Q&A: Josh Zegen, Madison Realty Capital

Madison Realty Capital has done $1 billion in transactions since it began investing in 2005. The Mortgage Observer spoke to co-founder Josh Zegen about the types of deals Madison, which just closed a new fund, is putting together of late.

The Mortgage Observer: Can you tell me your title here and how long you’ve been at Madison Realty Capital?

Josh Zegen: I co-founded Madison in 2004 with Brian Shatz. My official title is managing member and co-founder. And Madison Realty Capital started out with a first fund in 2004 that focused on the debt business. That was a $310 million fund and that fund was set up to do bridge lending—to lend to commercial owners of multifamily office retail and industrial properties for time-sensitive transactions. The goal was to focus on the middle market, which we thought was underserved.

josh zegen qa 2 for web Q&A: Josh Zegen, Madison Realty Capital

Josh Zegen.

And how did you get your start in the business?

I graduated from Brandeis University and then started a mortgage brokerage company in 2001. When we were brokering a lot of these private, short-term bridge loans, I discovered the niche of the bridge lending market. There was a need for a fund focused on first mortgage bridge lending in the sub-$30 million market. When I saw that need, I got together with Brian Shatz and then went to a family office and met a number of investors that really were the first money for us to start in 2004. The goal was always to create a vertically integrated platform, where we would have lending and other things and really ultimately be owners of real estate.

We started to build the organization and service our own loans and really did everything in-house as a normal lender. At the time, generally, lenders didn’t own much in real estate because they would get either paid off by another lender or the properties were liquid and they would sell. But when 2008 came, that started to change as the markets changed and there was less liquidity out there and lenders weren’t lending, so we started to take ownership of real estate. One of the things we discovered was that when you rely on third-party managers to manage real estate, there is a misalignment of interest and you don’t necessarily have the ability to take ownership and reposition the real estate, and that’s a lot of times where the best benefit is. So in 2009, we brought on Martin Nussbaum to really focus on building our own property management and asset management company—Silverstone Property Group.

Which helps you get it back up to market rate rents?

That’s exactly right. In 2009 there wasn’t much in terms of transactions out there, but as 2009 turned into 2010, having our own property management, asset management and construction management gave us the ability to buy debt with the goal of owning the underlying real estate. Because we’re now this vertically integrated company, that has the lending side and then the ownership side of the business, that’s given us the ability to buy debt with the goal of owning this real estate and repositioning the real estate. A lot of those debt funds don’t want to own real estate. They want to buy and restructure the deal or flip it back to someone.

How are you able to close these deals so quickly?

It’s the combination of skill set, all within this organization that gives us that ability to close quickly. We obviously hire appraisers, third party engineers—all the stuff you normally would hire. But in addition we have people on staff who came from the development side, who built buildings like that in the past, who have dealt with contractors and issues and zoning. We outsource just for third-party opinions but we have all of that in our organization and that’s given us the speed and the execution ability to be able to do that within a 30-day time frame.

Are bridge loans still a big part of finding a way to buy the note on a property?

We’re seeing in the bridge lending markets, a lot of recapitalization. Bridge lending is an active part of the business. Buying debt has been the largest part. If you look at the $70 million or so in deals we’ve done, more than $50 million have been note purchases.

Are you growing?

I think we have a couple more hires we would like to make. The property management and asset management side continue to grow as we take ownership of more and more real estate, so that’s very scalable. Another position we just hired is a guy named Bryan Rubin who came from TriBeCa Associates—a big owner and developer here in New York. He’s like an acquisition underwriter. David Speiser—he was at Davis Polk, Paul Weiss and then he was at Related for about six years.

Did you previously have an internal infrastructure for dealing with legal issues?

We have someone that has a legal and business background but got a law degree in Israel, so David Speiser is more of that legal function, crossing over between legal and business.

I know when we spoke before you talked about banks’ increasing willingness to write down their debt. Do you think that’s going to continue?

It seems to be, and we’re inundated with product right now in terms of buying debt and I think a lot of it is the increase of values over the last year and the fact that banks have been in a much healthier spot in terms of their own balance sheets. That has given a lot of flexibility to these banks to be able to write down assets and sell loans at prices that are more manageable for buyers like us. From the special servicer side—more of the LNR and C3 and those kinds of special servicers—we’ve started to see a lot more product from those groups as well.


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