Shaping the NYC Skyline

David: Welcome to Shaping the NYC Skyline, the podcast that explores the stories behind the buildings that shape our city. I'm your host, David Shamshovich, and I'm here with my co host, Brenda Slochowsky.
Hello, everybody.
Brenda: Welcome to Shaping the New York City Skyline. I'm your host, Brenda Slochowsky
David: And I'm your other host David Shamshovich.
Camila: And I'm your other host Camila Almeida. The three amigos
David: We're back in action season two part two is rolling along. And we got some really great guests
Brenda: Some heavy hitters.
David: People you're really going to learn from, and they're not just shaping the NYC skyline, but they're shaping the minds and hearts of our
skyliners.
James Nelson, was our guest. He's the principal and head of Tri State Investment Sales at Avison Young, has 25 years of brokerage experience, including at Massey Knakal and later Cushman Wakefield, and he was a wonderful guest. We love when our skyliners convert to guests.
Camila: We do.
David: And he's an educator himself, he does his own podcast. He has well over 200 episodes and wrote this amazing book, The Insider's Edge to Real Estate Investing.
Brenda: He's an engaging speaker with manageable tidbits and actionable items that allow you to get into the space.
David: And he's really embraced this whole social media stuff. The podcasting. He does these videos on LinkedIn.
Camila: He streams. That's extremely brave.
David: It's pretty cool.
James was here to impart some wisdom on us, to discuss his book, which is really fantastic and I think you skyliners will really enjoy it.
Brenda: They're gonna love it.
David: And so I'm gonna do my tagline, which is without further ado, James Nelson from Avison Young.
Brenda: Hey guys, welcome back.
David: Welcome back to another episode of Shaping the NYC Skyline. I feel like we're doing this like every week now. We have an amazing guest that we'll get to in a minute. Lots of things going on in the housing world, of course. City of Yes is on the cusp of coming to fruition and we'll certainly be discussing that on a future episode, so stay tuned for that. Hopefully we'll bring on some guests that can talk about aspects of it that are really great and we'll talk about Universal Affordability Preference, which is the replacement to voluntary Inclusionary Housing, which is Seiden & Schein's bread and butter, or at least one of them. Plus the office to residential tax incentives, 485X, extension to 421A. We have lots of things that we'll be busy with, and I'm sure that our next guest will be busy with as well. And now I'm going to introduce him. We're absolutely thrilled to have James Nelson, the principal and head of Tri State Investment Sales at Avison Young, where he's led his team to over five billion dollars in real estate transactions. He's been named one of the top investment sales brokers in New York by publications like the Commercial Observer and Real Estate Weekly. He's renowned for his ability to build and lead one of the most successful sales teams in the region. And we definitely want to talk about that because it's a lot of interesting things that you're doing with your team. He's a regular contributor to top industry outlets like the New York Real Estate Journal and The Real Deal, where he shares insights on market trends and investment strategies. James is also the author of The Insider's Edge to Real Estate Investing, which we have on the table here.
Brenda: An incredible read, guys.
David: And we read through it, and it's a must read guide for anyone looking to succeed in commercial real estate investment. He's also the host of a popular podcast by the same name. Many of which episodes I've listened to and have really enjoyed and have learned lots from. It's an absolute honor to have you here on our show. Welcome, James.
James Nelson: Wow, thank you.
David: You didn't even know you did all that stuff, right? You were like, I can't believe that this is me.
James Nelson: I'm just going to sit here and listen. No, this is fantastic, and it's amazing to be with you all, and thank you for everything that you do. Being a fellow podcast host, I know how much work goes into this, and it's incredible value, and I love the show. Your episodes, the last two that I listened to were with David Schwartz and Jed Resnick, and I learned a tremendous amount. So just thank you for everything that you all are doing.
Brenda: We love the feedback.
James Nelson: Five star review. Share with a friend. I know how this works.
David: If it's less than five stars, just whisper it in our ear or send an email. You don't have to post that. But kudos to you, James. You've done an amazing job. Over 200 episodes on every single topic that you could possibly want to hear about in real estate investment. Not even that, but just writing a book about the topic, which I read. A lot of the stuff was very familiar to me from an attorney perspective, because I do a lot of transactions and I understand it. But, from an investment perspective, not as much. It was a very easy read, and you have actionable items in there, which I love. I hate when there's ambiguity. So just want to say thank you for that before we dive into the podcast and say, you're educating the community and you do so much content, so everybody should check it out.
