Ashish Dua and Jeffrey Rosenblum, the co-founders of Acumen Capital Partners, had a problem.
In 2011, Acumen acquired the then-vacant Pfizer Building at 630 Flushing Avenue in Brooklyn. “We were trying to get a first mortgage in place as well as construction financing and there just wasn’t an appetite from lenders,” Dua said.
The asset had tons of inherent value, but Dua and Rosenblum couldn’t convince any banks to finance it; this was still during the hangover of the financial crisis, and the banks had curbed their lending programs and were looking for stable, well-occupied assets. Acumen began increasing occupancy, to 30 percent by the end of 2014, believing this would entice a positive response from the marketplace—it didn’t.
Adding to the complexity, the former pharmaceutical building needed environmental insurance and much of its income was short-term in nature. The property has been used to film various movies and T.V. shows. Cool, yes—but not to a lender who equates transient income with risk.
Jason Gaccione, a senior vice president in CBRE Capital Market’s debt and structured finance group, was hired to broker the debt, and the first group interested was Square Mile Capital—and with it Jeffrey Fastov, the alternative lender’s senior managing director.
“Our experience as an equity investor in similar situations—for example, The Factory building in Long Island City and the Row in Downtown L.A.—helped us to deeply understand the risks and opportunities associated with the business plan as a lender,” Fastov said.
“They came aggressive, and they came early,” Dua said. “Other lenders were concerned about themselves—what was the risk of this asset for them—but Square Mile already had that risk assessment prepared and were more concerned about winning the business and knowing our concerns.”
But…this is New York, and Dua understandably had some doubts. “We were very skeptical because that [approach] was so foreign to us that we thought, ‘Something’s wrong here.’ ”
Specifically, Acumen was worried Square Mile could be a competitor. “A lot of these alternative lenders’ game is loan-to-own,” Dua said. “But I didn’t get any sense of that, and 22 months later, I still don’t.”
Known for investing up and down the capital stack, Square Mile has now originated $4 billion in debt since Fastov came onboard in 2013.
“As an alternative lender, we’re lending beyond where the banks will go,” Fastov told Commercial Observer. “It’s important that you have the real estate skills and the market knowledge associated with being an owner and a developer, particularly for gap capital.”
One could say the lender is Square by name but not by nature, bringing creativity and flexibility to sometimes-challenging transactions. Aside from the Acumen transaction, recent Square Mile deals include a $50.2 million whole loan secured by 57 Willoughby Street, a six-story office building in Downtown Brooklyn, and a $145 million construction loan for the first phase of Bohannon Companies’ Menlo Gateway project—an eight-story, 210,000-square-foot office building in Menlo Park, Calif. The latter was built on spec, although a “global media company”— Facebook, according to Silicon Valley Business Journal—just leased the entire building, Fastov said.
The Menlo Park deal is another key example of the opportunity that alternative lenders have in today’s market. “The land was acquired in the 1940s, so clearly it’s worth a lot more today, but the banks aren’t able to account for the market value of the land [as required by the High Volatility Commercial Real Estate requirement]. It’s a perfect example of how alternative lenders can add value,” Fastov said.
It’s just one of the ways nontraditional lenders have stepped up to fill a substantial void created by the regulatory restrictions placed on banks, previously the most active participants in commercial real estate lending.
Fastov doesn’t see this role changing anytime soon. “We think the banks will continue to be conservative. Whether it’s regulations like Dodd-Frank or risk-based capital requirements associated with the Basel Accords, or just the credit culture and banks who haven’t forgotten what happened in the last cycle—it’s all putting pressure on saving the most conservative part of commercial real estate lending for banks, which is very senior and cash flow-oriented, not value-add or development,” he said.
Since its inception in 2006, Square Mile has built an infrastructure of 30 professionals in its New York office alone and has eight other regional offices across the U.S. Its boots on the ground in multiple states, coupled with the integration of its debt and equity platforms, have served it well. “We can react quickly to a transaction through its life, and we think we have a competitive advantage by just being a little more nimble,” Fastov said.
Commercial Observer met with Fastov in his office at 350 Park Avenue. He is a little less rigid than your average lender, in more ways than one—his geek-chic glasses are one trademark, his dry sense of humor is another. Discussing his family he mentioned that his youngest daughter Emily, 23, is a special education teacher and his eldest daughter Hannah, 26, is starting an athleisure accessories line. “That’s my ticket [out]. But for now, I’m the ATM, and my wife [Melissa] is the intern.”
Fastov has always stood out from the herd, said Eugene Gorab, the president and chief executive officer of Greenfield Partners, who partners with Square Mile on deals today, but first met Fastov while he was working at Goldman Sachs in the 1990s. “He wasn’t a typical Goldman guy—he was a lot more user-friendly. That’s not a knock on the other guys that I know there, but Jeff was particularly engaging. He’s very intelligent, but he’s not standoffish, and I think that trait draws people to want to do business with him.”
