Episode Transcript:  

 A lot of investors get into investments. Without digging into enough details about how the financing is structured. Today, we are going to bring on an expert lender to help you understand what to keep an eye on and how it can impact your bottom line. Let's get ready to scale.

Hey guys. My name is Jeanette Friedrich, director of Investor Relations here at Blue Lake Capital. Joining me today is Sean Kelly Rand. He is the managing partner at RD Advisors. Which is a real estate investment firm focused on financing in select urban markets, including Boston and New York. Prior to that, he was the director at HQ Capital, a multifamily investment firm, and then before that he was actually the senior VP at Monday Properties as well as a previous director at Madison International Realty and more, most.

Interestingly enough, he actually began his career in global real estate at the Lehman Brothers. He has an MBA in finance and real estate from Columbia, as well as a bachelor's in economics and business from Boston University, and he's joining us today from his New York office. So Sean, welcome to the show.

Thank you. Thank you for having me on. 

Yeah, absolutely. Now, I gotta dig in when I see Lehman Brothers, as would anybody, we all wanna hear the story, so I'm definitely curious to know when you're looking at today's markets, especially credit and investor behavior, are there any patterns that feel familiar?

Are there any signs that you've learned to watch more closely for this time around? That's an. Sane way to break in your career right off the gate. 

And by the way, to start out, how did I get involved in real estate? So I grew up in the hood and my dad was a carpenter, and my mom ended up selling Fannie Mae foreclosures as a real estate agent, which was in the nineties in Boston.

So for me, my first crisis was kinda my mom as a real estate broker selling Fannie Mae foreclosures, and I was the tall. Skinny kid, crawling through basement windows to unlock vacant buildings, the front doors. And so that was my start into real estate, was in the middle of a real estate crisis.

And my dad was an arc, then became from a carpenter and architect. And he was laid off every, every time there was a recession. And he always said he was the leading indicator of a recession coming because you lay off architects 'cause you don't need the design 'cause you're not gonna do any projects.

And so when I joined Lehman coming out of, business school in oh six, so I'd done my summer internship there. I, just to give you an idea where my head was, I bought my first multifamily property outta college. I sold it in oh six, and I sold it by telling the real estate broker. And if anybody knows, filing's, basement filing's, basement pricing.

If you don't have an offer, drop the price, five to 10% every single week till we have an offer. But that was my view in oh six of where our market was. And so I was at Lehman, sitting there doing deals, but we're, and I was in the London office, so a little bit distance from the New York office, from the epicenter of it, but very much involved.

It was across, it was a global team. I dealt with US transactions, European transactions, and, it was a very interesting time because it gets, you know what people don't. Think about going into a crisis is that it gets white hot before it flames out. 

And that's what we saw, right? So if you go back, and one of the most interesting things for people to do is everybody now looks in the rear view mirror.

Mirror and says, oh, it started in oh six and oh seven, and all the warning signs were there. Yeah. But if you went out there Bernanke was on there saying housing prices have never fallen across the nation. If that did, it would be a Cata catastrophe, but it's never happened. It's I don't know.

And I think a lot of people were saying in the news and everywhere else, Nope. Can't happen here, right? No, of course, this time or just like you hear today. No, this time around is different. The banks are structured different. The economy is different. It's more diversified. We're more sophisticated. Our economy doesn't go through cycles and crisis like that.

No, we're too interconnected. And you heard all the reasons on why it couldn't happen. And so that sounds very familiar, right? And I'm like the, I'm an economist at heart and that was, my master's in was in economics before I got my MBA and it was always you're predicting like the Economist magazine, nine out of every, one recession, we've always, I've always thought a recession was coming well before it's coming, right? Like you're looking at the indicators. And so then it was looking at the indicators, what was happening in the housing market, looking at affordability, looking at prices, and saying, wait a second, does this make sense?

How does this make sense? How does this make sense that it's going up this high? How does it make sense that people are paying these yields with this financing cost? And it's only, and then when you start having to do deals where everybody's forecasting growth because there has been growth and I love it.

Somebody now is looking at a deal and they said, Hey, listen. My growth next year is going to be this. Why? Because my growth was, that was last two years with growth. This, I said that maybe that indicates that there's less growth available. That's the other way to look at it, right?

And I've always taken a conservative view, which is probably why I spend more time being a lender than an equity investor. At that time it was crazy. It got white hot. One of the most interesting things that you can do as a real estate investor is to go back and put yourself in the mindset.

At that time, go look up Wall Street, and I did this a while back. I post fairly frequently on, on topics and I wanted to get myself in the mindset of oh seven and oh eight, because I wanted, make sure I wasn't remembering it in hindsight without really looking at the facts and the news you were seeing every day.



And I 

looked up articles that were written on real estate. From oh seven to oh eight, and I just read through for hours, read through articles that were appearing in newspapers and everything was Hey, we've got some issues over here, but everything's fine. Like we're all okay.

