The Forthcoming Distressed Debt Opportunity For Investors, With Nathan Whigham

The collapse of Silicon Valley Bank and Signature Bank, coupled with rapidly rising interest rates may be creating a prime opportunity for investors with dry powder to invest in distressed debt in the coming weeks and months.

Nathan Whigham, founder and president of EN Capital, joins the show to discuss the overall impact of the banking crisis on capital markets, and why he believes it could be a huge opportunity for some investors.

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Episode Highlights

  • A quick crash course on capital markets — what they are and how they work to form the capital stack of different investment deals.
  • The impact that the collapse of Silicon Valley Bank and Signature Bank has had on capital markets.
  • The impact of rapidly rising interest rates and the cost of debt on capital markets.
  • The opportunity that distressed debt may present in coming months to investors with dry powder.
  • Trends across the commercial real estate industry from a global macro perspective.

Guest: Nathan Whigham, EN Capital

About The Opportunity Zones & Private Equity Show

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson. Opportunity Zone fundraising suffered a sharp decline in Q1 of this year, that is according to a recently released report from Novogradac & Company. But OZs are not alone in this fundraising turn-down. Elsewhere, capital markets are freezing up quite a bit, with rapidly rising interest rates and the banking crisis, and general economic uncertainty all having impact.

Joining me today to discuss the current state of capital markets is Nathan Whigham, founder and president of EN Capital. And Nate joins us today from beautiful San Juan, Puerto Rico. Nate, great to see you. Welcome, and thanks for joining me on the show today.

Nathan: Yeah, likewise. Thanks for having me.

Jimmy: Absolutely. Nate, for our audience of high-net-worth investors and advisors who may not be familiar with you and EN Capital, can you give us a brief introduction to your firm and what your role is there?

Nathan: Yeah, absolutely. So, EN Capital is what I would say is a general commercial real estate capital advisory firm. So, we do debt and equity placement and capital structuring for, really, all property types, all parts of the capital stack, all over the country. I sit in Puerto Rico, I have an associate that’s based in LA, although now he spending a lot of time in Barcelona, and then I have a couple partners in Miami. And so, you know, when I say we look at anything, we really look at anything, in all property types, all over the country. I’ve got deals I’m working on in California, Oregon, Florida, Texas, New York, here in Puerto Rico, so it’s really across the map.

And I founded this company in 2017, and I’m the president-founder, it’s my company. But I’ve been doing capital advisory and commercial real estate since 2006, so I’ve seen, you know, I’ve gone through all the ups and downs, went through the last down cycle, which, you know, we all got scars and stories from. But I’ve seen just about every kind of deal you can think of.

Jimmy: Yeah, 2006, when you entered, everything was going great, and then it turned not so great just a short while later, it sounds like.

Nathan: Yeah. I found that business was easy. You just show up, and deals are easy, and you make a lot of money, and I had a couple great years and learned real quick that when the market turns down, things change real fast.

Jimmy: Yeah. That was a tough time to get started because it gave you a false sense security and then all of a sudden the rug got pulled out from you. Well, and you mentioned you’re working on deals all over the country and a couple down there in Puerto Rico as well. I’ll point out that, you know, we have a mutual friend in Jose Torres, who’s working on the Las Palmas deal down there in Puerto Rico, and he just recently presented his Puerto Rico Opportunity Zone fund to our group at OZ Pitch Day. I know you know him and work with him, is that right?

Nathan: Yeah, absolutely. So, I’m a partner in that deal. So, he’s a member of our GP through his Opportunity Zone fund, which, you know, Jose’s great. I mean, you know him. He’s got an excellent background in private equity for a while. So, he adds a lot of value and expertise just in general to our GP team, but he also brings these investment vehicles, one of which is the Opportunity Zone fund, which allows our, you know, obviously any Op Zone investors to come into our deal and receive the Op Zone treatment, which is very meaningful. Then he has another investment vehicle called a Puerto Rico Act 185 Private Equity Fund, which is equity fund specific to Puerto Rico, that has some unique benefits for people that live here on the island that wanna invest in that deal as well.

