Michael and his team deal with large development projects and large apartment community owners. Michael, through the company Equicap, specializes in getting creative and financing tough situations that most other lenders will not touch. They also lend in normal situations, and can help almost anyone looking for capital for real estate. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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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 we’ve got Michael Chelala. How are you doing, Michael?
Michael Chelala: I’m doing good, thanks for having me.
Joe Fairless: Yeah, nice to have you on the show. A little bit about Michael – he is the director of originations for Equicap, which is a real estate investment banking firm. He’s focused on effectively structuring financing for complex real estate transactions. Based in New York City, New York. You can say hi to him at his company’s website, which is in the show notes page.
With that being said, Michael, do you wanna tell us a little bit about your background and your current focus?
Michael Chelala: Absolutely. Like you mentioned, we are a finance firm focused around commercial real estate in New York City. We pride ourselves on our ability to structure debt and equity. We work for developers and owner operators around the country. My background is in finance. We’re a pretty small shop, about 5 or 6 guys here in the office on a daily basis, but we do about a billion dollars in transactions a year, so we’re very active. I think it equates to about 100 deals a year, and we go up and down the capital stack.
We arrange acquisition financing, construction financing, traditional refi’s, special situation deals… We touch all asset classes, from multifamily to industrial, to hospitality. We really like to touch it all; anything that as a commercial real estate component we talk about small businesses, SDA loans… We do it all, really. So yeah, we like the hairy stuff.
Joe Fairless: Give us an example of the hairy stuff. Give us a specific example if you could.
Michael Chelala: I’ll give you an example – last year we had a really interesting deal that came to us in Brooklyn. It was a distressed deal. The client was a couple weeks away from her building going to auction, and her lender was obviously foreclosing on her, and she was looking for an exit. Her building had tons of violation. In New York, the violations can get pretty heavy. You have to be on top of your building, and she wasn’t, so her building ended up going on the AEP list, which is a list of the worst violated buildings in New York City… So a lot of lenders wouldn’t wanna touch that deal.
Well, we did – we found a family office to come in, lend her the money, and pretty much get her out of the sticky situation that she was in, where she was in default. We bought her enough time to reposition the asset and stabilize the situation, and ultimately we got her out of that funky situation that she was in where she almost lost her building. She was able to buy time to clear up the violations, and then find conventional financing thereafter to take out that family office. This is an example of a hairy situation. We work on development deals where–
Joe Fairless: I’d love to talk about the development deals in a second, but I’d love to learn more about how that was specifically structured, just to learn more about, okay, if I have a building in Brooklyn, totally have been messing up, on the worst violation list, the AEP list… Is that it, AEP?
Michael Chelala: Yeah.
Joe Fairless: Okay, the AEP list… And then I come to you and you’re like “Hey, Joe, this is my specialty, you are in good hands. Let me try and take care of it” and then you come to me with the proposal – how is that exactly structured?
Michael Chelala: How is the loan agreement structured [unintelligible [00:04:34].02]
Joe Fairless: Both.
Michael Chelala: Obviously, the most important thing is getting to a place where the lender is capable of coming in, paying off the existing lender, and coming into a new sort of structured deal with the borrower. In this case, the loan was structured as a bridge loan, where the terminal loan was 12 months, and a couple extension options. So the borrower had 12 months time before the new loan would mature, she had a couple options to extend, and within those 12 months she was paying pretty high interest; the borrower is gonna be paying a pretty high interest compared to a conventional [unintelligible [00:05:15].05] but at least she was able to hold on to the asset and get it back to where it had to be.
So the trade-off with the bridge loan is that, hey, you’ve gotta pay up, but it buys you more time to get a distressed asset to where it’s gotta be.
Joe Fairless: And then her exit out in 12 months is she’s now done the stabilization — so the previous lender is paid off, done; now family office comes in…
Michael Chelala: Cleaned up the violations…
Joe Fairless: Cleaned up the violations, okay, and then stabilized it. From a stabilization standpoint, here what specifically are we doing to stabilize the property, other than cleaning up violations?
