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MRC’s Josh Zegen Talks Entrepreneurship and 14 Years of Alternative Lending


The road less traveled is one that Madison Realty Capital takes, and it’s a path that has served it well. An O.G. alternative lender, MRC started out as a debt fund focused on bridge loans in 2004 before adding an equity business where it’s an owner, operator and developer. Since then, MRC has invested up and down the capital stack through the market’s ups and downs. The firm doesn’t shy away from the special situation opportunities that may give some traditional capital sources pause, from making a $90 million preferred equity investment in a stalled residential condominium project on Billionaire’s Row to providing $300 million in construction financing for a Cobble Hill, Brooklyn mixed-use development. 

At its helm are the firm’s co-founders, Josh Zegen and Brian Shatz, and Managing Member Adam Tantleff. Zegen, 43, was a budding entrepreneur as a child and pegs the firm’s success—with $4 billion in investments currently under management and $1.97 billion in loans originated or acquired over the past 12 months—partly on its entrepreneurial nature and its ability to address specific needs in the market. “It’s not always about being the cheapest source of capital; it’s about being a solution-provider. That’s what we really love to do,” he told Commercial Observer during an interview at his 825 Third Avenue office last month. 

SEE ALSO: KSR Hires Seasoned Brokers to Expand Retail Leasing

The company is currently in the process of raising Madison Realty Capital Debt Fund IV, and is more than half way to its $1 billion target having raised $554 million thus far, according to Securities and Exchange filings.

Zegen lives in the Flatiron District of Manhattan with his wife and two kids (and another baby Zegen is on the way). 

There were allegations of predatory lending in the past, but MRC hasn’t taken back a property through foreclosure of a loan it originated since 2009, and to be clear:  “When we make a loan we’re looking to get paid back. I don’t want to own anything through that loan, and people who really know us, know that.”

Commercial Observer: Where does your entrepreneurial streak come from? 

Josh Zegen: My grandparents and also my father, who started a legal practice. My grandfather on my mother’s side was a Holocaust survivor, so there’s a little bit of that “fight to survive” in me. He started as a short-order cook and then opened some coffee shops. My grandfather on my father’s side came from Russia in the 1920s and started a lamp business. As a kid there was always a business I was starting. I had a baseball card business, a hat business and a business selling rocks when I was 5 years old. 


I found rocks, painted them and sold them to my neighbors. Selling baseball cards taught me a lot, too. I was going door-to-door at the time, and my dad was getting up at 6 a.m. and taking me to baseball card shows. Then, when Brian [Shatz] and I were roommates in college we started a hat business on Brandeis [University’s] campus. That was the first time we were business partners. 

 How did you get into the hat business? 

We saw someone selling these Game hats for $7 each and they normally retailed for $15 each, so we were like, “How is he doing this?” We realized he was selling closeouts and irregulars so Brian and I called Game and said, “We want to buy your closeouts and irregulars.” We bought thousands of them and they cost us 75 cents each. My brother [Marc Zegen, now vice president of acquisitions and originations at MRC] was 10 years old at the time and I had him working with a razor blade slicing the hats [fixing loose threads, etc.] to make them regular again to sell [for $8 to $10]. 

 Can entrepreneurship be taught? 

I think it’s either in you or it’s not. I never went to business school because I felt I could learn more actually being in business. 

Were you pressured to go?

I was [laughs]. My mom really wanted me to. I had pressure from peers too, because it was the expected thing to do. My feeling is that a lot of business schools teach you to think outside the box, but if everyone is thinking outside of the box you’re actually in the box.

How did you get your industry start? 

I started out in investment banking as an analyst at Merrill Lynch. Then I was recruited to a venture capital firm in 2000, but the market crashed a year later and they fired everyone from the New York office. I didn’t know what to do. What I did know is that I didn’t want to go back to investment banking. My dad’s a lawyer and he used to rent space to other lawyers and accountants. He said, “Listen, take a little space and figure out what you want to do.” There was a guy in the next suite who realized at loan closings that the mortgage broker was making more than him on the deal, and he said: “I’m going to start this mortgage brokerage business on the side. Let’s work on this together.” 