Jimmy: That’s great. Yeah, just wanted to shout out to Jose. Thanks, Jose. Hopefully you’re watching or listening. I’ll make sure I pass along this episode to you, so you can watch this. Well, in a minute, I wanna talk about what’s happening with capital markets, the impact that economic uncertainty, rising interest rates, the banking crisis, is having on capital markets, but first, what are capital markets, Nate? Maybe you can give us a quick one-on-one crash course on what.

Nathan: Sure. Yeah, I mean, that’s a great question, and the answer is capital markets are really just a general term to describe the debt and equity markets that are out in the overall economy, that different companies and entities can potentially access and tap for capital when they’re trying to, you know, accomplish something. And in the context of our conversation around commercial real estate, you know, that’s everything from getting construction financing to build a new property, getting bridge financing to reposition an existing asset, or even just putting a term loan on your property. You know, you own an apartment building, it’s stabilized, and you wanna go put a long-term mortgage on that, well, you’re gonna go to a bank, a CMBS lender, the agencies, etc. But, kind of, all those entities that provide capital to the commercial real estate world, we would consider to be, you know, kind of part of that broad capital market.

Jimmy: Good. And what I do typically, how I kind of fill in the capital markets is I help alternative investment products, largely Opportunity Zone funds, raise equity from my group of high-net-worth investors and advisors, the audience of this show and the audience that has opted in with us at our two platforms, Wealth Channel and OpportunityDb. So, I’m filling in a small part of the equity part of that overall capital stack that also includes some debt from time to time as well, depending on where the project is, which phase the project may be in. What about the impact that the banking crisis is having on capital markets with the collapse of Silicon Valley Bank and Signature Bank? How have you seen capital markets react to those events?

Nathan: Yeah. So, they’re definitely reacting. And, you know, it’s a reacting as you expect, which is negatively. So, we’re seeing the overall capital markets and especially the debt markets definitely contract, and become more conservative as far as what they’re willing to do. A large portion of general commercial real estate debt is held by regional banks. And regional banks are exactly the types of banks that we saw in that collapse. Silicon Valley Bank was a very large regional bank, and along with Signature Bank, you know, as well.

And those types of banks, they’re kind of the bread and butter for what I would call, I would say, middle-market term debt, and construction debt, to a certain extent, to the commercial real estate world. So, you know, if I’m in Los Angeles and I own a shopping center that’s worth, I dunno, $30 million, something like that, and I wanna go put a term loan on that center, I’m either gonna go to one of two places, typically. One is the CMBS market, which is, you know, commercial mortgage-backed securities, which is its own kind of separate thing. Or, and it has pros and cons, if I don’t wanna go the CMBS route, and there’s a lot of reasons why I may not, then I’m probably gonna go to a regional bank.

And in a big market like Southern California, you have quite a few regional banks you can go to. If you’re in a much smaller market, maybe a secondary market or a city in the Midwest or something, you probably have a small handful of regional banks you can go to. But overall, the regional banks are kind of a very common source of capital for that type of middle-market term debt, and that is definitely contracting.

And again, when markets are good, regional banks tend to be pretty active on the construction lending side, but when the market goes into a downturn, they tend to just do none of that type of lending. And that’s what we saw, you know, through the financial crisis, and that’s what we’re starting to see now. So, a lot of the bigger regional banks, like, say, Bank of the Ozarks is a good example, that was very active in construction in a lot of markets, you know, they’re really paring back and we’re seeing a lot of other banks doing the same thing.

Jimmy: Yeah. There’s a lot of fear out there, and I think a lot of these banks are fleeing to safety, and the downside of that is we get all, the cost of capital has gone way up, and the access to debt has collapsed. What about rapidly rising…

Nathan: To be clear, there are still a lot of debt sources out there. We’re not in, say, 2009, when there was virtually nothing. I mean, no one had any liquidity. You know, you couldn’t get a loan, say, a construction loan for anything pretty much. I don’t care if you had a billion-dollar balance sheet. From, like, 2009 to maybe 2011, 2012, there, just, no one was doing that.

Today there’s still a lot of private funds and groups that are active. It’s just that we are seeing an overall contraction in the market, and we’re certainly seeing it pretty strongly in that regional bank world. And I think we’re gonna see more of that because regulators are, I think, really putting the squeeze on those banks, but there are still a lot of other options that are available. So, I wanna be clear. Capital markets are contracting, but there is still capital that’s available for good deals and good sponsors, at a cost of capital that makes sense.