And you saw even articles in the New York Times about individuals queuing at open houses in 2008. To get into open houses. So you think about it. Yeah. Like most of us considered that the crisis was already well known in 2008 and you had quotes from people that were queuing for open houses in 2008 saying, oh, but if I don't buy now, I'm never gonna get in because prices have been going like this.

And 

then boom, look what happened later in the year. So it's the January articles are the most, January, 2008 articles are the most interesting articles you'll find out there if you find a set. And I think that's interesting exercise for anybody that invests in real estate and under thinks that they understand the cycle and they're gonna spot it.

And it's why did we set up RD advisors and why are we on the lending side of the business? It's that component of the experience is we said, look, we think we're pretty good. At underwriting investments, we're probably not good at judging when the cycle is right? So if you ask me when the cycle would've turn in 2017, when we set up the business, we're like, ah, we're 10 years out of the last cycle.

We're probably 10 years like it's gonna happen fairly soon that we're gonna head into January recession. Better get defensive, better get on the senior debt side, right? So we're on the senior debt. We only do senior debt in our fund, and we're in a single market that is judicial foreclosures, and we try to keep the LTVs fairly low.

So we like to have 30 to 35% equity cushion in front of us on the valuations that we expect. If it's a construction project on the backend or on a, true bridge on the, again, on the backend. 



That's the way we've been thinking about it. But yeah, going through Leman was a bit nuts.

So what similarities did you see then that you think we are seeing now? 

It's always I think there's a lot of liquidity in the market, right? I think people underestimate. The, you hear a lot of people talk about how much equity there and values, they're in the market. Hey, there's tons of value there, right?

Valuations, leverage. I think you're always looking at the last crisis. And saying, but in the last crisis, this was the problem. And in this crisis we don't have that problem, right? And I think people are forgetting that the crisis from last cycle isn't necessarily the crisis, this cycle, right? And if you look at leading indicators, right?

So if I look at leading indicators that would indicate that things are not all well, right? I think the market has a bifurcation, right? And if you look at credit card and auto data, so I tend to look at a lot of the credit data. Delinquencies are spiking. 

Student 

housing is another place, I'm sorry, not student housing.

Student loans, right? So if you look at those on the margins and you dig down, you say, oh, mortgage delinquencies are fine. You they're not rising that much. Yes. But when you dive into the FHA mortgages, right? When you dive into the higher leverage mortgages, you start to see cracks and you start to go, wait a second.

When you drive, when you drill down and you say what are the ones that are like, the canary and the coal mine? 

Like 

those places in the market don't feel as healthy. And then when you look at things, we've heard it, and I think, you've heard on this where people are, they have memes about it, but it's what is it the taco securitizations or the burrito securitizations for Klarna.

It's ah are we really, are we really running out of product? And so we're starting to package together things that maybe shouldn't go and, buy now, pay later, packaged in securitizations. I don't know if that's a great thing, right? And maybe that's a small segment of the market, but what it indicates to me is that there's so much liquidity in the market.

To, to, for the markets to absorb that there's a lot of money going to things that they don't really understand and and maybe they understand it better than I do. And I'm wrong on this, but it just seems I don't know if that's where I'd put my capital. It doesn't seem like that's a bad instrument.

And then when you look at the pricing out there, so those are things, I think affordability is a big issue. And one of the things I look at is you go, if, how's it a house sold for, was one price in 2020 and mortgage rates have risen, I dunno, it's 50% and the house still sales for the same price.

You're like in theory, right? If you if you said, Hey, mortgage rates are now permanently, 7% right, or 6% right? And they're not going down then to, to meet the market on the same person buying the same house you can afford 40% less. So in theory, if the rates had risen 7%. Then houses should fall 40%.

But they haven't. They've actually increased. In Boston, I find the craziest thing. Looking at Boston housing prices going, mortgage went up, and prices went up. 

What? 

And it's everybody's locked in. You have this lock in effect. 

Speaking of two, I wanted to dip my toe in the water about the Boston market.

You pointed out that basically the greater Boston area is short by around 150,000 units, and that new construction is basically slowing down very fast. So with that kind of imbalance, what are you seeing as the strongest risk adjusted returns out there? Is it traditional value add? Multi-family deals are those still the go-to or is it more conversions starting to pick up like office to residential?

I don't know. We don't yet know this is a reality on the office to residential. There's a lot of interest.



There's also a lot of subsidies, right? Boston is a funny market. It's very hard to build. The reason people aren't building isn't because there's no demand. It's because and Boston, it's the greater Boston market.

Anybody's from there, it's different than a normal city, right? Greater city of Boston, when you talk about like the mayor of Boston, there's only 800,000 inhabitants of the city of Boston, whereas like the greater Boston area is 5 million people. It's a hundred different towns, and so a hundred different towns with a hundred different rules on zoning.

And permitting and a hundred different views. So Cambridge is going full on to build housing. Everett is building housing. City of Boston is going, you can build housing. We want you to build housing, but every time you build something, you gotta add 20% affordability. And you go, wait a second. So for every, five units I build, one of those units has to be a loss making unit.

