Bruce Stachenfeld, Chairman at Duval & Stachenfeld LLP, joined the Real Estate Daily Beat for a wide-ranging interview. We discussed the unprecedented liquidity in the markets, C-PACE financing, Opportunity Zones, and other interesting topics.
Daily Beat: Can you please give our readers some background on Duval & Stachenfeld?
Bruce Stachenfeld: Patrick Duval, Terri Adler, and I started the law firm in 1997. We have grown tremendously and have evolved into what we call “The Pure Play in Real Estate Law.”
The firm blossomed into a major real estate player during the Global Financial Crisis of 2008/2009. A few years later, we decided to focus our full attention on this niche, which turned out to be a very powerful growth engine and a great decision for us.
We know the industry, the players, and the game. What that means is that we provide our clients whatever they want within the sphere of real estate. This includes buying and selling; lending and borrowing; ground-up development; and leasing from both the landlord and tenant perspective.
Our crown jewel practice is our Joint Ventures / Corporate Real Estate group. This includes platform investments, programmatic arrangements, fund formation, and everything that corporate deals and joint ventures require. That’s really the heart and soul of the firm on a practice side.
Daily Beat: What’s the primary role of a real estate attorney?
Bruce Stachenfeld: We realized years ago that our clients seemed to think of lawyers as a group of parties and commodities. Once there’s an understanding for a transaction, lawyers do good work and there isn’t that much differentiation.
Ultimately, what we’ve realized is that our clients want lawyers to do more. Our entire business model is six words: help our clients grow their business. That’s been a truly magic formula.
There are many law firms who do competent work, but we are the only ones that help with their business strategy, marketing plans, and competitive advantages. Where do they get their money? Where do they get their deals? Where do they get their ideas? What kind of strategic relationships do they have? What problems can we help them solve?
Daily Beat: So that’s how you differentiate yourselves from other firms?
Yes. There are two elements to how we assist our clients, in addition to the legal work: The first is simply connecting clients with money. Several billions dollars of deals have been generated principal-to-principal where one of our clients has a transaction and another has equity to place. We don’t take a cut.
The second half is intellectual capital, which is something that I personally spearhead. I’m a real estate junkie for the lack of a better metaphor. I spend my days, nights, and weekends thinking about real estate. It’s my job, passion, hobby, and life all combined.
I try to meet everybody that I can. I’ll meet two guys in a garage with an idea and no money. I’ll meet Blackstone and everyone in between. This allows us to gain a fresh perspective and come up with ideas for clients on whatever level they may be at and help them grow.
Daily Beat: What do you think is the most common trait that successful real estate investors on the equity side share?
Bruce Stachenfeld: I think it comes down to avoid trying to time the market. Many people often speculate as to what inning of the real estate cycle we’re in, but I think it’s impossible to really know. Nobody could have predicted the pandemic or the Great Financial Crisis.
The best investors simply look for real estate deals that meet their underwriting criteria. Sometimes they’ll find many of these deals and there will be tailwinds, while other times the market slams them in the face. The best investors know what they can control and that’s underwriting and how to properly execute on transactions.
Investors that get bogged down with macro-economic predictions are the ones that don’t experience sustained success. The smart money focuses on the deal in front of them and runs a rigorous diligence and underwriting process.
Daily Beat: Can you please comment on the unprecedented liquidity in the real estate markets?
Bruce Stachenfeld: Real Estate essentially became a separate asset class around six years ago. Wealth advisors used to only say there was bonds, stocks, and alternatives, but they’ve now added real estate. I think this is behind the tidal wave of capital that goes towards the real estate industry.
The poster child to that is Blackstone’s BREIT, which is raising more than $1 billion a month now. As older Americans look at portfolio construction and diversification, they see value in the security of real estate cash flow without much risk. The biggest trend that we’re seeing is sponsors are now looking for parties that have permanent capital.
When it comes to private equity capital – they are looking to achieve a 15% return – it has become more challenging with so much capital flooding the industry. The best firms are able to identify undervalued assets and find ways to grow them, while the others don’t end up doing as well in this type of environment.
Daily Beat: What are your thoughts on the gap between net asset value and market caps of the top office REITs?
Bruce Stachenfeld: I believe that the markets are irrationally undervaluing the stock of these REITs in the short-run because of a perception that employees will not return to offices in New York City. I personally don’t agree with that.
Warren Buffet says, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” SL Green is selling many assets for this very reason because they are buying back shares at a lower price.
I penned a recent article in Real Estate Philosopher explaining why I believe REITs are a fantastic investment right now. The main thesis is that people will ultimately return to the office and the market will realize that these are undervalued.
Daily Beat: What are your thoughts on C-PACE financing?
Bruce Stachenfeld: We’ve been big promulgators of C-PACE financing for around five years, but everyone is really taking notice of it now. With New York adopting it, we are seeing it become more mainstream.
In a nutshell, if a developer or property owner can use PACE financing to replace expensive mezz, preferred equity, or common equity financing, it’s a wonderful new option. On the other hand, if the first mortgage lender refuses to allow the Pace to be ahead, it just doesn’t work.
When you take a big step back, developers are always looking for more leverage and PACE financing is a form of leverage. The whole game is convincing the first mortgagee to allow the PACE loan, which primes it, to be ahead of it. Gradually lenders are grudgingly going along with it based on just market forces.
Once lenders started to concede to being primed, it served as an economic competitive force. My prediction is that PACE is gonna continue to grow exponentially. There’s the ESG part of it too.
Daily Beat: What are your thoughts on the politics surrounding the Opportunity Zone program?
Bruce Stachenfeld: When it started out, it was a very simple bi-partisan program designed to benefit everyone. The idea was to incentivize wealthy people to invest in areas that would help the poor succeed.
Since the legislation passed in 2017, there’s been some criticism that the least poor areas are attracting the most investments, which is intuitive because investors want the highest returns. I don’t envision the government improving the program because I think that would face political headwinds. The greater concern is that the government makes it restrictive to the point that people don’t want to invest
Daily Beat: With advancements in technology, how has the role of a real estate attorney changed since 1997?
Bruce Stachenfeld: The efficiency with which a lawyer can do work versus when I started in the industry is dramatic. Correcting a typo used to be a very tedious exercise!
The interesting thing is that what hasn’t changed is the words on the page. When a client is doing an acquisition, there’s still a purchase and sale agreement that has to be negotiated. The same issues on leases regarding tenants, rents, representations and warranties still exist. Loan documents are definitely longer, but they’re still loan documents that people argue over. If there’s a joint venture, the parties have to negotiate the agreement.
Interestingly enough, the intellectual side has gotten more sophisticated, but it’s still the same basic process. Technology simply speeds it along.
Daily Beat: With so many New York investors buying deals in Florida or Texas yet, have you seen any hard contracts being used in those markets yet?
Bruce Stachenfeld: In New York, typically there’s so much feeding frenzy demand for the asset that the seller is able to require a non-refundable deposit. The truth is that games are played on both sides because buyers will often wait 30 days to sign the contract, but the reality is that the seller could shop it.
I personally have not seen hard contracts out of state yet, but it would be the sellers that would start demanding this and they aren’t New Yorkers yet. The buyers won’t impose this on themselves unnecessarily!
Daily Beat: Thanks, Bruce. I really enjoyed our conversation.
Bruce Stachenfeld: Thanks for having me, Joe. Congratulations on the success of the Daily Beat. I don’t think I’ve missed an edition since you started it!
*The interview has been edited and condensed for clarity.