Jimmy: Sure, sure. Rapidly rising interest rates also has had a pretty big impact. We were in a very low interest rate environment for, what, 12 or 13 years or so before interest rates started ticking up. The Fed started increasing interest rates, when was that? About nine months or so ago, I guess, middle of last year?

Nathan: About a year ago.

Jimmy: Yeah, about a year ago, okay. What impact has that had? The cost of debt has increased. Has it made the cost of equity, by comparison, look a little bit more affordable?

Nathan: So, it has absolutely pushed up the cost of debt. I mean, so far, I think today’s at like 4.8%, you know. It was 25 bips for forever, right? And so, that’s a monster increase. I mean, I think this is the fastest Fed rate hike in history ever. If it’s not the fastest, it’s certainly one of them. And so that has really, kind of, flipped a lot of things on their head. I mean, that’s the reason that Silicon Valley Bank imploded, which is a whole nother discussion about how they were managing their assets and their balance sheet. But in the commercial real estate world, absolutely.

So, your average cost of a construction loan today, I mean, even from… So, most banks aren’t doing construction debt, but there is a handful that still are, but their pricing, you know, prime plus 1.5%, prime plus 2%?Prime’s an 8% today. So, I mean, that’s a 10% loan from a bank, which, most people, you know, we just haven’t seen that for, like, 20 years. And it’s definitely making, obviously you gotta underwrite that finance expense into your project cost, and that increases your cost basis, which is gonna lower your overall returns, because, at the same time, we’re not seeing a huge increase on the revenue side from rents or anything like that. So, certainly putting the squeeze on some deals.

And, you know, I think there was just a lot of deals getting done over the last 10, 15 years that I wouldn’t necessarily say were fundamentally sound relative to the dynamics of the local market, and were really just driven by the fact that capital was so cheap and so readily available. And examples of that would be, there was a lot of deals that were done in secondary, call it Sun Belt markets, and I’m talking, like, Phoenix, certain parts of Texas, etc.

And I’m talking about multifamily repositioning deals, where people were underwriting exit caps from that type of deal at… Southern California exit caps, like, 4%, and using really high-leverage, floating-rate debt to fund those transactions. And obviously that cost of debt has gone up substantially, and a lot of those deals just don’t make sense anymore. And so, I think…

Jimmy: They could get away with it up to a year or so ago because the cost of capital was so cheap, right?

Nathan: Yeah, exactly. Yeah. You had a really big margin of error, because money was so cheap, and you could probably, you know, if you ran into some trouble, you’d have refinance options from other lenders and other things like that. Those are kind of all going away. And so, I think there’s a lot of deals in those markets that were probably heavily over-leveraged, that now are gonna be seeing a pretty good amount of distress this year. And I also think there’s a lot of lenders on the private debt side, and I won’t name anybody, but definitely have a few key ones in mind, that I know are being very aggressive. And I would bet a lot of money that a lot of those lenders have loans on their balance sheets that they would really like to get rid of.

Jimmy: Sure. And I think that creates a big opportunity for people with capital. I wanna talk about that with you in a moment. That’s where we’re going with this episode, is the potential opportunity that’s out there for the taking for high-net-worth investors and other family offices and advisors, other folks who may have access to capital. But first, what about… I wanna talk about the capital stack in general for an average type of commercial real estate project, I guess. Have you seen a shift in debt-to-equity ratios recently? You know, you may have, in the past, been able to put more debt, more leverage into a deal. Has that come down recently because of cost of debt rising so much?

Nathan: Yeah, absolutely. So, we are seeing, you know, the lenders that are still active in the marketplace are definitely being more conservative on leverage. That’s both just because of, kind of, two reasons. One is they just fundamentally want to be in a lower-leverage position, given concerns about the market. And two, it is because you have the higher cost of debt. You know, there’s only a certain amount of debt burden or debt load that, you know, a deal’s gonna be able to support at the end of the day, and so you have to…

You know, when you’re talking about bridge or construction debt, or anything that’s transitional, that lender, the only thing they really care about and think really hard about when they’re analyzing a loan is how do I get paid off? And getting paid off is usually either one of two scenarios. First one is, sponsor builds the project and sells it. That pays me off. Or, what’s more common is sponsor builds it, he wants to hold it, and he’s gonna refinance me out with conventional debt, and that debt’s gonna come from, you know, regional bank, an agency if it’s, say, a multifamily property, or, you know, potentially a CMBS lender.