That's 20%. If your builder margin is about 20%. On your typical project, it means there's no profit to build. Yeah. So why aren't we building housing? Because I've gotta take a loss in every unit I, on, essentially every unit I build or every property, it doesn't make any sense. And so until they get rid of those rules now in the suburbs, they've got rid of those and development is happening.

But it's still a very long pro process. And the zoning for the city is set up such that. It's very hard to tear down a single family home and a large lot and build a multi, it's just not set up that way. There's a long bureaucratic process and it's just means that you don't get a lot and there's a lot of nimbyism and everybody goes, we want more housing, but next to you, not next to me.

And so when you have everybody going like this, it's not getting billed. And you go what are you gonna do? Are you gonna invest in new development? It's very hard to build, very expensive to build. It is, I think if you have a great site and it's already permitted, maybe there's some value to build there, right?

It's but a lot of, what people are doing and yields are relatively low in the greater Boston market, right? So if you want to buy core Class A I think people today are expecting still, they're still selling in the. Five caps.

And 

I go five cap when rates. Maybe you're borrowing Fannie Freddie at five and a quarter, like maybe less.

I don't know, maybe there's something out there, but I'm like, ah, it's counting on a lot of rent growth and I don't know if that rent growth is happening, right? Like people are at the max. And so then you go, what are the real opportunities? Like where do I see the opportunities? I think the opportunities in the greater Boston market in specific.

Are going to be the recapitalizations, and I think you're hearing it in the news. There's this wall of maturities. 

Yep. 

And that's and I'm starting to see it in the Boston market. So before there were no multi-families on the market and now you're and the small balance stuff, even the larger ones, I think the larger ones, they're still core fund capital for.

So if somebody has. A 300 unit project, some core fund is snapping that up at a five cap, right? It's class a core fund, and they have tons of capital that's flowing in from people's brokerages accounts or wherever it's flowing into. And they're not IRR focused, right? They're comparing it to a money market.

But that stuff where, the buyers, you and I, personally buying those type of things, projects. You know that those kind of three unit to 20 unit projects are starting to sit on the market a little bit longer. There's more and more borrowers there, and I don't think it's the same as it would be in markets outside of that the Northeast, right?

We still have a fairly solid, stable rental market. There's no oversupply. 



But if you were at a two and a half percent loan and it was five years and you did it in 2020 or 2021, guess what? It's in default. And if you go speak to Fannie Mae, Freddie Mac, servicers for small balance loans, they will tell you.

At a, seven cap there's not, the, at a 7% yield or even a five refinancing, all these things are in default. And that's, and so then where's the opportunity? The opportunity is, and this is, or the flip side, is somebody has longer term debt and they're at a two and a half percent rate, and it's for longer.

But they can't get out of it. They're now at a 50. They did it at 70% leverage. Values have gone up. Now they're at a sub 50% rate. 

Where's 

the opportunity? The opportunities and recapitalizations? And we're actually, and why do I know this? Because we spend a lot of time researching it because we're a lender, typically on the senior side.

But 

what we're seeing is more and more requests. And we said, wait a second, we've had a bunch of these command. We said, we don't have a fund. We only do senior debt, but you get enough requests for Recapitalizations with Mez and preferred equity, and you're like if I did something like that, give 'em.

Our senior is priced at 12. Then our, my Mez is at 18 and nobody blinks. You're starting to think, 



Maybe we should raise a fund for that. So we just launched an open, a a small Mez and preferred equity fund just in case those opportunities keep popping up. But we think that's where, from the equity side, it's gonna be those recapitalizations or potentially when they go through foreclosure, I think, there's gonna be some groups that are buying up some of these smaller deals around the country and package them up.

'cause they're gonna get a discounted basis from where they, they otherwise would've traded. 

Yeah, absolutely. Interesting. And since we, focused on Boston, I wanna shift over to New York because I can't recall his name, it's this young up and coming political mover and shaker that yeah.

Big socialist agenda, is at least what they're portraying it as in the media. Do you recall his name by. 

Dhani Dhani? Am I saying it right? I think, I don't know. Maybe not. Yeah. Hopefully 

everyone's following what we're talking about because what I'm curious to know is, as a lender in New York, how, but we're not, how we 

have done, so let me be clear.

We have done one, or, and this is, we've done a few loans in New York. 



Our home market is the greater Boston area. We have an office in New York, but their office in New York is, we're a partnership between myself and a family office. And the family office sits in, in New York. Ah, for the moment. They're certainly thinking about like where all these political things that are going on 



And taxes and all those sort of other elements. But, so we've typically, our focus, 90% of our business is in the greater Boston area. Kind of New England. 

Yeah. At school 

in Connecticut.

And the reason is just as you allude to, 



Judicial markets. So New York you have to go through if you want to foreclose, you talk about being a lender on it, it could be a three year process to foreclose. You can do a UCC and it's faster, but then if there's other liens behind you, it's a mess.

