Seth Weissman, Founder & President of Urban Standard Capital (USC), joined our institutional publication for an interview. We spoke about the alternative lending space, the harsh reality of the New York City condo market, and his entrepreneurial journey.
Daily Beat: Can you please share your background with our readers?
Seth Weissman: I started my career as an analyst at Goldman Sachs and then joined Perry Capital in their real estate private equity group. During my time there, I focused on multi-family and hospitality investing, in addition to bridge lending.
Perry Capital was strictly a capital provider and was not involved in operations and development. I was very much drawn to what our sponsors were coming to the table with in terms of identifying a business plan and executing on it.
I always wanted to do something entrepreneurial, so I put together a list of every person I knew that could write a $25,000 or $50,000 check and did a syndication. We were focused on a value-add strategy and acquiring well located properties. One area we honed in on was West Chelsea, which was still before the High Line opened.
I was fortunate to have success in those initial investments and was able to raise a small fund of over $10 million. We then bought another 10 buildings. I subsequently raised another $30 million.
Daily Beat: And this was all on the equity side?
Seth Weissman: Yes. In 2015-2016, it became harder to find equity investments that were compelling. One of the ways we like to think about both equity and debt deals is through the lens of assessing probability of different outcomes. We utilize scenario analysis to analyze risk adjusted returns.
From 2008 to 2012, deals made a lot of sense. You could buy a real five cap in Chelsea with upside and take on financing that was accretive to the investment. It started to get to a point where we were seeing fake four caps in Bed-Stuy and Crown Heights.
When someone buys a property at a fake four cap and you start applying real expenses and reserves, you’re drowning out of the gate. That’s not an investment dynamic that I thought was sustainable or something that we wanted to pursue.
Daily Beat: Those are tough deals!
Seth Weissman: We decided to continue pursuing those equity opportunities as they arose, but I felt it was a hard business to scale. The attractive deals are situational – a bankruptcy sale, foreclosure, or a seller who needs to close really quickly. Those are one off opportunities and it’s hard to deploy significant amounts of equity capital with that strategy.
Daily Beat: Got it. So that led you to the lending space?
Seth Weissman: Yes. We realized that we can leverage our experience to generate premium returns for our investors in a post Dodd Frank environment.
We speak the same language as our borrowers, which allows us to be more thoughtful and creative about how to structure deals and help them achieve their business plans. Traditional banks are hamstrung by regulations or if there’s simply an underwriter who doesn’t want to take risk and lose his job. There’s a significant spread between real risk and perceived risk.
Daily Beat: This is the vacuum the alternative lenders have filled.
Seth Weissman: Absolutely. A good example is a bank might flag a potential loan about a sidewalk lien from 1978 or an HPD violation from 1996 that no longer even exists! The banks get really caught up in minute details.As an owner / operator, it’s a challenge to find them to be reliable banking partners.
In the first year, we did around $20 million in loans and then we did $40 million the next year.
Daily Beat: What’s the size of your average loan?
Seth Weissman: We focus on the middle market space and our typical loan is roughly $5 to $10 million. Our volume last year was a little over $200 million and we will do around $300 million this year.
Daily Beat: After you lend, are you in the business of selling tranches of the debt?
Seth Weissman: We maintain our loans pretty much universally on our books and service all of them. The reason we operate this way is because the borrower relationship is very important to us. If there are any modifications or changes that need to be made in the business plan, it’s important that we have that direct relationship with that sponsor.
A lot of sponsors get frustrated when they make a loan and their lender is ultimately not who they thought. We are also dealing with transitional, bridge, and construction loans that typically are 18 to 24 months. These are not traditional cash flowing multi-family assets. Our sponsors are using the financing to get there.
Everyone has their pro forma in their Excel, but I can guarantee that the actual results are not going to match the Excel results.
Daily Beat: How aggressive is USC in leveraging your book?
Seth Weissman: We have internal guidelines to set leverage rates that are based on the underlying product type. If it’s a ground up construction project, we will take lower leverage than if it’s a partially cash flowing building.
Generally, we target one-to-one leverage on a blended basis. We don’t chase yield by maximizing leverage because this can lead to a lot of trouble. Some alternative lenders might have a 75% leverage across their book, but we’re much more conservative on that number.
We look at it based on the underlying asset profile, so that as a portfolio we are balanced. Any individual loan is a small percent and typically will not exceed 5% of our overall loan book.
Daily Beat: Where are you doing most of your business?
Seth Weissman: We lend in New Jersey, New York, Connecticut,, Pennsylvania,, Texas, and Florida, but roughly 50% to 60% of our book is in the Tri-State area.
For a New York City focused lender, we are mindful of the geographic risk and concentration. We mitigate that by knowing these markets inside and out. Some of our peers have gone into new markets for the sake of diversification. USC would rather be concentrated in a market that we know very well.