James Nelson: The book, and I've got to thank my writing partner, Rachel Hartman. We're sitting at home mid 2020, we didn't know if it was the end of the world. For once, have some free time. So, what am I gonna do? Write a book. Because for 20 plus years, people had always asked me, James, what's the book on how you invest in commercial real estate? And I appreciate what you had to say about it being actionable. And that's what I wanted. Whether you've never encountered real estate, whether you're a veteran, I wanted everybody to read this and say, okay, I understand how this works from start to finish. And I could not agree with you more about the actionable part. You really want specifics that someone says, okay, I know what to do.
David: And you break them down into very
Brenda: easily digestible points.
David: Exactly. And we're going to get into a lot of that. But before that, I wanted to catch everybody up to speed in case you're not familiar with James. James has more than two decades of experience in this field, but how did you get involved in brokerage, and how did you come to live in New York City and then start selling real estate in New York City?
James Nelson: Well, it was complete luck. I was an English major at Colgate, and my senior spring, all my friends had investment banking jobs. I thought I was going to go out to the West Coast to make movies or something, and then I realized no one was going to pay me to do that, so I started looking around, and there was a posting to be a real estate sales associate, that Paul Massey, a Colgate alum, had sent to the Career Service Center. I didn't know anything about real estate. The job market was a lot less competitive back then, 25 years ago. I sent in a resume and made the trip into New York and just had an incredible gut feeling about the place and they offered me the job. And it was an amazing time to start. We were still only in one midtown location with 20 people, of course, then it went on to grow over the next 17 years while I was there. Ultimately we sold it to Cushman. It was an incredible ride and just incredible people that I stay in touch with.
David: And what was your focus? Give us an understanding of how that changed and how it started.
James Nelson: Sure. I think the brilliance of the Massey Knakal platform was that there was this territory system. We focused on sales, and represented the owners. Starting out, I found that that was a really great way to learn the business because I didn't have to learn the whole city. I just focused in on the Chelsea neighborhood and I take a photo of every single property, take down the owner information. It's amazing how much of that sticks with you over time. And learned every single sale, who's buying, who's selling, who are the new tenants, what's going on with zoning. And what you find is even after 90 days of really intense study, I knew more about that neighborhood than 99 percent of the investors and brokers out there. And I talk about this in the book, because whether you're going to be a broker, an investor, a really successful law firm, you want to specialize. Generalists, it just doesn't work. If you really want to be successful, you have to have that specialty. In fact, I was sitting with a group of some of our team members this morning, and I was asking them as we went around the table, I said what is it that you specifically bring to the group? What do you know how to do better than anyone else in this room? And I think also if you want to be a successful investor, having that thesis and really studying it is what will also help lead to success.
David: There is an aspect that you've brought to your sales team, which is getting rid of the competition and making a team based and also taking out the territory aspect and putting in the asset class of it. How did that come to you? Why did you think it was going to be successful and why did it ultimately pay off?
James Nelson: At the time, the territory system was absolutely the right approach in New York City. 20, 25 years ago, investors would really just focus in a neighborhood. They wanted to buy in a neighborhood. Maybe they expand a little bit. But that's where they were interested. And over time, what you found is that investors would start to broaden geographically. They start looking all over the city, not just Manhattan, certainly the boroughs. And the different asset classes are so specialized. Think about multifamily in New York City and how complex rent regulation is, or even development, and we're going to get into a little bit of that. Everything as far as the bonuses that take place, the tax abatements, it's really difficult. Again, talking about specializing, it's really hard to be an expert at everything. So, we really thought that having asset class specialists who really knew all the ins and outs and would cover the city would really be in the best interest of not only the clients, but investors who are calling in saying, look, I'm looking to buy in multifamily, what do you have across the city? As far as how we built out the team, and I've got great partners in Erika Dean and Brandon Polakoff who helped build out the group, is that we wanted one unified sales team. The traditional brokerage model, which probably exists at pretty much every single firm out there, is that you have brokers who are certainly collaborative, but they have their own book of business. They have their own P& L. And they're salespeople. You want to incentivize them. So go out and bring in your own business. But if you're just focused on your book of business, you're not focused on what the person's doing across the cube from you. And you're not benefiting from helping each other out, and worse, there are some firms out there that brokers will actually compete with each other internally for the same assignment. I don't know how that works. What I wanted to do is create one unified sales team that covers the whole city as a group. And we meet every single morning. We go around the room. It's one investor database, everyone shares information, and you really are getting the benefit of our sales team, whether you're looking to buy or sell.
