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Your Commercial Real Estate Insider guide. From profiles of the biggest dealmakers to skyline-shaping transactions, we bring you the deals, breakdowns and war stories that move the market — for insiders, by insiders. From bad-boy guarantees to CMBS tranche warfare to syndicator sins, we cover it all.
Each week, The Promote Podcast explores three of the most interesting and consequential stories in CRE, taking you well beyond the headlines and into the heart of the action. Hosted by the award-winning “Bard of CRE,” Hiten Samtani, along with no-BS institutional insider Will Krasne. Now a top 80 pod on Apple in "Business & Investing." Also check out our 3x/week newsletter for industry insiders at https://www.thepromote.com/
Hiten Samtani (00:07)
Yeah.
My favorite word for the core quality needed to make it as a real estate investor and developer is a sickness. A sickness of optimism. Getting things built and funded in the world's most coveted markets requires the ability to suspend the fear of the thousand and one things that can and do go wrong during the process. Of course, that sickness has to be coupled with other essentials: political juice, will and capital in your corner, and a granular understanding of the city you choose to play in.
This is the Promote Podcast. I'm Hiten Samtani. We have a bonus episode for you today, an unfiltered conversation with Presidio Bays, Cyrus Sanandaji. Cyrus is at the vanguard of the comeback in America's most important boom and bust town. And sorry, 305 puppies, we're talking about San Francisco. His firm made prescient bets on SF's recovery as the city began to emerge from the black hole of COVID, while also expanding a national development portfolio that today spans close to 6 million square feet and is valued by the firm at $5.4 billion.
We talked through Doom Loops and Boom Loops, Capstack Sniping, and how the hell you cater to an industry, AI in this case, that is defined by hypergrowth and extreme volatility. As always, a big thank you to our sponsors, Bravo Capital, a leading HUD and bridge lender. Aaron and his team are building a really compelling platform and have put out some great resources to help guide you on the journey, particularly in the HUD and SNF space. You should check it out at BravoCapital.com. Lone Boss, your one-stop solution for CRE debt management.
Find them at loanboss.com The platform has evolved quite a bit in the last year or so and is doing some pretty powerful things with AI. And HEquities, they're your go-to mid-market partner on both sides of the cap stack. They can do bridge loans of up to $50 million, or they can come in as a co-GP with that last 10 to 20% to get you over the line. Check out their platform at hachequities.com. All right, let's get right into our conversation with Cyrus Sanandaji.
Help me make sense of the San Francisco market at the moment. Let's start with the office market because there seems to be a decent amount of activity both in development and investing, but the investing activity is often sideways.
Cyrus Sanandaji (02:23)
San Francisco, it's historically always been a boom and bust town. Every time we have a boom cycle, it's generally driven by some large scale kind of macro innovation shaping the world, but that starts here. The inflection point that we're at with AI is really unprecedented in terms of the scale, the quantum of dollars that are being invested in these companies, the
ARR that these companies are creating in such a short period of time is staggering. How do you
Hiten Samtani (02:56)
map out demand for a category or an industry that is a company can go from having two employees to having 200 employees in the matter of I and I'm without exaggeration in the matter of months. Months. Right. Yeah. And the valuations are going from pre-revenue seed to what $10 billion valuation post money. How do you allocate space for those kind of companies?
Cyrus Sanandaji (03:18)
There's no doubt that the pace of growth and the valuations are certainly a cause for pause and thought, right? For as quickly as as this stuff can get built, you know, you can look back at every bust and think about the fact that there's a hype, it's a bubble, there may be some overvaluation, et cetera. But I think that because of the quantum of dollars involved here and the fact that a lot of these companies seem to be attempting to go public, that hopefully some of these valuations will
rationalize relatively quickly with respect to kind of the feedback they're gonna get in the public markets. It's a little bit of the wild, wild west right now with respect to some of the companies that are more on the periphery of the sector, but a lot of the really mainstay businesses that are getting formed today seem to have real value, have a real product, have real revenue. With all that said, it's really tough because of the pace of play to evaluate these companies and
who the winners and the losers are gonna be, if it's gonna be a winner take all stenario or not. Even looking at the primary sort of frontier labs, the anthropics and the open AIs and their names change so often, but SpaceX, AI, I guess, now Google and Microsoft are doing, et cetera, they're all innovating at such a rapid pace that there's not a clear winner. It's sort of who's winning that specific inning or that specific moment in time.
