’re providing ownership, but that preferred equity is being paid right behind the senior debt. And so there’s opportunities where you can be that money that goes to them to keep their property afloat. So different kind of ways you can be involved as a lender when you’re doing debt investments.

    Dylan Silver (08:10)
    As someone in this space, you’ve seen people make mistakes, maybe buying too deep in last five years, and that’s why they’re being put in these tough spots. Is there one asset class or is there one common error that you’ve seen with other ⁓ investment groups or syndications where maybe they bought too deep in ⁓ office or?

    or apartment complexes, is there a common theme that you’re seeing?

    Terra Padgett (08:46)
    ⁓ Just like what I mentioned with multifamily, there’s the common theme where a lot they were buying with adjustable rate mortgages. And so, when the rates spiked as fast as they did over the past couple of years, it kind of blew through their debt service numbers. And then when it comes to different asset classes, like office and retail or industrial, ⁓ no one knows what tomorrow will hold, but…

    I do think ⁓ multifamily and even more than multifamily office space is probably been struggling the most out of all of the different kind of common asset classes when we’re looking at different real estate vehicles. think multi office space just do with what COVID happened and how we work and people being remote. You and I are remote, you know, doing this now. And so I think, you know, those that were in office space are struggling probably the most. Second, I would probably say is multifamily. ⁓ In retail.

    Dylan Silver (09:32)
    Yeah.

    Terra Padgett (09:42)
    has surprisingly maintained or kind of steady. You know, where I thought retail would probably falter with, you know, people, you know, not needing as much, you know, just retail space with, you know, e-commerce and things like that. But that has surprisingly, it’s had some bumps, but it surprisingly held pretty steady and pretty strong.

    Dylan Silver (09:56)
    Yeah.

    Mm-hmm.

    Terra Padgett (10:38)
    Industrial, industrial, think has has fared extremely well. So.

    It just depends on where I think the operator’s expertise was. If they have always done office building and if they had no expertise in anything else, I think they’re probably struggling the most. And I have seen a few that have tried to, that were made predominantly historically office building operators and developers and whatnot, and they’ve shifted into other asset classes, which I guess is good to be able to pivot and diversify.

    Dylan Silver (11:04)
    Yeah.

    Terra Padgett (11:04)
    But I do think they’re probably gonna have some learning curves and bumps along the way because, you know, retail is very different than multifamily or office or whatever. They have their own nuances. Yes, it’s still real estate in the six, it’s a building or whatnot, but there are, you know, a different type of clients, different type of tenants, different type of service providers, vendors that support it, different type of debt that you might take out on it. So I am very much so a pro of someone that can pivot into, you know, and adjust with the market.

    But I do think they will have learning curves that an LP as I am needs to look out for as you’re entrusting them to be good stewards of your capital.

    Dylan Silver (11:34)
    We’ll go along with it.

    You’ve got a background in the insurance space. So you’re no foreigner to pivoting, right? When we talk about insurance to real estate, there’s some similarities there between the two. But I wanna ask you, as someone who’s managed multiple different businesses, what’s your approach to pivoting, right? So we’re looking at right now, you don’t wanna buy the wrong deal in commercial. At the same point in time,

    you don’t want to say, commercial is going to be bad indefinitely because at some point time, the market’s going to turn around. How do you know, hey, I’ve got to make a pivot here or hey, this is where I might want to try something different? What’s your personal approach to pivoting?