David: And do you do these meetings by asset class, or is everybody in the room, and then you just discuss asset class by asset class?
James Nelson: Mondays are multifamily, Tuesday retail, and so forth.
David: Like Taco Tuesdays.
James Nelson: Yeah.
David: Retail Tuesdays.
James Nelson: So even if someone is not specializing in retail it's helpful for them to hear what's going on. Maybe they're working on a multi family deal that's mixed use, that has retail at the base. And also, I'm sure you've seen this with your clients, over the last couple years you have investors who are saying, you know what, I'm not liking this whole multi family situation anymore. I'm going to go try and do retail, or office is a little challenging right now, maybe I'm going to jump into multifamily. So it does help when there can be introductions made amongst the group as well.
Brenda: It sounds like it's a seamless transition. If you're working within the same group
James Nelson: For sure. Everybody has access to all the same information. You come in day one with us and you're automatically tapped into all the transactions. We don't want someone who just says, oh, well, I can kick back and I can just participate in these fees that are happening. We actually do a 360 review of everyone twice a year anonymously. There's comments as far as suggestions for growth as well as things that they're doing well. We want to make sure that everybody is performing. But I think the brokers love the fact that they've got their specialty and they know what the compensation is. Compensation is really important. Our comp structure with the brokers is a little complex and there's different buckets of compensation. But everybody knows what they're going to get on every single transaction based on what they do. You all are hear stories of brokers arguing about fees, that doesn't happen with us.
David: I think it's a great idea because you have four asset classes, but many areas of the city. When you started, Manhattan really was it. Now people are expanding to all five boroughs. Just turning back to your experience, you stayed on when it was acquired by Cushman, and then you eventually decided to leave after being with those two places for quite some time. Was there anything specific that triggered that transition?
James Nelson: I had three incredible years at Cushman. I have nothing but great things to say about the place. Massey Knackel, by the time we sold to Cushman, we were selling four times the amount of properties as the next brokerage firm. Think about that in a city this competitive where there's dozens and dozens of brokerage firms. That was an amazing run, but we took it as far as we could have gone. So, we're starting to think, okay, do we go to other cities? Do we become truly full service? And it really made more sense to just, at that point, selling to a global full service platform. I had some great years at Cushman and I saw the benefits for our clients having that global full service. So when Avison Young came to me, it was really the opportunity to build something, blank canvas. And this idea of a unified sales team that covers the city, you can't really do that in a legacy firm. And there was a lot of incredible brokers who remain there today at Cushman. But this was an opportunity to really build this out from the ground up. And Avison Young is a privately held company. I'm one of 750 owners of the company. So I love having a seat at the table. We also have 120 offices around the world. So we're global and we're full service. And that's really helpful to our clients. So when I talk about Avison Young, I really say it's the best of both worlds. Between the Massey Knackle and Cushman.
David: It makes sense. Sometimes it's easier when you're building something from the ground up. So I completely understand . Turning back to your early days. When do you think that lightbulb hit that I'm good at this and I have an actual future here. How did you figure that out?
James Nelson: Before I went off on my own, as a full time salesperson. I was a sales associate working with Bob Knakal and just to sit next to him and listen. That was better than an MBA. So, I had the roadmap. The thrill of getting the listing, the closing and obviously the commission check that came along with it. I was hooked pretty early for sure. Here I am 25 years later, still loving it. And every single day I'm learning something new. I do think you need to be wired the right way to do this. Brokerage is sales for sure. And so there is a lot of disappointment. I used to get all worked up cause these deals go left, right, sideways. And I've seen over the years, some brokers on the floor get really worked up and really angry. And I'm just kind of, hey, that's just part of the drill. I remember early on, we had Barbara Corcoran come speak to Massey Knakal. Amazing. And someone asked her the question, Barbara, what is the key to a successful broker? You've seen so many brokers over the years. What is it? And she said, it's how they handle failure. And I really liked that answer. Because, not that I want to fail, but when disappointment happens, it's like, okay, well, what's next? How do we learn from this? How do we move on? Where's the solution? I'm not someone who dwells in the problems. I'm in the solution business as I know you all are as well. I think that's just a big part of it, because if you're someone who has a hard time getting over defeat or rejection, brokerage is probably not the right job for you.