Hiten Samtani (04:40)
those companies move at a at a pace that's unfathomable even for the fastest and most nimble real estate developer. When you're used to dealing with a big law tenant or a finance tenant, you have a sense of what the space allocation is going to look like. You have a sense of how your portfolio is going to morph over time. But with AI, man, it's a good problem to have, but it's a problem. It is
Cyrus Sanandaji (05:00)
Is
a couple of just high level stats about the market and and to give you an indication of just San Francisco specifically and kind of how dominant AI is. We're at almost ten million feet of demand of tenants in the market today. Our ten year trailing average pre COVID was about five point four, five point five million. So we're almost two X our ten year trailing average. Of that almost ten million feet, about sixty percent is AI. So it is dominating the demand in the market, but
We still have a pretty robust recovery with respect to sort of the professional services from a strategy perspective for us, given how dominant AI is with respect to the amount of tenants in the market, we're not avoiding them completely, but we're being very, very specific and purposeful with respect to what type of AI companies we're looking to sign leases with, how mature they are, credit enhancement is is becoming a significant part of the conversation today.
Hiten Samtani (05:58)
Say more about that.
Cyrus Sanandaji (06:00)
These companies can come and go as quickly as they reach a ten billion valuation in in six months. They they may not be here in six months. We're rather skeptical in that regard. So what we're looking for is really how quick before we get our full return on our invested capital as a landlord between TIs and free rent and commissions and so on. And how do we downside protect ourselves with respect to letters of credit, cash security deposits, and otherwise guarantees? Obviously
For an entity that we have credit concerns about, a guarantee is not really worth anything. But again, sizing letters of credit and cash deposits candidly and maybe minimizing upfront landlord dollars out and free rent for that matter.
Hiten Samtani (06:44)
Have you
had to learn a whole new lingo to adapt to this industry?
Cyrus Sanandaji (06:47)
It's funny, we we were having this debate with a prospective tenant not too long ago that that has aspirations of going public. Rationalizing how they view themselves and their growth and what they're conveying and reporting out to their investors does not at all align with the way that traditional sort of private equity focused type businesses would think about risk and Ibita and and so on. And so just
helping explain that sort of our worlds are very different. We don't bank on future promotes when we talk about our future revenues. Like that's not realized. We just care about what's realized and what the net revenue is for that year. It seems like at least the industry is a little bit consistent across the various companies as to how they look at it. It's just translating that into sort of real estate terms.
Hiten Samtani (07:34)
When you go and are looking to put money together for a certain bet in SF, there's a very clear thesis. There's a lot of, as I said, tailwinds in your favor. But in twenty twenty three, when you bought Sixty Spear, I Will and I were very curious how you could cobble together the funds for a bet on a city that was honestly it was Gotham.
Cyrus Sanandaji (07:53)
San Francisco's a city that most love to hate and not people that are here. There was an absolute disconnect between perception and reality. We had a tremendous amount of own goals, self-inflicted wounds, politically, economically, et cetera, that had a knock-on effect. And it started with bad governance in 2018. That's really when our doom loop started, not in 2020. we passed a series of taxation, you know, measures that were really
problematic for the city that drove Stripe out of the city, for example. We had a gross receipts tax that ended up penalizing larger tech companies, even if they were homegrown, by taxing them on their gross receipts, which for a business like Stripe, which is sort of more of an intermediary and does not run at the margins that this tax rate was applying, was fatal. We had terrible governance. We had a bad economic structure that started to choke the golden goose effectively.