Raider Boston, it's a non-judicial market, and this is anybody who's looking at, partnering up or doing lending. One of the most important factors is within the state and Texas. Non-judicial market, right? So you can start a foreclosure and it's 30, 60 day process to, to get to an auction Boston, 30 60 days to get to an auction.

New York, three years 

in New 

York, right? It's not, yeah. And then you go and you look, New York is complicated. There's, do I want to deal with rent stabilized? Do I wanna, do I, no. I just. And it's so much capital here. It's great to come to New York, raise money, finance, find financing partners joint venture partners.

The capital market flows in New York are second to none. No. Nowhere I've found better in the world. Even London, right? Doesn't compare to New York. Do I want to? But because of that, there's so much capital here. Even though it's not the best place to lend. And so that's why kinda like Boston, it's like smaller, little bit slower local, have a mode around the market.

And if you're, we built an operating platform. It's very, we've been in the market eight years, people. We don't like borrowers. I have a 9 1 7 number, so that's a New York number. Borrowers want to pick up a 6, 1 7 number. They want to know that you are in Boston. And we, we have such a repeat borrow base in Boston.

It is you build a mode around your market, and that's incredibly important, interesting. But that's, but yeah, I'm watching the politics in New York. I'm sitting in New York, I'm speaking to people, and there's certainly an attitude, at least now, we'll see what happens that people are like, I, why would I own here?

And, why would I keep my capital here? Yeah. And do I wanna live in New York City? Maybe I have to, maybe I have to do business in New York City, but maybe I live in New Jersey or Connecticut. 

Maybe I move down to Miami and commute back here and make sure I spend less than, I don't know if it is like 130 days a year in, in Manhattan.

Yeah. Yeah. But like 

The discussion is there, it hasn't happened yet, but I think the discussion is there going I don't know. This is not good. 

Yeah. You answered my question either way, because I was gonna ask, what kind of reservation you would have from a lending perspective, and that answered it plenty.

We were like, we were already 

like like this market is, no we like our like market, non-judicial. 

You have 

barriers to entry. I think it's very, Boston people are like, I don't know how to say it, but it's like a closed market. It feels like people in Boston wanna deal with people from Boston.

Oh yeah. In New 

York. People constantly tell me, Hey, we'd like to partner up with you because we've been trying to get into the Boston market. And we just can't break into it. And I said, yeah, interesting. I like it like that. Yeah. 

Yeah. No, for sure. Now, just for the benefit of our listeners, I wanna pull the lens back a little bit and take a wider angle.

First of all, this is very elementary, but I just wanna make sure that we've got that out there, for everyone that's listening. 'cause it's easy to get on lost in the inside jargon. And leave people out of it. So just very simplistically, can you explain basically what bridge lending is?

Why why this product is utilized by general partners and help investors, especially passive investors, understand that it can be structured in a way that actually. Favors the business plan and their overall returns versus the type of structure that works against them, just so that people really have a clear understanding about it.

Yeah, 

so a couple of things. So you know, what do we do and why do we do it, right? We're a bridge lender. We do construction lending as well. So our typical rates, our typical terms are about, we're lending at about 12% for 12 month terms, and then we have an extension on there for another six months, and that increases by, effectively the interest rate increases by 3% and go.

Why does a borrower wanna borrow that? And so then my loan sizes are anywhere from. 500,000 to about 7 million today. And then what do we do with those loans? And on our side we pack, we're putting, that's in a fund with 60 to a hundred of these loans in at any one time.

Why do we do it as an investor? It's incredibly secure to have, 60 to a hundred senior depositions, all of which have about. 30 to 35% equity cushion on 'em, and they're all in typically individual risk. So the point for our standpoint is it's a capital preservation and a yielding product.

We set up initially because we needed something that was beating where we were with treasuries in terms of returns. And then, but not as volatile as either the public or private equity markets, right? And so this was from my own personal pocket and then also from the family office perspective that we partnered up with so that, so we created for our own capital, investing it.

And then from the borrower standpoint, you go why does a borrower need. A 12% loan. And you go into it and you go yeah, why would I borrow? It's and I constantly go to my borrower and I go why would you borrow from me if you can borrow from the banks at 5%?

Our typical situations are bankable borrowers, so our credit scores are high, six hundreds of our borrowers. So that's the average. Some are even in the seven hundreds. 



The borrowers are using our non-bank lending. I've closed transactions as quick as two days. And so what does it allow our borrowers to do, right?

So one use case is you're going to acquire a transaction and it's a multi-family transaction, and you're looking out there, it's a small balance transaction. You go to the owner and say, Hey, I'd like to buy this and here's my offer at $10 million, but it's subject to bank financing and we're gonna close in the standard 90 days.

Or you go back to them backed by us and say, I'm gonna buy it. For $9 million and I'm closing next week. 



And they go and they look at it and if they're under any pressure at all, they're gonna go and, we're closing next week, we're gonna be at the closing table. This is it. And so all of a sudden then you have a buyer buying it for a million less than what the other be betters were competing with.