Daily Beat: Insofar as fundraising is concerned, do you maintain an open-ended fund or is it closed?
Seth Weissman: We have different buckets of capital. The first is core plus capital for lower risk, lower yielding projects that have no leverage – that’s open ended.
The second is a closed-end, value-add bucket, which is primarily family office, foundations and high net worth individuals. That has a higher yield target, but in our deal origination funnel, we see opportunities for both.
Daily Beat: Our research team noticed that you’re doing a lot of single family housing deals in the Hamptons?
Seth Weissman: I think we’re the largest private spec lender in the Hamptons. That’s a market we have always really liked and have successfully grown our business there. We’ve identified the hundred builders in the Hamptons who own 90% of the new construction and we reach out and build relationships. It’s a lot of breakfast, coffee, lunch, and dinner.
We also do a lot of high-end single family lending in Miami, South Florida, and the Palm Beach market.
Daily Beat: What percentage of your deals would you say are direct versus ones that come through brokerage firms?
Seth Weissman: About 50% to 60% of our deals are direct. It’s a lot of repeat deals. We bet on the horse and the jockey. The jockey’s super important and we spend a lot of time investing in potential relationships.
Daily Beat: These are residential deals when they’re building on spec and there’s no future cash flow, so the localized knowledge is key.
Seth Weissman: Yes, absolutely.
Daily Beat: Thoughts on the condo market in New York City?
Seth Weissman: I have not seen any developer who started a project after 2016 doing well. Very few, if any, are making any money. The recent recovery in the condo markets has minimized the pain, but we’ve consistently seen either complete equity wipeouts or significant impairments. The winners who are breaking even are getting back 50 to 75 cents on the dollar. Everyone’s project took longer and cost more to build.
Development projects are a speculative and cyclical business. If you get caught on something that typically takes you three to four years to build and it gets delayed a year or two on top of that because of a global pandemic, it’s hard to figure out a path to profitability within that formula. That’s before layering on inflation and supply chain issues.
Many condo projects that appear to be successful in the headlines are blood baths behind the scenes. Some are hitting sales numbers way above what their schedule A, but the cost of construction was double and it took them twice as long as anticipated, so they’re still losing money.
Daily Beat: This coupled with the political environment has probably pushed some of the developers to other markets.
Seth Weissman: Agreed. There’s a frustration with the cost of doing business in New York City and all of the administrative bureaucracy. Being a developer in New York is waking up and getting punched in the face every day. There’s a general fatigue for that.
Daily Beat: What are the average rates you’re seeing on condo inventory loans?
Seth Weissman: The market is pretty tight. I would say it’s between low sixes up to 9.5%. You don’t really see north of that range unless there’s a significant underlying problem tied to the proceeds.
If you’re lending $1,600 to $1,700 a foot on a development that’s selling for $2,000 per SF, that’s obviously a very high loan-to-value; however, most condo inventory loans range from $1,000 to $1,200 a foot in Manhattan.
Daily Beat: When underwriting a luxury condo deal, how much have hard costs gone up on per SF basis?
Seth Weissman: Hard costs are going to be $600 to $700 a foot. Most developers are trying to hit a 2x multiple in three to four years, so if you are projecting to sell for a blended $2,000 a foot, you can’t pay more than $200 to $300 for the land.
Daily Beat: The 570 Washington deal is a good example of how the land market is still very strong. How would you compare the total development costs to before the pandemic?
Seth Weissman: Prior to COVID, the total development cost would be roughly $1,500 to $1,600 per SF and the blended sellout would be $2,200 to $2,300. Now, the blended sellout might have stayed the same, but the cost basis has crept up to $2,000. If you’re selling at $2,300 per SF, less commissions, transfer taxes, you’re right at that break even number.
Daily Beat: When we talk to developers and ask about construction costs and they say that everything’s locked in at predetermined rates, it’s hard for me to believe that the costs actually stay the same.
Seth Weissman. You are correct. It only works to the extent that your counterparty has the credit and financials to support it. On the equity side of our business, we had a small project where we could have held them legally to that number, but we would’ve put our subcontractor out of business and then who really cares what the contract says. Developers are coming back to the table and recutting it.
Daily Beat: In a hot market, the lending space clearly affords great opportunity.
Seth Weissman: Yes. It’s clearly been the right decision to really be focused on the lending side because alternative lenders make money on those condo projects and the equity does not.
There is an attractiveness to investing on the equity side of development, but there’s not enough attention paid to the downside risk.
Daily Beat: The same thing is true with hotels.
Seth Weissman: Yes. Restaurants and theaters too.
*The interview has been edited and condensed for clarity.