I didn’t have any kind of real estate background, but I knew that I could sell. Dumbo [Brooklyn] at that time was starting to explode and a friend was referring to me buyers who were interested in units at one of the big buildings [30 Main Street]. That was my big break. I would take on any opportunity. So if someone called me on a commercial deal I just figured it out. I soon realized that there was a lot of money in commercial brokerage and I started to broker a couple of bridge loans. 

 What did the bridge loan sector look like in the early 2000s? 

The borrower was typically someone who needed money very quickly and was willing to pay a premium. It was very fragmented, it was small loans, not what you hear of in alternative lending today. We were able to serve a purpose in finding typically a family office in a local market who said, “Yeah, this is worth $10 million. I’ll lend them $4 million quickly.” So I brokered a couple of deals because I realized that was where the money was.

 Is that when the idea for MRC came about? 

Brian [Shatz] had worked at BlackRock and then at a family office, and knew a number of investors. I was 28, he was 27, and I went to him to say: “Brian, [bridge lending] is the best business ever. People need money quickly, it’s a first mortgage, it’s well secured, let’s do this together.” So, we started a fund around it. We went to a number of attorneys to ask, “Can you put together a [private placement memorandum] for this?” And I can’t tell you how many people turned us down—attorneys, people we would pay—because they said, “Why is someone going to pay 11 percent on a first mortgage?” They didn’t get it. But there was one attorney at Paul Hastings named Mike Zuppone. He took on the task and we’re still great friends with him and do business with him to this day. 

We raised $10 million of [limited partner] capital to start Madison Realty Capital. That fund grew to $300 million of equity. Between 2005 and 2008 we did $700 million of deals and got a line of credit from CapitalSource. As the market changed though, things became very illiquid and when 2008 happened, people couldn’t pay [loans] off. We knew the only way we’d be able to maximize value and our track record was to be able to have our own property management, asset management and construction management in-house. Because we were sometimes taking over assets and we’d hire a third party and they weren’t maximizing value—they were taking fees. 

 These were situations where the borrower had defaulted on their loan? 

Right. In 2008 the world was coming to an end and you had to take over assets. A lot of lenders at that time were just selling loans, saying, “I’m getting out of this.” But doing that wouldn’t maximize value, and as a young company it wasn’t a great position to take. 

 Must have been an interesting time to build a company? 

It was, but we had the seeds in place and at the time there were a number of people out of jobs because they were getting laid off so the talent pool was actually pretty strong. It was almost perfect timing and set the DNA of Madison Realty Capital. 

 How has the company evolved since then? 

Today we have 80-plus people. I think what we’ve been good at is being able to build a business and always morphing, reinventing and creating. We manage over $4 billion of capital and we have every piece of the business in-house. It took a long time to find the right formula. The big change has been the caliber of borrowers we deal with every day. You see us doing $300 million deals and you see us doing $10 million deals. From a company standpoint, we still have that entrepreneurial culture, but we also have the institutional infrastructure now that we didn’t have as we were growing the company. That evolved over time. 

 How has the alternative lending universe changed? 

It’s grown. When we used to pitch investors back in 2008 it was very hard to convince the institutional world why they should be investing in a debt fund. Another element is that today’s debt has different shades and flavors. In 2008 and 2009 it was, “Oh, you’re a debt fund.” No one understood the nuances between a L+325 business versus a special-situation business. We’re one of the few that have been around pre-crisis and post-crisis. The debt fund business has become more of a commodity business today—not our business [at MRC]—but how many debt funds are there out there who do the exact same thing? If you look at the yields in the value-add business, the money being made there isn’t what it was. It’s probably one of the reasons that you saw Mesa West sell the business and I think you’ll see more consolidation. And at some point there will probably be a shakeout in that part of the business. 

 Something’s gotta give? 

Right. I’m not saying alternative lending will change. But it’s very easy to make loans in a good market where values are going up and get taken out. The market at some point has to differentiate [lenders] with a track record. It’s not always about being the cheapest source of capital, it’s about being a solution provider. 