It's on market. It's not even an off market transaction. And then they close it with the bridge loan. They're paying us a higher rate, but they might refinance. Typically they think they're gonna refinance in three months. What actually happens is they said while I'm at it, add some construction proceeds to it, I'm gonna rehab a couple of units.



And then 

I'm gonna refinance it at a $12 million valuation. So I'm gonna add some work at it, and that way I can not only take out the debt and all so it's a speed factor that allows deals to get done, right? 

And you 

can even think in a competitive market, you just go with a $10 million bid and somebody else has.

The same bid, and you either get the deal done or you don't, right? And if you're an equity investor, I think you should be shooting for, 20% returns, right? If you can get 12, 10 to, percent in senior debt. Yeah. Then if you're getting that in senior debt, then on your equity side, you should be getting like a heck of a lot more, right?

Because there's more volatility and more risk. And so if somebody's underwriting deals at a 20% return and paying 12% for the debt for a short period of time before they refinance at a 5%, that's why you do a bridge loan. It's speed and execution, getting a deal done and actually capturing a deal that you otherwise.

Wouldn't have earned it 20% on, 

right?

So that's one use case. Another is its construction. On the smaller balance side, it's just difficult dealing with banks. Even, I have bank loans now and like I have to send all of my financials over for a deal that like, I'm like, why do you want every single LLC that has nothing to do this, send it over every single year.

You want my tax returns? This deal's cash flowing. It's you're at 50% LTV and the bank's Nope, I need it for my records. And you're like, Ugh. And so some people just don't wanna deal with the bank. So the transaction is only a 12 month, turnaround. I just say, Ugh, pain. This is just so much simpler and when you do your, banks today, I think we're doing construction lending. We're probably at a 12 banks today in Boston, might be it nine 10. 

And then 

they've got prepayment penalties. And the other thing is you've got a short timeline. I don't have a prepayment penalty, right? If somebody wants to borrow from me, I'm going, you know what?

If you wanna pay me back in one month, pay me back. You go to a bank and they've got a 5, 4, 3, 2, 1, right? So you borrow at seven, you pay back in the first year, you've gotta pay a 5% prepayment penalty after they've just gone through a, I don't know, a 60 day closing process that was. Painful.

And so that's why there's the need for the non-bank lending. It's a much faster, so I'm a real estate owner and developer myself. I get it from the investor side, right?

So 

we understand it. We're single market sharp shooters. We don't need tons and tons of time. And we do parallel processing.

We do the same underwriting a bank does, but I don't know why the bank has to wait for certain components in for them to get the appraisal started. Let's go do it all at once in a short period of time, right? And focus on efficiencies, build the systems out so we can do it. So anyway, so that's why the need from the borrowers there, it's really the need for speed.

And the need for doing stuff that's more creative and less you don't feel like somebody's putting on the rubber gloves when you're getting a loan, right? So we still do a credit check, background check and all those things, but I don't need to see, your 2001 taxes for every single LLC that you have.

It's just, I'm not I, irrelevant, right? To this transaction. 

Yeah. Yeah. And interesting because I'm curious to know, you've gone from, executing multi-billion dollar deals to institutional financing and now you're over here originating deals as low as 500,000. Yeah. So I'm just curious to know how that shift has worked for you from going to Wall Street to basically your.

Your everyday, average person here. Have there been any surprises either like structurally or culturally that you've adjusted, between these two shifts? 

Of course you go from we had Whitehall as a client, Lehman Whitehall, which is Goldman Sachs. Morgan Stanley's fund, Tishman Spire.

And I was interacting Steve Woff. He's a developer that was a client. So you know, you go and you have these big names, sophisticated groups. You have lawyers on both sides. And there's so many advisors that you're quarterbacking everything, but everybody's a professional.



And I think when you go down to the smaller deal size, and we found that we don't really want to go much there. There's a lot, this is why we're lending in Boston and not, we looked at some other markets, but they have a hundred thousand dollars, transactions. I don't wanna do that.

Like it's way too small. But couple things is you have to set up, you go from being a tailor to Zara. You wanna make sure that you have a template and you have a box.

And either 

fits the box or it doesn't, but you can't spend loads of time. Like my docs are non-negotiable. Everybody, we used to spend hours, whatever firm it was, private equity firm going back and forth to docs.



Now 

here's my docs. They're form docs. They have everything. They're, 200 pages we have to close in 10 days. They're non-negotiable. You can read 'em, you can review 'em, your lawyer can look at 'em, you can make sure that there's no mistakes. We can make sure the name's spelled out.

We want to check everything, but there's no negotiation. 



It is what it is. So that's, you have to build a business that can, that scales across doing many transactions, and you have to build it in a way, and then you have to focus. You can't and people think about this, they're going I can't understand why people invest with national lenders that do small scale deals.

I I, there's no way I can understand an underwrite a loan in California when I'm gonna take a week to get to know the California market and study it. No, if you don't, if a deal comes in and day one, you can't analyze it and figure out, 'cause you know the market that well, and you have a team that knows the market that well, don't do the deal.