David: Brokerage definitely, and, in life in general, dealing with failure is important because if you're thinking about the past failures and what I coulda shoulda versus trying to either get out of the situation or coming up with something new, it's not going to benefit you. So I think learning from it is a great thing and then moving on and applying that to future transactions. And I love that perspective. Brokers have a lot of disappointment way more than lawyers. We have plenty of disappointment.
James Nelson: But you do get paid by the hour, though.
David: Yeah, if we get paid.
Brenda: How do you match investors with specific property. What are you looking for to balance that human connection, but also the investment connection?
James Nelson: Early on, if you only have a couple of buildings to sell, everything is a great investment. And you're just, well, you should buy this. Why? At this point, we probably have close to a hundred exclusive listings. But when you call me and we start talking about, okay, what are you looking for? What are your objectives? And should we start with the asset class and geography and business plan? Do you want to be passive? Do you want to be active? Once we've established what you're looking for, then the good broker should be able to think and say, these are the three things that you should focus on. So it's really drilling down on that and really trying to solve for what you're looking for. I think another big part of a successful sales process or legal process is just mapping out the issues up front. I'm a big believer, if there's an issue or problem with the paperwork whatever it is, we're going to just tell you that up front and you might say, you're killing the deal, but the buyer's going to find out anyways down the road. I'm sure you've had plenty of situations where you're working on a deal and you want to be nice and say that someone wasn't trying to cover something up, but maybe they could have been a little more forthright and it just ends up wasting everybody's time. Whereas if you just cover it up front, then it's like, okay, well, it's part of the deal. And either that works for you or it doesn't, because if you can't deal with that, then let's go move on to the next.
Brenda: I like that approach it's fact based driven. If it works, it works. If it doesn't, we'll find something else.
Camila: Not only that, but you have more time to think about a possible solution for that issue.
David: And hiding it is not good because you say you're wasting time and I appreciate it more when someone tells me up front because then you have a buyer who says, okay, there are DHCR registration issues. There are tenants here that I want out. You can't make it vacant for me. I know going in that that's going to be the case. I'm going to have a different negotiation strategy and you're not going to be wasting time negotiating around that.
James Nelson: That's right.
David: One of the things that you talk about a lot in the book is credibility. I'd like for you to talk a little bit about that, and the importance of credibility, because there are a lot of people that work in real estate in New York City, but a lot of people know each other and you don't want to go in as a buyer and look for a property and then either not have the capital or not have right people behind you to get it done. And that goes to what you were saying earlier, which is, I'm going to tell you straight up, this building has X and Y issues. If you're willing to continue, let's go on to a term sheet.
James Nelson: Yeah, I couldn't agree more. Your reputation is everything, and that's why your clients come to you, because they know that you're going to give them the right advice, that's in their best interest. So you have to have that perspective. And I think for all parties in the transaction, reputation is everything. Whether it's buyers who think at the last minute, they're going to be able to retrade. Of course, there's always negotiations at the right time, but when you agree to something and then go back on it, you know for the next one. And if we're in a tight spot and we do have to accept something after the fact, maybe they get away with it on that one trade, but when they show up the next time, the first thing that we're going to tell our client is, hey, just so you know, this buyer last time said they were going to close in 60 days and they dragged it out past 120 days and came up with all these ridiculous issues at the closing and asked for this credit. So, whatever price you want to land at, just make sure you tack on whatever it is. So we've already factored in that there's going to be that. Fortunately, that happens like a couple percent of the time, if that. I think real estate professionals get a bad rap, and that's really the exception. Most people we deal with are so professional and they don't want to waste time either.
David: But it's important to think about the re-trades you're making after you've already committed to something because they will remember you and then the price will increase or if there are multiple offers, even if yours is the highest, they may not accept it. One of the basics you talk about in the book are the four asset classes, multifamily, office, retail and land. What is transpiring today? Multifamily hasn't been doing so well, but some people are seeing lots of opportunity. Offices, not great. But you've come out with a few articles recently that said, No, actually, New York is doing much better than most places. Development was at a standstill because you didn't have a replacement for 421A. That's come back, but people are not sure about how effective it is. Plus, now you have the City of Yes, which is going to revamp zoning, take away some red tape, hopefully, and then provide some bonuses in areas for affordable housing where you wouldn't have them before. So what's going on with these different asset classes today?