    Terra Padgett (12:21)
    Yeah, and that’s a tough one because like I said, no one knows what tomorrow will hold. And so you’re kind of making future predictions based on historical data a lot of times. that’s really in insurance. That’s what actuaries do and kind of how we set them, how they set pricing and things like that. You kind of just look at historical data and what has happened historically to make predictions on what you should do today for a positive return tomorrow. So the same thing with the stock market.

    you know, you look back and say, oh, historically it’s returned anywhere from seven to 10%, depending on the return period that you’re looking at, 20 years, 50 years, a hundred years, whatever. You know, you might fall in the, if you look at it just for the past year, okay, it’s great, 17 % returns. But if you look further back, might, your perspective will be different. So I think a lot of it is really just looking at the best that I believe that you can do is just look into what has happened historically and what has trended when things happen, you know, when this happened, then that.

    when this happened, this, and try to just evaluate it with looking at historical trends to make predictions on what will likely happen again. And so I don’t think there’s an exact finite answer, a silver bullet, but that’s what I tend to do is just kind of look historically what has happened and then try to make the best educated prediction of what will happen tomorrow and try to put myself in that position to be able to capitalize in the best way possible.

    Dylan Silver (13:46)
    I want to pivot a bit here and ask you maybe a different question. When we talk about different asset classes and strategies that investors are applying, I come from the fix and flip space and wholesale distressed real estate turning those 90 day flips, that type of thing. But that’s becoming harder and harder. And I’m seeing more people from all different backgrounds, all different ⁓ specialties go into development.

    And now because of that, you’re having maybe a lot of newer developers, but you’re also having interests from private equity and from people who may be investing across state lines. And you’re also competing with the D.R. Hortons and the Linares of the world in development. I’m curious to get your thoughts out there in Houston. I know there’s tons of development in what you’re seeing in new development, whether it comes to,

    multi-use commercial, know, retail with apartments or whether it comes to just new subdivisions entirely that are popping up all over the place.

    Terra Padgett (14:52)
    Yeah, I think in a place like Houston, we’re so spread out landmass wise

    where you can be in Pearland to the Woodlands to Katy to Cypress to Humboldt to actually Houston or city proper. So mean, the MSA is so large unlike say like a New York or Chicago where a lot of times you’re going vertical. So if they have these office buildings, you’ll see a lot of the headlines or they’re converting them into multifamily, into retail on the bottom and maybe livable space on the top.

    Whereas

    in Houston, yeah, they can kind of just expand out and buy a plot of land or ⁓ some open land that’s there and convert it and just build ground up, not converting anything from something to something, but just take raw land and build it up. in my market here in Houston, I do see…

    a lot more of just land that then you just start seeing the pipes laid down and the signs go up and the yellow, all the earth moving equipment starts to show up. And then a year or two later, it’s an apartment complex or it’s a new office space or retail building or whatever it may be. So I think depending on the market that you’re in and, but for Texas, we’re the great state of Texas, all this land everywhere. Yeah, I think it’s more than converting old buildings. I’m just seeing a lot of… ⁓

    Dylan Silver (16:27)
    Yeah.

    Terra Padgett (16:49)
    I say a lot, use that term loosely. I have seen projects going up. I forget what the data trends are, far as permits pooled and whatnot, but I’m definitely just around as you drive around. Yes, I’m seeing some new development. I’m looking at multifamily, but I do see a lot of new development multifamily going up.

    Dylan Silver (17:12)
    I was in Houston in either late July or early August of this year, a couple months back, and I was blown away by how much development, how many new areas, how it was so full of life. Like I was in the third ward staying with a buddy. And then we went to, I forget the name of the stadium, but it’s not Minute Maid any longer, right? But we were out there.

    Terra Padgett (17:37)
    daken or dyken,

    yeah.

    Dylan Silver (17:39)
    Yeah, and I was like, I can’t believe they changed the name. What happened? when I was out there, I was marveling at how much my perception was really like off. I was thinking like it was going to be maybe some distressed areas, but it was all brand new. Like there was coffee shops in every corner, yoga studio. You have like, know, retail. And then, you know, any areas where you might think that, hey, this might…

    be a potentially distressed area, you go like two blocks down the road and they’re flipping houses over there. And I’m sure it’s just gonna continue on like that. Also, Houston does have somewhat of a downward pressure when it comes to pricing for Texas in general, whether that’s because of the insurance costs, I don’t know exactly. I’m imagining that as something to do with it. But there’s so much interest in Houston, not just from Texans, but from people all across the country looking at these prices and going, hey, is that…

    Real?