Michael Chelala: At the time where the property was really in distress, there were a good amount of vacancies. Some of the properties needed some cap ex work, some minor renovations to get them leased up. Once our lender came into the deal, she had that 12 months time to come in, make those minor renovations, get those units leased up, and that’s why she was able to upside the cashflow and get the building performing again.
Joe Fairless: And from a lender standpoint, is the reason why I would lend to an individual in that type of circumstance because if they don’t perform I get the building? And the reason why I say that is because if an owner has gotten to that point where they’ve got all these violations around the naughty list, it sounds like that would be tough to trust that they’ll follow through with this new loan.
Michael Chelala: For sure. I think that any bridge lender that tells you that they’re not worried about getting paid off is probably lying to you. They’re always worried about it, because they’re coming into hairier situations than a conventional bank would… But they definitely need to take into account what the property is worth as is, what they’re lending on, and just in case they run into that issue where they need to take back the keys to the property, they know that their basis is solid and that they would still be able to come out either making a little bit of money or breaking even. But I don’t think that any lenders that at least I deal with intentionally go into a loan to own situations, right?
There’s a lot of lenders out there that people need to look out for, and maybe some of your listeners that are sort of getting into the real estate game, that are looking for private money or “hard money” – you’ve gotta be careful, you’ve gotta make sure that your lenders are not out to just take the property right under your feet; they’re there to work with you… Dealing with those lenders, you’ve gotta be careful.
Joe Fairless: Any particular questions you could ask a lender to try and determine if they’re a loan-to-own type of lender?
Michael Chelala: Yeah, I think it’s important to know how many loans they have out at any given time, how many loans have been paid off, what their level of experience is… Anybody can have money and anybody can be playing in the real estate game, but really how many transactions have you been a part of and who can I call as a reference? Who are one of your borrowers that I can speak to and make sure that the process went smoothly?
And I think deal with debt and equity brokers like myself, that can speak to that, and… I’m accountable, right? A broker is accountable to which lender they pair you up with. Experience is definitely important, and just being able to speak to somebody that can guide you through the process.
Joe Fairless: Now, you were mentioning development deals before we went very deep on this Brooklyn deal. What about a development deal(s) that was challenging?
Michael Chelala: We’re dealing with a few challenging construction deals at the moment. For example, we have a developer that bought a lot that had environmental issues that we needed to clean up in order to acquire that land and then start building on it… But there’s all types of situations that developers can run into.
We also have seen a lot in this market, where people, first-time developers are getting into deals, they don’t budget properly, there’s cost over-runs, they end up falling short of their budget, and they need to upsize their construction loan again.
We worked on deals like that where we’ve taken out a construction loan, then we needed to bring in another construction lender to upsize the loan and give them more money to complete the project. So developers definitely need to be careful and make sure that they budget everything as detailed as they can, so as not to run into that problem.
Joe Fairless: What’s a scenario where I came to you and I said “Hey, I’ve got a really tough situation”, where you say “Joe, you’re screwed… Sorry, I can’t help you.” What would that be?
Michael Chelala: I think if you get to a point where you’re as complete value is falling short of what you owe on the property and what you need to complete the property. That’s when you’re really in trouble. You’ve gotta make sure that you buy things smart, you buy things at a good basis, that you’re not just building to build. You go into it, you’ve gotta run the numbers and make sure that you have room to play, and room for error, because any developer will tell you, it’s never 100% smooth; there’s always gonna be bumps in the road, there’s always gonna be contractors that need a little extra money to do whatever, there’s always cost overruns… You’ve gotta be careful.
Joe Fairless: What’s an approach you take to developing relationships with family offices?
Michael Chelala: I think with family offices you definitely wanna approach the ones that first of all have sort of an interest in real estate; not all family offices play in that game. And I think that you wanna bring good deals to family offices. Some of them play on the equity side, some of them play on the debt size, some of them play on both levels, but I think I’ve developers these relationships over the years by bringing good deals – deals that are strong on paper, that have strong sponsors. That’s primarily it. You wanna make sure that whatever you’re bringing to the table is gonna look good for them.