James Nelson: First of all, apologies to the industrial owners. The critique that I received in my book, was, James, how did you forget about industrial?
David: You know what? I didn't even think about it myself.
James Nelson: And when you look across the country, industrial a couple of years ago was the number one selling asset class. It actually eclipsed multifamily. It's just, my career has mostly been focused in New York City and we do handle the occasional industrial deal, but there's so little of it. So, multifamily, and again, this is what we talked about before with how specific it is. So are we talking about rent regulation? Are we talking about 421-a? Which is stabilized by definition or fair market and how are each of those performing? Now, from the New York State housing package, we have good cause eviction, which now affects fair market housing that was built before 2009. So you have several different categories of multifamily. What I would say is if you had a truly fair market building, it was built 2009 and it's rare because a lot of them are still done on 421As, there's huge potential there because right now the vacancy rate's 1.4%. And so rents are going up at a tremendous level. We could spend a whole hour talking about how rent regulation and what happened in 2019, you can't get increases anymore except whatever the RGB gives you every year. Investors are saying, I'm going to need, a seven and a half, eight percent return, because that's all I'm getting. And in some cases, I don't have upside, I have downside, because it's not like they're capping my expenses. So, the yields on regulated went up dramatically, but fair market has been really desirable because we still have a huge housing shortage. And it's still the safest investment opportunity in many cases. You have a hundred unit building and you lose one tenant, you don't, lose your whole rent roll and the leverage is conservative out there, but the agency debt today is very attractive. So I'm pretty optimistic actually about, multifamily. Next on the list office again, so specific to what and where I was just meeting with one of the biggest office owners in the city and just talking about their trophy in a space is renting incredible rents. Our data is that 75 percent of the leasing activity has occurred at the top 25 percent of the buildings of the Class A and Trophy. There's also some incredible sales that have taken place where end users have stepped up and bought their own office building. So that's encouraging that companies, sure they're taking advantage of the market and pricing, but they want to really establish permanent roots here. And I talk about it in the book, office is a really capital intensive business. So unless you've got the wherewithal, the base building work, the TI, the downtime, the commissions. In some of these 10 year leases that we're doing now, it might be three plus years before you see rent. But that being said, there are some tremendous discounts that we're seeing today where office is trading 20, 30 percent of maybe where it was at peak.
David: Can you just explain the difference between A and the two other classes? And then I assume you're just referring right now to class A, which is doing obviously much better, but the class B and C, which people are buying more from what I understand to do potential conversions to residential.
James Nelson: Yeah, that, that's the hope. A is a full service building. We even bifurcate that with Trophy. B is still full service, but not the same caliber a building and then C, you really, you don't have the services. And so B and C buildings both alike, that mid block stuff, there's a lot of it. It's really challenging if you're a landlord and you're looking at the rent, after COVID and hybrid work, now the vacancy rate in the city is 20%, that's a hundred million square feet of available space. So tenants are trading up. You want to lease that antiquated building, it's not just that the rent is cheap, but then you still have to spend the money to get a tenant in there. And so in many cases, it just makes it really obsolete. That's why there's such a big discussion and focus now on the office to resi conversion. We've got 100 million square feet of available office, but we have a need for 500,000 housing units. I know you'll get to it in your future shows on City of Yes, what I've heard is that, I don't know if this was the city or REBNY's data, of moving the vintage of building to convert from 63 to 91 frees up like another 125 million square feet of office that could be converted. Now we know the challenge is it's got to have the right zoning, it's got to have the right footprint, we can get into 467M, we think that's going to be a good thing, but I think we are going to see a lot more conversions, but I want to talk about retail development as well. Retail has been phenomenal. In many cases, the vacancy rate is now tighter then it was even before COVID. So that's been incredible to see that a lot of these retail quarters filled back up.
David: What's the reason for that change?