Whereas when you were doing massive deals, we're in London, but we do a deal in Paris. We're spending, we've got all the sorts of experts, we've got partners on it, we've got a Paris team, we're going down there, we're flying there, we're serving the market. We do it. And maybe we didn't know the Paris market as well as we thought, but now you have to be hyperfocused on doing what you know very well.

And then you have to have the ability to take them over. You have to understand, no, we don't do that very often, but you've gotta understand at that level. And so that's one big difference in it. Another big difference that people don't recognize is when you're doing billion dollar transactions, your originations is pretty easy, right?

So if you're somebody's financing a billion dollar transaction, 

you 

know your list of like people that can finance that transaction. And by the way, or the number of people doing billion dollar transactions, if you're a bank and you need to figure out who's doing a billion dollar transactions.

There are 50 guys, a hundred people, you're gonna know 'em, you're meeting 'em all at the same conferences. Somebody in your a hundred person office knows somebody at that firm. 

They 

exist. Okay. Now we're gonna go into a place where you're doing 500,000 to $7 million transactions. I think in Massachusetts you've probably got about a couple thousand potential borrowers and we've, and now you realize that all of a sudden.

They don't know who you are, you have no way you're not gonna meet 'em all on the street. So then all of a sudden you go from being in a B2B business where sales and marketing don't matter because you have the capital. They'll find you, they have the deals, you'll find them. It's small universe to this much larger universe.



Where and I just did a, a post on this I think today or yesterday, but you've gotta go to be a B2C business. All of a sudden you have to think about branding and marketing and origination strategy. And one thing, our firm, compared to most lenders, we don't have any originators.

We go How did, how do you bring in deals? Not originators. Yeah. Not eight years. I don't want, Coca-Cola doesn't do door to door sales. We want be a brand. If you are a bankable borrower with a non bankable transaction and you are looking for a sophisticated develop, partner on the financing side, that is not a bank.

That's us. And, but that means we have to get the word out there. So all of a sudden I found myself, talking about social media strategy. I'm a guy who skipped my marketing classes in business. I don't know why I need this. Like I created at Excel. I'm gonna do financing, and I understand the cap stack and structuring and taxes and, but I certainly don't need marketing.

And we've got a whole marketing team that does that

Now 

all of a sudden I find myself doing marketing, right? And never had to do marketing before, certainly never had to do capital raising, right? So you go talk about it and you go how do investors find you? I don't know, it's like getting, learning all these things that, by the way, did you tell that person that you had a fund that was on it was the 5 0 6 C and they can invest? No, I forgot. I don't know. But so you have to get really good at realizing that you've gotta get into marketing and branding and build a brand.

And we've been very focused for the past couple of years on building a brand so that everybody knows because. You find a borrower, they don't have a transaction that day. 



You have to constantly be out there and so that's why, LinkedIn, I'm out there. People know that I exist. Instagram, why have an Instagram page, guys that are.

Fixing flipping homes, or even on, buying multi-family properties. A lot of them are Instagram showcasing their projects, right? They're gonna find us through there. We have a feed, we have 2,500 followers in the greater Boston area, right? So people underestimate the value of that sourcing channel.

So you, how are you gonna replicate? I probably got. Almost probably 4,000 followers in the real estate industry on my LinkedIn. That's just in Boston. And so somebody else wants to come in and compete with us. They don't have that sourcing channel. 

They 

can't, they don't have that reputation.

We have eight years, we've funded nearly 400 transactions. People see our name on the deal roll and oh, you funded this transaction. So the figuring out that you're a B2C business as opposed to a B2B business. Was a huge learning curve for me. Like I just like the first couple of years I just couldn't get it in my head.

Luckily we, we're eight years into it, we, we've figured it out and I think we're pretty good at it now, but that was a huge change. 

Very interesting. And speaking of changes and this is my last question for you before we jump into what I call the lightning round. So Jamie Diamond came out recently making a statement about, private lending and how it really made him very nervous because he thought it was reminiscent of, kind of other factors that were similar at the time in the market before the GFC, but.

At the same time, all the big boys are wanting to get into the game too, because they do see the demand. So I wanna know from your perspective, where do you think short-term bridge lending is headed now into next year, especially in terms of risk adjusted returns, and if the benchmark rates start to fall, how do you see lenders managing their own cost of capital?

Yeah, so that's a big question, right? 

Yeah. 

And so I think there's, I think a lot of things that get put on the Wall Street Journal or the news or Bloomberg. They go private credit. 

And 

so private credit, you go that's everything from your, burrito securitizations that are buy now, pay later, right?

Idea. And that's one end of it, right? Or private credit could also be financing startup tech company with zero revenues, with, pay in kind loans. IE they're just accruing, there's no current payment, right? 



It could be. A second Mez on a building that is underwater, right? That's all private credit. And then there's the also realm of the private credit where we sit, which is senior secured on real estate, current pay, stuff that is relatively lower, LTV. And, with very little debt behind it. And so those two things are both private credit. And so I think this massive, trillion dollar private credit world, when Jamie Diamond's talking about it, he's talking about this corporate financing world.