And so they’re gonna underwrite to that takeout, and so they’re gonna look at the deal and say, “Okay, once the asset’s stabilized, given the higher-cost-of-capital world that we’re in now, at a higher interest rate loan, amortizing on a conservative schedule, this deal will support a term loan of X dollars, at some minimum amount of debt coverage that we think is reasonable.” And we are certainly not going to provide any kind of bridge or construction loan that is greater than that, in the fact we want some margin of error. So we might say, “Look, the maximum loan we’re willing to provide on this property is maybe 10%,” or some, you know, margin below what we think that takeout financing is. And so given all that, I mean, that kind of methodology has just put most lenders in a position where they’re definitely, you know, contracting, you know, leverage compared to where they were a year ago.

Jimmy: Got it. Let’s take a look at multifamily for a moment, because that seems to be the biggest asset class in real estate. What was typical a year ago for the amount of leverage you might have on a multifamily deal, and how has that changed to today? Was it, like, 60%, 65% could be typical, and now it’s…

Nathan: Oh, you had lenders being real aggressive. I mean, we have we go to that would give us, you know, 80% of cost financing on multifamily construction. Yeah, I mean, and you could layer sub debt on that. So, you know, we had groups going up 80%. We had a group that’s one of the largest mortgage in the country, we know very well, they had a program where they were saying, “Look, we’ll provide 90% of your entire project cost as a debt instrument, and that gets some participation.” So, they give you, you know, basically 90% at a pretty good interest rate as a debt piece. And then I think it was something like, you give them 25% of the equity off the back of the deal, and you’re good to go.

So, those programs have definitely, you know, either gone away or come down. For ground-up multifamily, or, called value-add multifamily, I think a reasonable debt assumption today is probably around 70% of cost. You might still be able to push that a little bit, but that’s what I would be underwriting to. And there are still some options for layering in sub debt, which is gonna be mezz or preferred equity or even PACE in certain markets.

So you can achieve higher leverage, but you still have to go through that same methodology I described of underwriting to what that takeout financing is. And that takeout financing has to underwrite to not only repay the senior, but any sub debt that’s in there as well. So you’re still kind of constrained by what the overall cost of capital across your entire debt stack would be between your senior and junior lenders.

Jimmy: Good to know. That’s a little bit higher than I had thought, actually, so, that’s good to know. You mentioned PACE. We’ve talked about PACE, I think, maybe once or twice on this podcast in the past. There’s some OZ deals that I’ve spoken with that are doing some PACE financing. Can you tell us a little bit about what that is?

Nathan: Yeah, absolutely, and I actually used to be a PACE lender. Before I founded EN Capital, I ran business development for a PACE lender outta San Francisco for about a year and a half. And yeah, PACE is a really interesting, unique product. The acronym stands for Property Assessed Clean Energy, and the reason for that is because it was originally created in 2008 at Berkeley as a way to finance community solar projects. It since has grown beyond that.

And what PACE is, is a legal framework that’s established by state statute, and I think 39 or 40 states to date have it, that allows a private market lender to lend against real property but secure their interest in that property not through a traditional mortgage, but through a voluntary special property tax assessment. And a loan is actually repaid as a line item on the property tax bill.

This has a lot of advantages to the property owner or borrower. One is it kind of, it comes in as a tranche of capital in your capital stack. Typically, PACE maxes out at 25% or 30% of value over cost, but it comes in tandem with your senior lender. But because PACE is repaid through the property tax bill, it’s actually senior to the senior. We call it super senior. And so, because if you don’t pay your property taxes, you can go to a tax right, and that’s senior to everybody.

And so, because of that, the PACE lender can provide debt at a very low cost, even relative to what your senior lenders are charging. And so when you combine, you know, PACE to your debt stack, you’re typically adding leverage and reducing your overall cost of capital. So borrowers tend to really like it.

The trade-off is that because you’re doing it through this very unique structure, the PACE funds need to be used to fund building improvements that serve the public good. And, started with energy, so, anything that is energy-efficient, on-site renewable generation, you know, you’re putting in a solar system or something like that, all those things are definitely PACE eligible, but it’s kind of grown beyond that.