James Nelson: It's really the rent. Look at Broadway and Soho. At one point, maybe it was 10 years ago, it was like a $200 rent market. And then five years ago that went up to a thousand dollars a foot at peak. Then COVID hits and the tremendous vacancy rents crash back down to $150 a foot and it's cheap. So space starts filling back up again. And now we're back in that $300 to $400 a foot range, obviously very specific to the size of the space, the block, could even be higher than that. But it's really just pricing. And so that certainly helped, because the tenant demand was there. Food and beverage has also been incredible. So certainly see that helping in the neighborhoods. And for an investor, I love the thesis because with rates going up and cap rate expansion, if you can go get a six or seven percent return from retail, on a lease that was done right after COVID, where there's upside in that rent, get that 6 7 percent return and then get the upside potential from that future rent increase. So I think retail is super exciting. The last piece is development. We're just talking about on the residential side. That's really the only place where you're seeing development. There are very few speculative office these days, but rental we're waiting to really see what 485X does. Developers are running their numbers. You all know. I see if you got your map back there. It's zone A, B, we got the whole thing mapped. This is like the war room here. In a lot of discussions is are you building under 99 units? What does it look like? 100 to 149. So everyone's trying to figure out increased labor costs. They're all solving for what can I pay for the land. They're trying to back into the return. So, when developers say, well, hey, if I'm going to build over 150 units, I think I can only pay in the mid 200s of buildable. Well, that's great. But who's selling land in the mid 200s of buildable. So if no one's selling that land, then nothing's going to get built. So that's what's happening right now is everyone is trying to figure this out. Like, where does it make sense? And we'll find out if this program worked or not. Meanwhile, condo has been incredible as long as it's in the right location. Some of these sellouts on the Upper East Side, over $4,000 a foot. Amazing. But it's very specific to that location.
David: Domino I just saw the Two trees did some of the top contracts. I know it's only in specific areas and you don't really get 485-x for condo.
James Nelson: But the inventory is tightening up, I think two, three years from now, everyone's going to look around and say, Hey, where's all the new condo product? But it's expensive to finance for sure. And to raise equity. A lot of the equity today saying, well, Hey, why do I want to take development risk? Everybody's a lender today. Well, why do I want to put equity in a deal when I can put out mez and get a high teens return? So that's part of the challenge is these developers are trying to raise the capital to do it because the pricing's there for the end product.
David: And what are you seeing in terms of financing, not on the investor side, but on the bank side? I assume you don't get involved too much in the construction loan, but maybe in the acquisition loan. What are you seeing? Are lenders more willing?
James Nelson: It really depends on the asset class, the sponsor for sure, and the business plan. Scott Singer, who leads our Debt Equity Group at Avison Young, he's really dialed into this, but there's a lot of different capital sources that are out there today. And I think overall, for the most part, certainly the cash flowing assets , we're not seeing the loan to values that we used to see. I think the leverage is more conservative and certainly for the community banks and the multifamily space rent regulated. And with Signature gone, New York Community Bank trying to sort out their challenges and the rest of these community banks with a lot of scrutiny, it's tough for them to lend unless that loan to value is very conservative. That being said, obviously we got a rate cut. That's great. The spreads are tightening too. That helps. CMBS has been amazing. We're seeing a lot more CMBS issuance. That's more for the stabilized cash flowing deals, but that could really help fill the void. But the big challenge slash opportunity here is, at some point I should probably figure out what the exact percentage of sales that we are handling that are driven by loan maturities very high where we're getting the call from the borrower saying, okay, my loan is maturing in six months and the lender is telling me that I have to pay down this loan by $10 million and either I don't want to or they're not telling us, but they don't have the ability to do that. They have equity in the deal, so what we're seeing is just a massive deleveraging that's taking place. So it's going to force a lot of sale opportunities. The last two years, a lot of buyers sellers have been on the sidelines. So sales volume in New York City across the major asset classes has only been a third the 10 year average. So you have a lot of buyers saying, well, hey, rates are going up. There's going to be more distress. I'm not going to jump in now. Sellers are saying, why would I ever want to sell into this? I wrote a white paper on the psychology of the market. 50 bips. It's amazing. But when you look at what that does to cap rates and the actual economics, that alone is not going to completely right the ship. But I think what it will do is it will get a lot of buyers and sellers off the sidelines because buyers are now going to say, oh no, I missed the bottom of the market. We're on the way back up. I better jump in now. And sellers are going to say, Hey, maybe now the wind's a little bit at my back and it's okay to sell now.
David: I think that's a very good point. And another point that you brought up, which is some people are going to be selling because their loans are maturing. They don't want to pay it back. And so they'd rather just sell it. And that creates an opportunity to capitalize on that need. And another thing that you talk about in the book, is the reason behind a sale, whether it's fighting between the members or investors, or because they have to sell because the loan's going into maturity. It's funny, I've always had that intuition, like, why don't you ask them? I wonder why you're selling it. This is such a good investment. Why aren't, why are you selling it? And you in your book actually encourage that question. How often does it come up where somebody asks that? Because I think it's a very good point, right? Because then you know what their motivation is. Assuming they're telling the truth.