And then combine that with the concept of remote work during COVID at the time in twenty twenty, for as quickly as sort of tech had filled all of the office buildings and driven absorption, drove our vacancy down to two to three percent at the time and rents in the triple digits, they quickly rushed out of the city as well and and went to that remote model. So now come twenty twenty-three, we had at that point successfully recalled the
DSA D A Chessabudine. So we actually started prosecuting crime. It it was cool to to to actually prosecute crime again. One of our biggest problems as a city was that the business community was completely apathetic leading into 2020 and just not engaged with the political process at all. Post 2020, that was a seismic shift, a level of involvement at this point across the political process.
Whether it's elections for specific individuals for office or ballot measures, et cetera. Twenty twenty and COVID and the experiment we had with the last DA fundamentally changed it. We had a new DA, Brooke Jenkins, who's spectacular and was prosecuting crime. Morale in the police department was recovering as a result of that. We had a new mayor and we swept the boards. We had seen AI start to emerge, and as a result, the narrative amongst the entrepreneurs in this
region was completely turning on remote work. When you're sitting here and you're seeing it, it it gives you some insight into that. That was the thesis. That was really it because we saw the green shoots across every one of these aspects of the region. And then capital, well, there was no debt and there was no institutional capital. But we were able to partner with a family office that we had worked with quite regularly, has a tech background, is is based here.
understood those dynamics because we'd had success with our springline project together. And that afforded us the ability to act first and buy effectively at the bottom.
Hiten Samtani (10:56)
How much do you pay a foot? I you paid about forty one million or so, I'm not sure what that was a foot.
Cyrus Sanandaji (11:01)
on we expanded it the expanded the building, infilled a bunch, et cetera. It's about two hundred bucks a foot going in for our basis. Arguably that's what TI allowances are today. So it gives you a sense of how cheap we bought it.
Hiten Samtani (11:13)
In general, you're not shy of what we call it the promote cap stack sniping, where you're coming in by buying the NPL often at a large discount from another debt fund or a lender and then probably gearing up to take over the building that way. Let's talk about that strategy by design, it's messier.
Cyrus Sanandaji (11:29)
For all of its flaws, California is ironically actually very lender friendly, unlike New York. Yeah,
Hiten Samtani (11:35)
You don't pay the transfer tax, right?
Cyrus Sanandaji (11:37)
but that's on the ballot in a few months. So I think that transfer tax is going to start applying to Deedon Lewis and foreclosures. But up until now in San Francisco, those were exempted, which was good. Specifically in California, the way that the courts and and the way that the law works is that
You file your notice of default and it's effectively a nonjudicial foreclosure. So in ninety to a hundred and twenty days, you take title unless you get paid off in full.
Hiten Samtani (12:02)
Similar to what what we call a UCC foreclosure in in New York? Yes. Similar process? Okay. And it's not just for them as if you own any part of the debt.
Cyrus Sanandaji (12:10)
Exactly. Assuming the underlying loan was written well, for example, you have provisions that will trigger personal recourse for trying to declare bankruptcy to slow down the process, which in the cases that we have bought, you know, NPLs, those have been in place. That's given us the confidence to be able to lean in and say, look, we're buying it at such a steep discount, fifty cents on the dollar, forty cents on the dollar, whatever it may be, that
Even if we got paid off at par to avoid the foreclosure, that's a fantastic short-term sort of return. In some cases, 2x, you know, maybe more with would leverage because we've finally in the last year or so have seen note-on-note financing become available as well. So that there's this sort of confluence of things that have benefited sort of our strategy. Candidly, because of the exemption that has existed in San Francisco.
cap stack sniping has been less strategic from a how do I get control and become the fulcrum and and kind of take the asset to simply it was actually the cheaper way to sell the asset, which is what led to this legislation and to close what some politicians are calling the loophole full transparency, we've sort of pursued the strategy for both reasons. Our most recent note purchase a couple months ago for three one battery. It was
Hiten Samtani (13:32)
Is
it from Richard Max? exactly. What was the the haircut on that one?