So, for example, in California, seismic improvements are PACE eligible, and in Florida, hurricane-proofing is PACE eligible. I’ve been working hard to try and bring PACE here to Puerto Rico, because there’s a lot of applications for PACE here, even beyond the stuff I just described. So, it’s a really unique product. I think there’s a lot of benefit to it, but it can be very tricky with how it interacts with the senior lender, and you need to have a senior lender that is PACE-friendly.

Over the last few years, there’s been some debt funds that have come to market that offer both senior and PACE financing through a single fund. I think if you wanted to explore PACE, that would really be your best option because, like, when I was originating PACE loans, the biggest challenge we had, and this was also 2016, so this was a really new product, and no one even heard of it, but getting senior lenders of that time comfortable with it and being willing to actually sign an acknowledgement which allowed us to fund was really challenging. So, if you’re going to an entity today that, you know, can provide both the senior and PACE, you know, from a single shop, then you don’t have that issue and you can get things done much more efficiently.

Jimmy: That’s great. I didn’t mean to derail the conversation too much. I just think that’s interesting. Yeah, we haven’t had an episode that’s covered PACE in detail. I might have to have you back on the show because I’m sure we could probably spend 30, 45, 60 minutes even, talking just about PACE financing. It’s a fascinating topic. We should do a deep dive at some point down the road, but we’ll leave it at that for today.

Getting back to our main discussion, though, on the state of capital markets, some of the turmoil, the freezing up, and distressed debt you mentioned a few minutes ago, all of this potentially is leading to an opportunity for high-net-worth investors or other sources of capital. What is the opportunity that is posed here?

Nathan: Yeah, absolutely. And I’ll add something to that, which is something like one third of all commercial real estate debt is floating-rate debt. A floating rate is, of course, exactly what it sounds, right? Rate’s not fixed. It floats with the market. And floating-rate debt is so ubiquitous in the industry because we had low interest rates for so long. I could go out, I have a multifamily portfolio, I can go get a, you know, long-term amortizing, floating-rate loan, with probably some long period of interest-only, so I’m not even paying down principal… Like, let’s say I did a 10-year loan with five years IO, well, that, you know, just boosted the cash flow off my portfolio tremendously, which, you know, created a lot of wealth and cash to distribute to investors for those types of groups.

Now, since interest rates have gone up so substantially over the last year, any floating-rate debt that did not have some kind of a interest rate hedge instrument, which could be a credit default swap, or an interest rate swap, or an interest rate cap, is something that you acquire typically when you originate your loan, well, all those loans now, you might have had a loan that had a 4% coupon on it, and now you’re paying 8.5%. And unless your properties, your portfolios, were just throwing off tremendous amounts of cash, it’s quite likely that you’re either underwater or you’re barely breaking even, or you might not even be satisfying the debt coverage covenants of your loan, and you could be sitting in technical default.

So, you know, what all that means is that this rapid rise of interest rates is directly impacting, you know, basically one third of the debt that’s out there for the overall, you know, U.S. commercial real estate market. And so we’re gonna see, and we’re actually starting to see a lot of, you know, potentially distressed deals and distressed loans. But that translates directly into an opportunity. So, you know, anyone who is well-positioned to have two things, first, the most important one, is the access to deal flow, and access to the deal flow means you have relationships with the lenders, the entities that are holding these loans on their balance sheet.

You know, most lenders… I don’t wanna say most. Really, no lender is gonna be advertising to the market that, “Hey, we got a bunch of bad loans, you know, that we’re willing to sell at a discount just to get rid of ’em. You should give us a call.” No one’s gonna say that, right? So you need to have relationships and contacts with these groups that, you know, trust you and are willing to, you know, let you know. I mean we’re starting to have reach out to us saying, “Hey, you know, maybe we should talk about a couple deals that we’re looking at.”

And so, again, having access to deal flow, super important, and challenging. And then secondly, you need capital. So, a lot of these opportunities are very quick-moving. It could be something like, “Hey, if you can acquire this at a, you know, very quickly from us, because we’re looking to increase our liquidity as a lender, you know, we’ll sell it to you at a pretty substantial discount.” That discount might be 10%, 20%, 40%. You know, half. It could be… And it just depends on the deal and how distressed the situation is and how in need of liquidity that lender is. And so if you’re in that, again, position to have access to have those conversations, but also have dry powder that can be deployed relatively quickly, you’re gonna do very well.