James Nelson: Surprisingly, not that often that the buyer asks why is the seller selling? Now, a broker who's doing their job, if your client's in financial distress, you're not exactly going to volunteer that. If it's an estate sale, they'll probably be very quick to say, it's an estate sale. This is what it is. But I think knowing the reason why they need to sell and why they're committed to selling. Do they have the ability to sell into the market? The first thing we do when the owner calls us to value their property is look at how much debt they have on the property and we're going to eyeball it, and if we think that it's close or if they're underwater, say, look, we'd love to help you out, but we don't think we can get you out from under so much better to have that conversation to get up front and maybe it's having a transparent process with the lender. I also wrote a white paper on why short sales are better than note sale And I think if you can get the lender on board to say, look, this is better for the asset to have a traditional marketing process, we're not signaling to the world that this is under distress because once you're selling a loan or there's a default, then the vultures start circling, but that way it's like, look, we'd like to try to recoup some equity for our client, but if we can't, then you've got all the bids and then you can decide what you want to do. So. In many of those cases, those end up becoming short sales.
David: That's a good point, which is if you're in trouble, you want tell the lender because a lender wants to get paid at the end of the day. They'd rather not go through foreclosure. It's a long process. It's costly. And they may be willing to take a little bit of a hit on their principal as long as they get paid something and they can get out of that investment. So I think it's a good point for people to understand. Go to the lender, try to negotiate something, and see what you can do instead of putting in default. Because like I said, once you're in default, the reason behind the sale is very clear. And it's a fire sale, so you're going to get bottom dollar prices. So, you were doing the brokerage thing, and then you just decided, you know what? I'm not just going to sell it to other people, I'm actually going to go and buy property. I'm going to be part of an investment group. I'm going to be a limited partner, maybe a general partner. I'm not sure. But how did that transition happen? And what types of investing do you do?
James Nelson: The first investment I ever made was really, I don't want to say by accident, but I had met someone through NYU, this emerging developer, and he had tied up this property in the West Village, and he said that my plan is to do a condo conversion, which at the time, for a five story walk up, there weren't a lot of those. It happened to be in a really good location, but he said, James, I think I got a really good deal on this contract that I bought it off market. Can you go flip the contract? So after two weeks, I had offers of over five, $600,000 just to sell the contract. And he said, James, I appreciate your help on this, but this is such a great deal. I'm just going to do it myself. And so I don't know what prompted me. And I said, well, hey, are you taking investors? Maybe I should get in on this. He says, well, actually I am. And that was Matt Blesso, Blesso Properties. I went on to do probably at least a half a dozen or more investments with him. And saw the benefits and really mostly as a limited partner and ultimately what I wanted to do is really scale that and that's when I brought the idea to my partners at Massey Knakal, look, we should raise a fund to go do this, to go invest as put out JV equity for value ideals. And so we partnered with River Oak and Steve DeNardo. still remain very close with them because what we found is that for a lot of these sponsors, it's tougher to get a two to $5 million check than it is maybe even to get a 50 million check. So we raised 50 million. We went out and invested in a variety of different deals, which was a great way to participate in the market. But I think also as a broker, you have to do it in the right way. So I am so conscientious of conflict. So first of all, if anyone ever calls me and says, James, I want to sell my property. I'm not thinking, oh, this is a nice property, I should buy it. It's like, how can I get you the most money for your property? That is my job. Now, if another broker is representing that property, that's fair game to me because that seller has representation. I have GP'd a couple projects, but it's much better for me to bring on an operating partner who can do that. And so definitely do more on the LP side. But even with that, if I have anything to do with the brokerage, I'm not investing in it. And that's just I think the best way. You ask about what do I look to invest in? I invest all over the country, certainly some deals here in New York. It's really sponsor driven. That's the most important thing for me. I'm invested in an RV deal right now. This is a sponsor who's got 20 plus years experience, has done all kinds of great things in multifamily self storage. The business plan made sense to me, but it was really having confidence that I knew the sponsor could deliver on it.
David: Cause you, you were working with somebody who had a track record. In the book, you say, build a good team. And one of the first things you say is find a good lawyer. This is where my conflict of interest is because I'm one of those lawyers. You also talk about the, having a general contractor, accountant, a property manager. So in a nutshell, give our Skyliner a brief overview of what the novice would do to bring in some credibility and to be able to actually close on a deal where they haven't done so before.