“He looks very young, but he’s been doing this for a long time,” said Chris Lee, the co-head of Real Estate Credit at KKR.
Fastov, 58, grew up in Newton, Mass., and got his first taste for real estate from his grandfather, Benjamin Fastov, who was a developer in the Boston area. After receiving his MBA from Columbia Business School, he got his industry start as a ratings analyst at Moody’s Investors Service in 1983.
It was an opportune time: The nascent structured finance market was finding its footing at the same time as the young analyst was cutting his teeth. Several transactions crossed Fastov’s desk during the 1980s, but the floodgates didn’t truly open until the Resolution Trust Company began liquidating savings and loans (held in receivership after the Federal Deposit Insurance Corporation took over failed institutions) in 1989. “There was such a massive amount of commercial mortgage product to be sold that securitization was literally the only effective way to move it from savings and loans to new investors,” Fastov said.
Enter the CMBS market.
There were two main rating agencies back then: Standard & Poor’s and Moody’s. Most investors required that both firms rate a deal, thereby eliminating any competition between the two. “As a result, there was probably a little less innovation, but the transactions were more conservative,” Fastov said. “When Fitch Ratings became a major player, it was helpful to the market because it was innovative and creative, but it also changed the business from one that wasn’t competitive to one that is. As a result of that [competition], the levels of protection for a given rating eroded in the last cycle—they’ve since become more conservative again because of what happened in the global meltdown.”
As a participant in the CMBS market from day one, Fastov watched the sector evolve. “The B-piece buyers who buy the first loss risk in transactions are much more invasive [today]—they have a huge influence on the loans that are included in a securitization. It makes it a little cumbersome because the [conduit originators] have their own view on what to originate but they also have to account for what the B-piece buyers will accept.”
Risk retention wasn’t around back then, either. (Fastov told CO he believes it’s “probably a good thing” because he is a believer in “skin in the game.”)
Square Mile has participated in risk retention-compliant deals since the rule’s implementation on Dec. 24 last year; it doesn’t have a preference as far as structure goes, but does prefer to invest independently in tranches: “If you’re in the most junior tranche all by yourself, then you don’t have other parties to coordinate with,” Fastov explained. “Typically within a band, there is a party that is the designated decision-maker, but if you have other stakeholders in the same tranche as you, it can become complicated. We’re open to any and all structures, but there’s the consideration of being by yourself in a horizontal tranche versus with others.”
Fastov left Moody’s in 1992, one month shy of his 10-year anniversary (“They didn’t give me a gift!”) joining Goldman Sachs. He started out looking at the bank’s transactions and estimating where ratings would land on the capital structures of mortgages—how much of the deal would be AAA-rated versus AA-rated, which ultimately would affect the loan’s pricing and value. Over time he made his way up to become the co-head of commercial real estate lending (along with Leo Huang and Ted Borter, among others).
Highlighting the difference between the lending environment of then compared with now, Fastov said, “Just before I left Goldman [in 2009] the underwriting standards for making loans were very aggressive. There were aggressive assumptions about the pro-forma performance of properties, whereas there are more conservative assumptions about how properties are performing today and less emphasis on pro forma. Also, leverage levels have come way down and leverage-on-leverage doesn’t exist the way it used to. In the late part of the cycle virtually every component of the capital structure was levered again and again.”
Fastov did a stint at Credit Suisse, where he was a co-head of the bank’s real estate finance and securitization group, before joining Square Mile in 2013.
“We made a decision to expand our investment strategies in light of market conditions, in a manner consistent with our core competencies,” Craig Solomon, the newly named chief executive officer at Square Mile, said of Fastov’s hiring. “A diversified CRE debt investment platform was a natural fit for our firm, but we required a senior professional with the right skill set to build the business and who understood our company culture. Jeff has proven to be the perfect choice.”
Likewise, the company certainly appealed to Fastov. “The reason alternative lenders have a place in the market is because commercial banks have become much more conservative since then, in particular with respect to nonstabilized properties,” Fastov said. “So when it comes to development or construction and value-add lending, there’s a tremendous demand for gap capital that just can’t be satisfied by the banks.”
Today, KKR and Square Mile regularly partner on deals, as well as borrowing and lending to one another—last month Square Mile provided a $95.2 million loan for KKR’s purchase of 180 Grand Avenue, a 15-story, 278,596-square -foot office building in Oakland, Calif.—but 17 years ago Lee was a recent college graduate working under Fastov at Goldman Sachs. “He’s seen a lot of transactions over time; whether it’s CMBS or bridge lending, when you have 30 years of experience you’ve seen what can go wrong on deals. So you’re able to apply those lessons learned over time into new deals.”