Joe Fairless: Thinking about that Brooklyn deal where the family office came in – I’m not asking you to name any names, but how did you initially meet a person at that family office?
Michael Chelala: I actually met that person at a networking event that one of my title relationships organized. You’ve gotta go out to these little events that people put together. It was sort of a private thing where a few guys got together and exchanged business cards, that was actually it.
What’s funny about that deal was nobody wanted to touch this deal. There was not a lender under the sun that wanted to touch it. And then the week before we got this thing closed we found this guy. So it was a really quick process.
Joe Fairless: How long have you been a director of originations?
Michael Chelala: Equicap has been around for 15 years. I’ve been here for about 3-4 years now.
Joe Fairless: Okay. With your approach in particular, for the 3-4 years you’ve been there, what’s something you’ve evolved?
Michael Chelala: I’ve definitely been paying more attention to me. In particular, I’ve developed sort of a marketing platform on Instagram, and some of these other media channels… But you’re starting to see more brokers and more developers and more owners put their product to show on these platforms, and I think it’s important to pay attention to that and be a part of it, because I think in the next couple of years it’s gonna grow even more. There’s a lot of people in the industry that aren’t really paying attention to it, but you’d be surprised how many new leads, new contacts, new developers I meet on a daily basis through social media.
Joe Fairless: So you’re a registered broker-dealer?
Michael Chelala: Yes.
Joe Fairless: For someone who’s not familiar with that term, first what is it, and then secondly, what’s the type of compensation that someone can expect to be charged if they work with a broker-dealer?
Michael Chelala: Sure. By the way, before I answer that question, about 90% of deals in New York City on the debt and equity side run through a brokerage, and that’s because brokers in this market are — it’s important to find a good broker, one, and two, you wanna have representation when you’re negotiating with your lenders to make sure that you get the best deal and you see all the options on the table out there, because it’s our job to know all the lenders and equity players out there.
Obviously, I’m biased, but I’m a big believer in people going out and using brokers, and I think the market speaks to that. But as far as what it takes to get into the brokerage world, you need to get license from a city – there’s a series of tests that you can take… And as far as the fees are concerned – different companies offer different sliding scales for their fees and stuff, but typically speaking, on a debt assignment you’re gonna get charged about 1% of the total debt. Then ob equity assignment, equity is usually between 2% and 3%.
You can play with those numbers – sometimes smaller deals or more difficult deals could be a little higher, bigger deals that are a lot easier to get done, cookie-cutter multifamily refinances, you can chop that point down to maybe 0.75%. So there’s some flexibility there.
Joe Fairless: Thank you, I appreciate that. What is your best real estate investing advice ever?
Michael Chelala: I would say to look for hairy situations, special situations. Don’t just go for the fancy-marketed real estate acquisitions. I think that if you wanna find a good deal, you’ve really gotta dig for it. You’ve gotta look for the guy that’s in trouble, or the lady that’s in trouble, that needs help. This way you can structure deals that make sense. You can maybe come into the deal in a unique way… So I think you’ve gotta look for special situations; you’ve gotta look for hairy deals. That’s the best way that you can sort of find the golden opportunities.
Joe Fairless: I’m gonna ask you a follow-up on that, because you’re brokering the money between the person doing the hairy deal, who is at risk, and the lender, who is at risk, but should have a property that they can own if the owner doesn’t adhere to whatever the loan covenants are. So you don’t have skin in the game necessarily; sure, a reputation, but skin in the game. So from looking at a hairy deal – I hear you, that’s where we can get a lot of value, but holy cow, that could be where I lose my shirt… So have you been an operator on these types of deals before?
Michael Chelala: What I’ve done in the past is if I really like a deal, I’ll roll my fee into the…
Joe Fairless: Oh, okay.
Michael Chelala: If it really makes sense, if it really pencils out and you know that the guy that’s running with the transaction knows what he’s doing, then it’s worth taking a shot at, right? Or maybe you split your fee, so you get paid half, and you roll half into the deal.