Cyrus Sanandaji (13:37)
So we bought it for seventy million, you know, outstanding principal plus accrued and and default interest and all that. You know, when you took the senior and Mes, because they had both, you know, was close to a hundred and forty plus million, so about fifty cents on the dollar. We felt very comfortable that because of the NOD process and our ability to be able to file it, which we did the day after we took control of the note to start that statutory clock. We were banking on
going through that foreclosure process. And it's not done yet, but to our far's credit, they have been a good counterparty. It appears that we're gonna have a negotiated deal that will give us title a lot sooner than that hundred and twenty days. So
Hiten Samtani (14:18)
There seems to be a level of resignation or acceptance rather of certain states of play that we did not necessarily see 18 months ago where the sponsor's like, this one's gone, on to the next one. The lender's like, I'm gonna realize my losses on this one, on to the next one.
Cyrus Sanandaji (14:33)
That's spot on, but it's also a function of the fact that there's been such a depth of price discovery, right? Because the market fundamentals have come around as well. No one wanted to be the first mover when Clarion sold us the spear, they didn't have any debt on it. I mean, it wasn't an odyssey fund for them. They just needed liquidity because they had such a redemption key from what we understand. And they needed to lower their office exposure. But they were one of the first. That was, in many people's view, not indicative of sort of
a market price until the next series of of transactions close, but each one of them had a different driver. When you have a sample size of three to five transactions, I think a lot of people will hold on to hope
Hiten Samtani (15:17)
it makes sense. Yeah.
Cyrus Sanandaji (15:18)
and wish that it wasn't as bad as it was. A lot of these assets were bought or valued or marked at north of a thousand bucks a foot. So it starts trading at 200.
It's not just the equity that's wiped or the Mes that's wiped, senior lenders, right? B of A, Wells, like there were massive traditional lenders, banks, that do not expect to take 50, 60, 70 percent haircuts. A lot of the lenders were holding out hope. And I think once there was real price discovery and they realized that maybe 200 was sort of rock bottom, but stuff started trading in the mid 200s, then three hundreds.
Now we're at about 400 per foot is is roughly kind of where the market is at for not fully stabilized, sort of call it 20, 30% occupied type office to 50% occupant. There's also been a resurgence of debt, which is what's driven that value from two to four hundred simultaneously because there was no liquidity on the debt side at the time. And then at the same time, you're actually seeing leasing fundamentals pump as well. So you've got real tenants in the market.
Our vacancy was teetering around almost forty percent. We're down to twenty eight percent, right, in in less than three years. Now look at the resie side. There are a ton of people that bought very strategically at the same time we did three years ago, that bought these multifamily portfolios, the ballast portfolio, the various Veritas portfolios, etc. And they are already looking to exit and will make a substantial return in that eighteen to thirty six month old period.
by virtue of a couple of things, right? All this new investment that's happening, the new company formation, the job creation that's translating into all this office demand, these are real bodies moving to San Francisco to fill those seats. I wish we had an ability to do a snap census now and compare it to the last one, but I could guarantee you that we've seen, you know, net migration in the multiple six figures, which for a city of eight hundred thousand moves the needle pretty significantly.
Hiten Samtani (17:17)
And it's higher earning people for the most part.
Cyrus Sanandaji (17:19)
As
well. Which is exactly why you're seeing apartment trade outs in the twenty-four, twenty-five percent range year over year at this point. We bought an asset from Gray Star about almost two years ago now with Artemis and Bearings. We bought it for about $330,000 a door. To put it into context, it's about a million to a million two for replacement cost for high rise type one apartment buildings in San Francisco. So we bought it for effectively, you know, thirty three cents.
On the dollars. Within the first quarter we had hit twenty four, twenty five percent trade outs and we hadn't done anything yet.
