ESG – Required/Desired Unmentionables

According to a recent Bloomberg survey:

About two-thirds of respondents in a survey of roughly 300 Bloomberg terminal users said the anti-ESG movement that started in the US last year will force firms to stop using those three letters in conversations with clients. However, they’ll continue to incorporate environmental, social and governance metrics in their business, they also said.

And the market reflects the controversy with corporate dollar denominated ESG bond sales declined from $91 billion in 2021 to $30 billion in 2023.

In addition, ESG isn’t highly ranked in importance:

Some 85% of respondents who identified themselves as being engaged with ESG said financial performance is the most important factor to consider when investing. Only 39% said the same of ESG, which was the lowest reading in the survey.

On the flip side, Bloomberg also reports that Morgan Stanley, the 7th largest underwriter of ESG debt, reports a decent pipeline growing stronger into 2024 and BNP Paribas, the largest underwriter, is predicting a banner year.

So why continue to incorporate ESG when you can mention it and don’t think highly of the concept and why the divergence in between “decent pipeline” and “banner year”?

The answer is a mix of increasing demand for ESG investments with faster growth outside of the US and regulatory requirements. While the GOP is making ESG a four-letter word in the US, the EU is strengthening ESG requirements including verification of ESG validity and compliance. The SEC is also increasing scrutiny of ESG claims.

So, the current situation:

  • Many investors, including major institutions, want ESG investments.
  • EU and other non-US investment regulators are increasingly requiring ESG reporting and in some cases requiring some level of ESG investment.
  • US and other regulators are cracking down on “greenwashing” i.e. falsely claiming ESG compliance.
  • US will fall behind EU and other countries in requiring, originating, and regulating ESG investments.

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Digitalized Tokenized Real Estate

From accountants creating country club partnerships to Master Limited Partnerships, Private REITs, Public REITs, TICs, DSTs, LLCs – the real estate industry has always pursued new, more efficient, more effective ways to raise funds and diversify risk. Digitalization and Tokenization are the next steps in increasing efficiency, expanding the potential small and institutional investor base, opening investment globally, and providing liquidity for what has historically been an illiquid asset.

Digitalization is the creation of a digitally recorded investment such as proof of ownership of or participation in an asset (for example a limited partnership interest in a property) which is recorded electronically on an unalterable blockchain instead of on paper in a filing cabinet. Digitalization can be expanded to include real or near real-time updates of investment performance, valuations, and other data items needed to enhance the liquidity of the asset.

Tokenization is the expression of the digital asset which can be administered electronically and automatically via smart contracts (short blocks of code) embedded in the token. The tokens can be traded privately (subject to SEC regulations) or be issued as a registered security and traded on an Alternative Trading System (ATS) providing access to individual and institutional investors on a global basis and secondary trading of previously illiquid investments.

The World Economic Forum estimates a potential $24 trillion in tokens by 2027. The Boston Consulting Group is more conservative at only $16 trillion by 2030.

What does this mean in plain English?

In brief, information on the property or other investment is onboarded and updated on a permissioned blockchain. This provides for the information to be memorialized so it can’t be changed, linked to the underlying source for validation, and feeds into smart contracts that can automatically perform pre-programmed functions. Capital tables, distributions, etc. are automated and viewable by investors online through a secure website portal. Audit trails are established and maintained.

The investors purchase tokens – basically think of them like shares – which they can trade on the ATS similar to trading stocks and bonds rather than the current reselling of real estate shares to specialist buyers with the typical limited market, discount price, extensive paperwork, and lengthy time for buyer’s underwriting and legal.

Investors log on to the ATS, review the documentation, decide to buy, click the button, transfer done – all with institutional grade legal, documentation, valuation, and implementation.

Issuers have the option to add components providing:

  • ESG/Environmental reviews.
  • Updated property performance information (potentially real-time).
  • Property valuations on a periodic or as-needed basis.

In short: real-time online information, updated valuations, automated record keeping, transparency = reduced workload, enhanced investor relations, access to institutional investors, lower costs, and higher values.

Contact me if interested in additional information on digitalizing real estate on a SEC registered broker/dealer.

Real Estate Markets – Not Even Close Enough to Haggle

Participated this morning in the monthly Columbia Business School RE Circle, the Paul Milstein Center for Real Estate International Real Estate Alumni Meeting: Updates on RE Markets Around the World.

Participants confirmed my opinions that:

Sellers are looking for 4-4.5 caps and buyers looking for 5-5.5 caps – indicating a 20% decline in value and too far apart to even haggle.

Funds that were lending at 8% and leveraging up with an A-piece from a bank can’t cause banks now charging 8%.

Lots of money sitting on the sidelines and more funds being raised with nowhere to go.

Equity funds raising money for debt funds to play lower down on the LTV.

Only asset class that’s optimistic is single family.

Values down 20% and market won’t start clearing for 6 months or so.

Banks/Special Servicers will cooperate to avoid a panic.

Mezz/Pref Equity that’s really Equity + Hope Note is the future.

White Knight Pref Equity To The Rescue

What is White Knight Pref Equity?

White Knight Pref Equity is the investment of new funds into a capital stack by a friendly investor to solve a refinance or other shortfall. It is the opposite of bottom-fishing or vulture investing or loan-to-own. 

How does it work?

Say for example you have a property where changes in cap rates and LTVs leaves your refinancing short by $10 million, the White Knight Pref Equity funds the gap.

Why be a White Knight?

For example, a pension fund real estate investor that I work with had a problem. They buy or JV on existing and to-be-built low/mid-rise residential rental properties and BTR projects. The market for that product is extreme competitive and even paying market rates, they kept losing deals to other buyers – even at the same price. Last to play golf with the broker got the deal.

Their solution – offer favorable terms for White Knight Pref Equity in return for a Right of First Refusal. The property owner receives favorable, even below market funding, The lender receives an acceptable rate of return and is first at the table in the event of a sale.

A win-win.