If you then 

went and asked and specific about what do you think about senior secured real estate? Loans that just happened to be done by non-banks, you wanna talk about your loan book? Ja, Jamie Diamond. I think it would be a different view. I think you really need to segment it.

I think it's people, it is getting a broad brush. And I think people need to segment it and I think we're focused on the senior secured side for us. If lending, if rates fall, I think it's great. I think we're still gonna be able to put out capital at the 12% rates because it's the scarcity of capital.

And this is one of the things you talk about, the Lehman learnings. After Lehman, right in the GFC, nobody's asking about the cost of a life raft in a storm. 

It capital flows, right? So it's not the cost of capital that matters, it's the availability, right? And so if we think, if rates start falling, it's because we're heading into a recession.

If we're heading into a recession, capital pulls back. So if you have capital at a time when capital is scarce, you can charge what you want for, right? And so that's what we're. Planning to be in is in the environment, but our leverage on the backend is so FR based, so it falls, so our spreads widen, so we'll have a higher spread and we'll actually earn more if rates fall and we head into a recession.

Right? That's my gut sense, right? Just having gone through it before. And our returns have been pretty steady we're getting. Nine to 10% returns almost, every single, annualized almost every single year for eight years. But that's what we do, right?

That's what we do day in and day out. And so what's gonna happen to, in a recession, to stuff that, and what Jamie Diamond is probably alluding to is what you're talking about is covenant light. So I'm senior secured, I have a UCC, I can foreclose on the property, I can foreclose on the LLC and have a personal guarantee.

Covenant light is when somebody's doing a loan, they're probably not senior. They have very little security, and it's just a hope that somebody's gonna repay them. As long as the economy keeps going well. 

When the economy doesn't do well, they're probably not getting their money back there, right?

And so I think that's where the real worry is. Is on that stuff. That is the covenant light. And guess what? All the major firms, when you go into it, they go your side is the great side where you're senior secured doing smaller loans. Why don't all these massive firms with trillion, billions of dollars go into this?

Okay? What you allude to before, how are you gonna find how many thousands and millions of borrowers do you need? At that are doing bridge loans in the construction space that you can underwrite from your, the huge tower in New York across America, like to fill this bucket. And by the way, then you've got barriers, entries, you've gotta find several thousand borrowers.

You've got underwrite them, you've got, it's just hard. They can't enter into this market. So then all the billion dollar firms are crowded in this space where there's billion dollar loans, which are on. Private equity corporate stuff,



I think that's what he's alluding to. And I think his frustration is that he's gotta compete with a whole bunch of other firms that have raised tons and tons of money and they're telling their clients, you know what, we're not gonna put that covenant in there.

We're, don't need to be senior, secured. And he's gotta play in that market 'cause he's gotta put the money out.

Yep. Yep. 

I think one thing to put in there that I think people are not watching. That I think is a very scary part in this market that is different than last market, but could be a downfall in this market.

One. So people are looking at, the multifamily delinquencies people are looking at the office delinquencies. What people are not thinking about as much, and I don't see any much news written on, is the problem of, it's great that homeowners have a 30 year mortgage for 2.5%. 



But somebody owns a mortgage.

For the next 30 years where they're earning 2.5% and their borrowing costs are now 5%. Yep. Plus. And so in the debt business, that's called a duration risk. And what that means is if you do a mark to market, so if you said, Hey, somebody was gonna have to buy that loan that's got another 25 years on it at two point half percent.

What is it worth today? Given today's rates, it's probably worth 40% of what it is. So even though nobody defaulted, you'd pray if you have a two and a half, if you own. A mortgage and you're a bank at 2.5%, you're halfway praying that it goes into default because it's, you'd rather recover 70 cents on the dollar than have 50 cents on the dollar that yield.

So I'm wondering, those holders of the mortgages, how much longer can they hold out before they have real issues? 'cause if you're a bank and you're only earning 2.5% 

and you're paying depositors, what? If people look at the deposits and there's banks that aren't paying the deposit. Consumers are getting smart and they're going, Hey, but I need to get 4.5% here.

I 

think that's a real issue, and I think it's gonna be a real issue when banks go bust about how bad it is, because only when banks go bust do they have to recognize those loss because they're not for the, for sale product. And that's gonna be very akin to was it SVB when it went, Silicon Valley Bank when it went bust, right?

It went bust. Not. Because it had senior secure mortgage, not because it went fault, but 'cause they were earning too little on the portfolio they held and it just wasn't sustainable. And I think that's a big problem that is not being written about, isn't being investigated, but the mark to mark losses on the trillion dollar mortgage market could potentially be massive.

And I think that's something that's being overlooked by a large, and that's why we prefer the shorter duration, 12% yield loans. But 

wow. Fascinating insight. I'll have to have you back on so we can unpack all of that because that's a whole other fascinating conversation that we can have. Definitely insightful.