    Terra Padgett (18:40)
    Yeah, yeah, that that historically that has been been the south in general. mean for sure and that’s why a lot of not just in Houston, but in Texas. I mean, you know, we’re Facebook and Tesla and Google, you know, they were moving to the Austin area, ⁓ you know, just because I think a lot of it is the legislation and some of the laws and things like that for businesses in the state of Texas and how they’re taxed.

    in different tax credits and breaks that they get. I know just here at Houston, which is in the Woodlands, ExxonMobil moved their headquarters. This was a while ago, but they built a massive headquarters in the Woodlands, Texas. they got, I’ve heard they had some massive tax break by moving it here, you know, into this area, into the state of Texas. so, so yes, they’re in another thing within Houston. And I don’t know this is a Texas thing, but I do know within Houston, there’s not a lot of like zoning.

    like where you can basically have a house right next to a restaurant. They don’t have zoning type, a lot of rules around that. So you can kind of build anything everywhere. So to your point, when you say, it was like, there’s a yoga studio. Then they were flipping a house. So basically there’s retail, coffee shops, and then there’s just a house right next to it. And that’s kind of how it is to where you blink and you’re in a neighborhood, then you’re in the mall. ⁓

    Dylan Silver (19:34)
    Yeah.

    Yeah!

    Have you

    seen, this was the craziest thing. I don’t know what was going on, but right next to that stadium, right, there was a house. It looked like a huge, huge Victorian house that was like on stilt. And I was like, that costs a lot of money to do that. And it’s so distressed. Like what is going on there?

    Terra Padgett (20:08)
    Yeah!

    Seeing that, I believe that is a historic house that, I don’t know if there’s nonprofit organizations that may be trying to preserve it or keep it there. There may be some, don’t quote me on any of this, there may be some battle with the city and on the land and whatnot, but I know exactly that house that you’re speaking of. It’s a massive house, it’s like on cinder blocks, that’s like right across the street from like the baseball stadium.

    Dylan Silver (20:38)
    Yeah

    This stadium?

    Yeah, I was like, what?

    Terra Padgett (20:44)
    think it

    falls within some historic district that either the city or nonprofits are trying to preserve and save the historical-ness of it. I don’t know all the details, but yes, I believe it’s something with it being a historic, either land or property or something that, you know, that when big money comes in, tries to re-gentrify and kick everyone and everything out. And I think that may be one of the pieces that people have been trying to preserve within

    within that area.

    Dylan Silver (21:14)
    When you mentioned having different zoning, was one of the things that came up. said, when I went to Houston, that blew my mind. then just how amazing the third award was in Houston in general. ⁓ Taro, we are coming up on time here though. Where can folks go to reach out to you? Or how can they learn more about Power Cool Fund?

    Terra Padgett (21:33)
    Yeah, they can learn more about PowerPool Fund at the website on PowerPoolFund.com and they can also schedule a call with me on the website and shoot me an email just info at PowerPoolFund.com. They can also follow and connect on all socials. So Facebook, Instagram, ⁓ YouTube, even I even started a TikTok little page there. Look at me getting in. I’m late to the party, but even even started up a little TikTok page for PowerPoolFund. But it’s all just about

    Learning, educating yourself so you just feel more confident as you’re going out there investing. No one knows all the answers to everything. The Oracle of Omaha himself, I’m sure, will admit he’s made mistakes in his investing world. But the key is to just keep educating yourself, keep, you know, keeping an ear to the street on whatever it is that you’re trying to invest in and try to make the best decisions possible with eyes wide open as you’re going into these different vehicles to deploy your capital and grow.

    Dylan Silver (22:29)
    Terra, thank you so much for coming on the show here today.

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