Hiten Samtani (17:56)
Just ride the wave. What is the platform pitch and where do you think this should go in the next five years if you guys do a good job? We've got
Cyrus Sanandaji (18:02)
Got these
two sister companies. We have Presidio Bay that's the investor developer. We have three verticals there. We've got our mission critical, which the federal government's one of our biggest tenants, and that spans the country. We have our sort of commercial development and and commercial arm that's sort of office, R and D lab, advanced manufacturing and retail. And then we've got our high density housing sort of apartments and and we've done some poor sales stuff there. Mm-hmm.
Where we've really evolved based on sort of the politics, not just in California, but nationally with the sort of housing crisis. Housing has really been the key to unlocking commercial development and FAR and approvals in a lot of otherwise high barrier to entry markets. When we look at our pipeline of new development, that's really our primary focus. We've got about seventy to eighty acres of really high value kind of infill property in in those markets. We're still not at a point where
ground up development across the board is justified or warranted. And so until that point we're finding value and creating value, finding the B assets and turning them into A assets and not just by plowing capital into them from a CapEx perspective, but our whole thesis, and this is why we spun up the main post, which is our services business, is that we're fundamental believers in this flight to experience, not flight to quality. There's sort of this misnomer in the industry where you have to
invests in the biggest, brightest, shiniest, newest asset. But the reality is you can actually buff and polish some of the stuff that's sort of diamonds in the rough, but you got to layer in that hospitality, layer in that service. And that alone will actually help you outperform from a returns perspective because it'll keep your basis down and help you achieve rents that that would be competitive or if not better than some of the new construction products.
Hiten Samtani (19:49)
I was bummed you guys walked away from the the mall. That that was a fun one. Did you wanna talk about what happened there?
Cyrus Sanandaji (19:54)
Sometimes the best deals you do are the ones you you don't. It was a very tough decision to to walk, because we had the entire capital stack lined up after eight months of pursuit and diligence and a tremendous amount of capital, you know, and time spent on that business plan. We had this great vision to turn it into something akin to sort of the Penn District, a key anchor, kind of four to five thousand person music venue within the building. And we had the tenant we'd have about
800,000 feet of the one and a half that would have been office. The old Nordstrom building we were going to reskin, that would have been five hundred thousand feet of new effective office. It was a very difficult choice, but the fundamental structure of the deal, because a third of the site was sitting on a ground lease with the school district, was going to be the Achilles heel of the entire deal and had everything gone perfectly, but for this ground lease, when it came time to reset the rent in 2031, our biggest concern was that.
for the hundred million of capex we were going to put into just that office portion to re-skin it and and retenant it, when it came time to doing an appraisal to figure out the residual land value, we would have gotten disproportionately impacted by virtue of the capital we ourselves put into the deal and the revenue we created by leasing that office piece.
Hiten Samtani (21:11)
Basically it would boost your F V to such a level that it would be
Cyrus Sanandaji (21:15)
The
level that it would have nuked our NOI yeah and the school district would have been the direct beneficiary of it for not having taken any of the risk. And so we could have wiped all of the value we created. And so it was this sort of unfortunate just structural issue with the ground lease that's a legacy ground lease from forty years ago.
Hiten Samtani (21:32)
I don't know how much you follow that, but if you look at what happened at Cooper Union or any of the RFR deals in New York, you have you have reason to be cautious there.
Cyrus Sanandaji (21:41)
Sure. Those ground leases, especially with public related, public agency related counterparties, for as well intentioned as their administrative team are, and they were very productive in in discussions, but then try to go and convince a school board, an elected school board, who have no business understanding any of the complexities of what a ground lease entails, that you have the need to do this. This school board may have said yes.
But it was gonna take too long and unfortunately, candidly, the servicer, Midland, shot the bondholders in the face by not giving us the time to solve it. We were on the path to solving it. They just wanted us to put up an unreasonable amount of non refundable money. We made the tough decision to walk. But on to the next
Hiten Samtani (22:26)
On to the next one.
Cyrus Sanandaji of Presidio Bay, thank you so much for being with the promote.
Cyrus Sanandaji (22:32)
Thanks so much for having me.