James Nelson: I think for that first deal or two, finding a great partner is really important. Your value add is you find the opportunity. It starts with a deal. And if you have a skill set, you can package it all together and that's your value add. But then the partner you're bringing in. They've got the team to execute on it. And they have the credibility and you should still look to build your investor network. But then you're also raising money based on your partner's track record. Whereas, you might have the proverbial friends and family who are like, yeah, I know you're smart. I know what you're doing, but I haven't seen you make an investment before. You haven't done this 10 times. This is still a lot of money. And so I think if you can point to the partner to say, here's their track record, this shows you they have the expertise and how to do it. That's really the best way to learn. And I think along with that comes a lot of the professionals. But I think it's important to certainly develop your own network as well. And we've talked about the importance of specializations. It's not like just go to a generalist attorney. It's if it's a landlord tenant matter, you want to go to a landlord tenant attorney, etc.
David: One of the quotes that I like from your book was, you say create value where others see obstacles. And it feels like almost every transaction I'm working on now has some obstacles. What good examples have you seen of that and potential solutions that you've seen.
James Nelson: So first of all, risk tolerance, that's really important to assess, because we don't always have all the answers or we know there's exposure, but we don't know how much and we don't know what's going to unfold. You can try to box around that in the right contract, although, what sellers are handing out representations these days? You need to first assess if you're looking for something more passive and predictable, maybe there's one track of investment, right. You've got to have your base case assumption, and your best case, but you have to know that even if whatever doesn't work, you can at least get by. And I recently heard Peter Hungerford on a podcast, and I like what he had to say, everything that's under my control, I'm going to execute to the best of my ability because people talk about, maybe we'll get another rate cut and then cap rates will tighten. It's really having the expertise, making sure you're on top of the issues. And the creativity that's seeing something that maybe the owner does not. And as a broker, we want to sell the upside. I talked about in my book, Margaret Streicker, really smart investor, she made a bid on a couple of mixed use properties down in Greenwich Village. And I said, Margaret, what are you going to do with this? This isn't your typical kind of deal. What's the plan here. And found out that she could actually build a carriage house, like a nice size property in the backyard. And I didn't even realize that. I was like, wow, that's good.
David: Knowledge is power. My mom was right.
James Nelson: Knowledge is power for sure. And that's the thing. It's what's the highest and best use? What's your business plan where you can approach something and have an advantage? , this is a very basic investment thesis, but a good one is retail when it's vacant, it sells at a discount. It's difficult to finance. But if you have that tenant relationship and you can bring a tenant to the table and buy it at the same time, you're creating value immediately. That's how Jeff Sutton became a billionaire. First it started with Payless and then Walgreens. Having that advantage, that's what I talk about is the insider's edge. What is your edge?
David: James, you've been an absolute wonderful guest sharing this information, and not only that, but you do this day in and day out. You have some amazing videos on LinkedIn. You also have a blog, write articles, you're everywhere. Maybe you want to tell people where they can find you.
James Nelson: I appreciate that. I built jamesnelson. com the site's not about me, it's really for investors. That's where you can find out about the book, the podcast, all the show notes. I write weekly for Forbes, we put the articles there as well. So there's a lot of content. We're also very active on social media. James Nelson NYC, that's on Instagram and LinkedIn is really, I think the most powerful platform for what we're doing.
David: And then your podcast, you have several hundred episodes. So, check out the backlog. I definitely will because I learned a ton from it. How often are you releasing new episodes?
James Nelson: I try weekly.
David: Wow.
James Nelson: Challenging?
David: Unbelievable. And the book is called, The Insider's Edge to Real Estate Investing. I highly recommend it. I read through it. I'm sure I'll read through it again. It was a great read. And thank you so much for joining us and sharing. It was a lot of fun.
James Nelson: Thank you, everybody. I appreciate it.
Brenda: Well, everyone, that's our show. Thanks so much for listening.
David: And of course, don't forget to subscribe. Also, don't forget to leave comments, because we love to hear from our audience, right, Brenda?
Brenda: Yeah. Feel free to reach out at [email protected] or visit our website seidenschein.com. We really look forward to hearing from you.
David: You can also reach out to David and Brenda at [email protected] and
[email protected]
Brenda: Those are lengthy last names. You can just find us on our website.
David: That's right.