Today, Square Mile has over 100 positions comprising $4 billion in total lending. It originates across the spectrum, from first mortgages to mezzanine loans to B-notes to preferred equity. Beyond its loan origination platform, the firm has worked on special situation transactions since its inception in 2006—sometimes a preferred equity investment deep in the capital stack or a combination of preferred and common equity. One of Square Mile’s very specific strategies is to play in different parts of the capital stack, Fastov said, so that it can find the best relative value in the market given at that point in the cycle. The strategy “keeps us sharp, and frankly it makes for a more interesting job,” he said.
The firm lends on all basic property types but has a history and specific expertise in hotel investments. Retail is underweighted in Square Mile’s portfolio, Fastov said. “It’s harder to find good value in retail, but there is no hard and fast rule; for every sector that is strong, there are always exceptions.”
As a case in point, the firm was recently involved in a $20 million horizontal risk retention piece in the Del Amo Fashion Center near LAX airport—a 2.6-million-square-foot mall owned by Simon Property Group and J.P. Morgan Investment Management. “There are going to be survivors even in the super regional mall space,” Fastov said. “With respect to core, stabilized real estate, we’ll make a 10-year fixed-rate, call-protected mezzanine loan behind a life company senior loan, or bigger CMBS loans.”
Square Mile has also been busy paving roads where few dare to tread: construction lending. With regulators handcuffing banks’ lending activities, their pullback from unstabilized properties has presented a big opportunity for alternative lenders like Square Mile. “We think [the banks] are painting with too big a paint brush,” Fastov said. “Looking at all the transactions in the market we can identify 20 or 30 investments over the next year or two that represent extraordinarily good value.”
In past five years, the firm has done approximately 15 deals alongside another very active (yet traditional) construction lender: Bank of the Ozarks.
“[The Square Mile team is] not only book smart but they understand real estate cycles,” said Dan Thomas, the vice chairman of the board and chief lending officer at Bank of the Ozarks. “We want a mezzanine lender who will look at deals the way that we do—which is ‘What’s our basis per square foot or our basis per key?’—and not only understands where they want to be in the capital stack but, in a worst case scenario, can take over a project and complete it. Square Mile not only underwrites in an excellent fashion but in a situation where they had to take out a borrower they can complete the construction component and make a success out of a project.”
Having flexibility within a deal doesn’t mean playing it loose and fast though, Gorab noted. “They’ve taken a more flexible approach to a very disciplined process. I don’t think they’re taking more risk. I think they’re taking smarter risks.”
When he’s not working, Fastov is an amateur photographer, budding fly fisherman, skier and a “terrible golfer.” Or, if you want to take him to dinner, Jaiya Thai restaurant is his favorite in the city.
As for the next phase of investment for Square Mile, Fastov said the firm will consider debt-for-control investments when distress appears in the market cycle again (“Cycles won’t ever go away,” Fastov noted, “as soon as you think this time it’s different, you’re in trouble”)—but that was not the case in Acumen’s Pfizer Building deal.
For Acumen, Square Mile’s flexibility was what sealed the deal. As a small firm, Acumen reacts and adapts to the market, often requiring construction money to build a floor based on tenant demand, and needed it.
Square Mile agreed to refinance Acumen’s existing first mortgage ($23 million) and allowed Acumen to use the rest of the loan proceeds as it saw fit for the project. The eventual structure was a $43 million mortgage with $15 million of future funding.
Dua noted Fastov’s creativity and flexibility. “We wanted to borrow $15 million of construction financing from them without having to submit budgets or get approvals,” Dua recalled. “We structured it so we only had to meet a debt yield requirement, whereas a lot of lenders would say, ‘Okay, you have to spend $100,000 on drywall.’ It was an unstabilized asset, only 30 percent occupancy when they committed to loan us $58 million. We were getting low rents then, but we projected growth and [Square Mile] understood it when a lot of guys didn’t.”
Almost two years later, the loan has performed extremely well for both parties, Dua said: Square Mile has a double digit debt yield on the asset, and Acumen has drawn down around $8 million of its $15 million line.
“Jeff is a very smart real estate mind who can look to the value of the bricks in his credit analysis,” Gaccione said. “He and his team brought a more practical yet creative approach to the deal than other interested lenders.”
“We’ve shot everything from ‘Spider-man’ to ‘Batman’ to ‘The Blacklist’ here,” Dua said, triumphantly. “Traditional lenders don’t want to underwrite that income because it’s transient in nature—even the other nontraditional lenders had a tough time getting around that.”
But not Square Mile, and not Jeffrey Fastov.