It becomes a small piece of the transaction, but 12-18 months down the line when there’s another play – whether it’s a sale or a refinance – you can see a little premium on your money. So the answer to that is yes.
Joe Fairless: Certainly more of an alignment of interest with them when you do that. Still, it’s investing money that is a commission, versus perhaps the owner-operator who didn’t earn money with the equity that they put into the deal; they might have had to dip in savings, or something… But still, more of alignment of interest. I didn’t know broker-dealers did that, so that’s pretty cool to know.
Michael Chelala: Yes, it’s definitely a creative way to get involved. And by the way, I wanna mention that these lenders, although they’re lending on a hairier transaction, let’s say, sometimes they like that, because they also recognize that there’s a unique opportunity to come into a special situation that the guy or girl that’s running the deal can create a lot of value and put the lender in a better position to be taken out down the road.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Michael Chelala: I’ll give it a shot, man.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Break: [00:17:34].29] to [00:18:11].13]
Joe Fairless: Okay, best ever book you’ve read?
Michael Chelala: Best ever book I read… Oh, God… Like a Virgin, Richard Branson.
Joe Fairless: Alright. What is the best ever deal you’ve done that we haven’t talked about?
Michael Chelala: I did an SBA loan for a trendy cafe in New York City called Cafe Grumpy.
Joe Fairless: Why is it the best ever – just because it’s kind of a cool name?
Michael Chelala: If you look up their logo, they’ve got the coolest logo, man. A really cool coffee brand.
Joe Fairless: Alright, where is that located? I don’t know Cafe Grumpy.
Michael Chelala: They have a location in Grand Central, right in the middle of Manhattan, and they’ve got a bunch all over the city. The loan that I got them helped them open up a location downtown.
Joe Fairless: Alright. Yeah, they’ve got a new Miami location, too.
Michael Chelala: They’ve just opened up one in Miami… I think they’ve got a couple in Brooklyn.
Joe Fairless: Yeah, “Roasting in Brooklyn & Brewing Beyond.” Cool! What’s a mistake you’ve made on a transaction?
Michael Chelala: A mistake I’ve made? Hopefully none. I think the only mistakes I’ve made are really presenting things to lenders that hadn’t been fully vetted. What I mean by that is, for example, if a guy comes to me and says his net worth is 10 million dollars and it’s really $500, then that could pose a potential problem, and that’s happened in the past… So it’s definitely important to make sure that the people that you deal with, you vet them and you make sure that what they’re telling you is actually true.
Joe Fairless: That wild swing of net worth has happened before?
Michael Chelala: Maybe not $500, but give or take…
Joe Fairless: [laughs] Give or take $50.
Michael Chelala: Yeah… There’s definitely some cowboys out there, no doubt.
Joe Fairless: What’s the best ever way you like to give back?
Michael Chelala: For me, I like giving back to orphanages. My grandfather was an orphan, so that’s really a soft spot to me, to give back to orphans.
Joe Fairless: And what’s the best ever way the Best Ever listeners can get in touch with you?
Michael Chelala: The best way to reach me is by e-mail, or on my Instagram, just DM me… That’s definitely the best way to reach me.
Joe Fairless: Cool. Do you wanna say your e-mail?
Michael Chelala: It’s michael@m-equicap.com. The Instagram is @thedeveloperclub. On @thedeveloperclub on Instagram you can reach out to me. Either through DM, e-mail me, call me… All my information is there.
Joe Fairless: I loved our case study conversation with the Brooklyn deal. The woman was in trouble, and then you got the family office involved… They bought out the existing lender and structured a new deal with her, as a bridge loan, 12 months, a couple extension options. She cleared up the violations, had some vacancies, cap ex, minor renovations, got it leased up within 12 months, and then exited out into a longer-term loan. It was a loan that no one else would touch. And you met the family office contact at a networking event that I think a title company contact put together…
So a lot of lessons to be learned there, and it’s just kind of a microcosm of the type of deals you do. Thank you so much for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Michael Chelala: Thanks very much.