In the interest of time, we do have to get to the lightning round questions which are just five questions that I ask all the guests on the show. So are you ready? 

We'll see. We'll find out. 

All right. That's good. So when you're not fast and furiously, originating loans what do you actually do for fun?

What do I do for fun? Sports. So like fairly athletic. I have an 8-year-old daughter, so we know we do rock climbing together. We hang out together to spend up a lot of time with her, so a lot of family time. If not then some sports, some, working out, running bouldering. Yeah. Those sort of things.

Very cool. All right. And what is something interesting about you that most people don't know?

I would say one thing about me is I grew up in the hood, so people come across me now, they would never realize I grew up in a Puerto Rican, Dominican hood wow. In Boston. So that's it came out of there and then ended up going to BU and then business school.

So a long way from home, but 

yeah. A success story though. A very good one. Alright, good. What about as far as podcast or books, if people wanna get a little bit more savvy when it comes to understanding lending structures debt anything along those lines. Is there anything that you'd recommend people should check out?

I 

think of what are good books? I always liked Michael Lewis's, like Liars Poker. I always thought that was great. What else did he have? I think he has some good books that he breaks it down fairly well. Okay. I think your podcast is doing great. You're asking some very insightful questions and you're forcing me to break it down to terms that, that is, that are easier to digest, I guess I would say.

Yeah. Yeah, for sure. And thank you for that. Yeah. Yeah. All right. And then one of the things that we also like to talk about on the show is, yeah, we all wanna make money. We wanna have good returns, but the point is not about the money. The point is we wanna try to build and live extraordinary lives.

It's a critical tool for us to be able to do that. So what is your advice for somebody who's focused on living an extraordinary life? 

Oh, I always said people, in Wall Street, they always say something like. What's your number, right? What is that number that you can make before you retire? And I always said, oh no, I don't have a number. I have a place. So today, early in my career, it was like Guatemala, right? Like at this point in time, I can drop everything and go live in Guatemala and never work again, right? And so I think about it is, where do I work up to, right?

Can you drop everything, never work again and live a good upper middle class life in New York City? Okay, then you're doing all right. But I think also beyond it is. It is passive investing, right? You have to earn a little bit more. You have to focus on saving and put some money.

You can't spend every single dollar. You've gotta save some, right? Don't bite it down to the skinny where you're living a horrible life. Being able to, we, I started my own firm eight years ago, right? And we talk about retirement. I don't wanna retire. This is my retirement. I keep thinking about what would I do if I retired?

I'd get bored on a beach after two days and write a business plan. I'd call up a good friend and I'd say, Hey, listen, I've got something. Let's start it. This is gonna be fun. And basically, that's exactly what we had. Founded RD Advisors was me and a friend. It was a family office I'd known for, now nearly 20 years.

We sat down, sketched it out over brunch, what we wanted to do. We went into it and we're very focused on working, but living life too, we do, we tend to do, one thing we're doing is a lot of events for teamwork. So the rest of the team, I'm heading off to Europe, but the rest of the team is heading up to Maine to do a triathlon.

Oh great. So everybody's 

gonna Maine together around a triathlon. In the winter, we go do the Miami marathons, half us do the half marathon or the 5K, but we all do a team event down there. So the team boat, but we wanna love what we do. As opposed to focus so much on having to retire because you hate what you do today.

Love what you do today. Put some aside so that you never feel trapped. You never wanna feel trapped because if something fails, it allows you to the flexibility to do a startup. That comes with, having some stuff and some passive investments that you set aside and, just continuing to work through it.

Yeah. Very nice. I like it. All right. And then Sean, last but not least, if folks wanna get in touch with you, how can they find you? 

Couple of ways. So we're, already advisors, you can look us up on a number of different platforms. It's Sean Kelly Rand. The easiest way to find me is on LinkedIn. And then we have our website, which is RD Advisors.

re.com. And so people can find us there and we have information on our firm and our funds, but hit me up on LinkedIn. Follow me there and you can always DM me and I'm pretty sure I'll give you a response and look forward to hearing from you. 

All right. Very good. Thank you for a very interesting and insightful conversation.

Really appreciate your insights. Very cool. We will definitely have to have you back. Okay. 

Thank you very much. It's been an absolute pleasure being on the show. 

Yeah, for sure. And for those of you that invested your time with us today, thank you. Don't forget to leave us some comments. Let me know what else you want me to dig into, and in the meantime, be bold, be extraordinary, and keep moving forward.

Ready to Scale is brought to you by Blue Lake Capital, where we hunt down the best multi-family investment opportunities that we can find and invite investors to join in with us. We target class B value, add multi-family properties across the Sunbelt. Our CEO Ellie Perlman, invest a substantial amount of capital into every deal.

This means our interests are aligned with yours. If you're an accredited investor looking to expand your portfolio and diversify sponsors, be sure to visit us@bluelakecapital.com. Blue Lake Capital, be bold, be extraordinary, and keep moving forward.