 That approach is appreciated in the value-add space, I imagine.

Yes. In any value-add acquisition there are always things that change. When you have a bad lender in the best real estate deal that can screw the deal up. Typically a lender outsources servicing and the servicer pulls out loan docs and says, “It says this.” That’s not someone who understands the business. We still have a two-man investment committee; myself and Brian [Shatz]. We’re a very flat organization from that standpoint and people like coming in here and knowing they can close a $300 million deal or a $20 million deal, and have certainty and flexibility. 

What was your biggest takeaway from the crisis?

We’ve always been very asset-focused so we didn’t get enamored by sponsors. A lot of lenders lost a lot of money because they over-lent to big sponsors. Now, if we’ve done business with a sponsor I’m not going to tell you that we don’t give them more credit. But especially in times like these when things can get a bit frothy lenders can get over their skis [in terms of leverage]. We were never one to lever our position too much, and in the downturn we levered 1:1. If you look at most lenders today at that time they were levering 4:1 or so. 

We also learned to stay away from tertiary markets, because when things change they become very illiquid. If I’m making a loan there has to be someone else there to buy it. Lessons were learned in taking over properties through the downturn. Someone once said to me, “It’s like you’re selling ice cream and everyone around you is lactose intolerant.” That resonated with me because there were times that we had positions in tertiary markets and just couldn’t get rid of them. 

You said you aren’t enamored by sponsors. Many lenders are extremely sponsor-driven. 

Everyone is so sponsor-driven, right? There are people that we’re willing to take more risk with because we understand the real estate. But when we make a loan we’re looking to get paid back, and I want to make that clear. I don’t want to own anything through this, and people who really know us, know that. You do have some bad apples and there’s nothing you can do about that. If anything we’ve tried to be very fair to give people the proper time to get out of situation, and then if they can’t we’re a fiduciary and you gotta do what you gotta do. But we haven’t taken over a single deal through foreclosure in a loan we’ve originated since 2009. Loans that we’ve purchased is a different story because we buy a loan and often have to modify it. 

 What was the toughest period in your business? 

Probably 2009 to 2011. At the time we were raising our first [private equity] fund but we had to recreate our investor base because the investor base from our previous fund—which was an open-ended fund with a hedge-fund kind of structure and lots of asset-based lending fund of funds as investors—was gone. Our initial fund was one of the best performers but some of our fund of funds investors lost a lot of money in other investment themes and they had obligations to their investors. We had to recreate our investor base with long-term private equity capital.

 What was that process like? 

Impossible. I was on the road constantly. The investor base for true private equity funds that we wanted to raise was pension funds, endowments, the sovereign wealth funds. We had a track record but it wasn’t a Blackstone-type record and it was post [Bernard] Madoff [and his Ponzi scheme]. So everyone was skeptical of anyone raising funds.  

How did you convince people to invest? 

We just kept doing deals. We were buying loans throughout New York with a hedge fund who gave us a significant amount of capital and we purchased $200 million in debt in 2010 and 2011. That was important as it gave me something to talk about to these big institutional investors; it kept us relevant. 

We were going to some of the biggest pension firms in the country and there were some that [our strategy] really resonated with. Adam [Tantleff] worked tirelessly on the fundraising side, I was on the deal side and Brian [Shatz] was keeping it all together. Finally in 2012 we closed Fund 2, which was a $350 million fund. We got to the full $350 million and did $1.4 billion of deals through it because we could recycle capital. Then we did Fund 3, which was $695 million of equity.

What do you see causing some cracks in the alternative lending space?

I think the cracks will come from leverage. Firms today are more levered than they’ve been in recent years. Some of that is driven by the collateralized loan obligation [CLO] market.  People are backing up the truck with warehouse lines because they can offload loans into a CLO. Then, as rates have gone up lenders are trying to maintain the same actual rate and spreads have come in. What was L+425 a year ago for the same deal is now L+275, and who’s taking the brunt of that? 

 The lender. 

Right. They’re working on thinner and thinner margins. So I think that at times like these when things are a little flatter is when things come home to roost. It’s very hard to lend in the alternative lending world knowing that people aren’t hitting business plans. I’m seeing it. Some of that may be due to a leasing market that’s not robust, but that’s going to force things to happen. 

 Which markets are looking healthier than others? 

Other parts of the country feel more robust than New York. The West Coast is very hot right now. 

Is that why you opened an L.A. office? 

There was a real void in terms of the financing opportunities there. And offering the speed, flexibility and things that we do here [in New York] is a huge opportunity for us. There are a couple of very large deals that I’ve signed up there.

 What comprises the bulk of MRC’s activity right now?

We’re a special situation lender and investor and there’s a special situation at all times. Right now you’ll see us addressing those needs in some of the condo inventory loans and construction loans we’re doing. We’re also doing some note financing for the acquisition of non-performing notes. One of the outgrowths of the alternative lending business is that a lot of those lenders don’t have the appetite for holding nonperforming loans. 

You recently invested $90 million in JDS Development Group’s condo project at 111 West 57th Street. Why was it a fit?

We like projects that are far along. More conventional lenders don’t like going into projects that are mid-construction and we were able to address a capital need on a deal that was 60 stories up. As a developer and owner we’re able to understand the project from both the development side and legal side and that’s what’s needed to be able to put together the above-market returns.

What’s your take on the luxury condo market?

I wouldn’t say I’m bullish but I am of the belief that in the next two to three years the existing inventory will be gone. Well-located, well-conceived projects are selling. They may not be selling for what the developer originally thought, but if you adjust pricing by 10 percent they’re selling. 

Can you talk us through the $167 million Madison Square Park Tower loan you made to Bruce Eichner in June? 

We had been in [discussions] for eight or nine months trying to make a deal and finally there was a settlement agreement with [equity partners] Fortress and Dune Real Estate Partners. We were able to react quickly and close within 30 days. At that point the deal was that much better than when we looked at it nine months prior because [Eichner had] finished all the amenities and closed on $400 million in contracts. Bruce had became a little more reasonable with pricing. What was $20 million pricing was now $16 [million] to $18 million and that difference is what pushed through contracts. The market is there—it’s not like 2008 when there was no bid—but it takes longer to sell. 

You’ve made some substantial construction loans recently, including a $297 million loan to Fortis Property Group for its River Park mixed-use project in Brooklyn. What do you like about the space?

We really understand it and there’s still a void in the market relative to the demand. We can come up with the whole loan to a developer and that doesn’t exist from traditional banks today. Brokers often pitch two capital sources together as the cheapest cost of capital but a sophisticated owner—and I as a developer—will pay slightly more to know that I have one counterparty to deal with. 

Your residential project at 69-02 Queens Boulevard was rejected by the community board last month. What’s happening there? 

I can’t talk specifics about it, but community board review is one step in the [Uniform Land Use Review Procedure] process, and we’re still very excited about the project. One of the things about Queens in general is there has really been a lack of affordable housing. We’re trying to deliver affordable units and City Planning certified the project and City Council will determine the outcome. I believe that they think it’s a valuable project as well. 

 What keeps you up at night?

The unknown. You’re starting to really feel the rate creep more than you did six to nine months ago, because as those floating-rate loans creep up, you’re writing bigger checks at a time where things are getting harder from a business plan standpoint and leasing perspective. On a positive note, I don’t think there’s overcapacity. There’s a little more condo product but it’s clearing out and the retail market is close to bottoming out but there are still bids. I’ll give you an example: I know the Chabad community and a couple of years ago a rabbi said he wanted to start a program for special-needs kids. For two years I was on the hunt looking for retail condos for him and every deal would fall apart. Two weeks ago we found an amazing deal on a retail condo unit on 14th Street between [Avenue of the Americas] and Seventh Avenue. I’m going to name it after my uncle [Solomon Watchman]. He was born blind and passed away a number of years ago. The point is that retail opportunity didn’t exist a couple of years ago and it’s a function of what today’s retail market looks like.

20180620 co josh zegen 116 MRCs Josh Zegen Talks Entrepreneurship and 14 Years of Alternative Lending
Josh Zegen .