And in the last cycle, there was a lot of groups, probably, that did, say, from a low 2011 through, like, 2013, ’14, that bought a lot of distressed paper at really substantial discounts, and they created a tremendous amount of wealth for themselves. And I think this cycle is gonna be very similar, potentially larger, because this impact of increasing rates has been so quick and so dramatic, and also I think this cycle is going to move a lot more quickly than the last one. There’s still a lot of liquidity in the system, and we’re just in an environment where business just seems to be, you know, the pace of deal flow in general has just accelerated so quickly, you know, probably due to technology and other factors, but things are just moving fast.

Jimmy: Well, I’ve got a few follow-up questions for you. It sounds like a great opportunity if you’re able to take advantage of it. If I’m a high-net-worth investor or a family office or an RIA that has a lot of dry powder sitting around, but maybe I’m not quite sure where to turn, I don’t know who to talk to, what’s the best way I can take advantage of this opportunity? Who should I reach out to to get access to deal flow?

Nathan: Yeah. So, that’s a really good question. And I would say unless you are an expert in loan workouts, restructuring, you know, doing these types of deals, I wouldn’t try and do ’em yourself, because they can be relatively complicated, and depending on what state you’re in, what jurisdiction, what the foreclosure process is like, you know, is it judicial, non-judicial, etc., it can be complicated.

So what I would recommend is you’d wanna find a platform that has all that expertise, and a lot of experience in-house, through their team and sponsorship, and potentially invest through a group like that, because, again, you need access to deal flow and you need to be working with a group that has that. And then you need to know how to do these deals. And so you wanna be working with a group that has deep expertise on that front.

So, for us, we actually have a partnership with a platform exactly like that, based in Miami. The sponsor has, you know, he was in the workout group at a local bank in Miami, I think for, like, 11 or 12 years, ran a billion dollars in their portfolio in the last down cycle, restructuring workouts, etc., and now has his own platform that he sponsors.

And so, we’re working very closely with him, both on originating these deals through our network. And so we have a lot of deals we’re working on. For example, we’re looking at acquiring a $50 million note on a distressed condo development in New York City. We’re looking at a note on a hotel in Florida, among a bunch of other things. And then we’re also, you know, bringing capital to this group, you know, basically, at the fund level.

But that’s what I would recommend. You wanna identify, whether it’s a group like that or someone else. But, you know, I think the best near-term opportunity to invest in commercial real estate over the next, call it 18 to 24 months is gonna be on the distressed side. Primarily distressed debt, maybe in certain cases, at the distressed asset side. But again, unless you are an expert distressed note investor, you should be investing in a fund or, you know, through a platform, maybe on a deal-by-deal basis, where they have that expertise.

Jimmy: Really good insights. Great advice there, Nate. Hope my listeners and viewers were listening to that, and they can reach out to you, or if they know anyone with that type of platform, they can start taking advantage of this opportunity, potentially, as it springs up over the next, what you said, about 12, 18 months or so, you think, a lot of distressed paper will be available?

Nathan: Yeah. I think in the second half… So, we’re starting to see deals now. But I think the real kind of deluge of deals is coming, that wave, because there is a big wave of maturities on short-term floating-rate bridge debt that is coming towards the end of this year and into next year. That’s when I think we’re gonna kind of see, you know, a lot of those deals coming down the pipe. But like I mentioned earlier, I think it’s gonna be a fast-moving tall wave that’s gonna go pretty quickly. So you gotta be, you know, in the right position with capital to surf that wave, and if you’re able to do that, you’re gonna do really, really well. If you’re not in that position, you’re gonna miss it.

Jimmy: Right on. Well said. Well, let’s shift gears for a little bit here as we kind of wind down our conversation, wind down this episode. I mentioned at the top you’re in San Juan. You’ve lived in Puerto Rico for last several years, I think, now. What is the real estate market like down there in Puerto Rico?

Nathan: Yeah, Puerto Rico’s interesting. The market is still quite strong. Puerto Rico’s a little, I mean, it’s a U.S. territory of course, but it’s a little insulated from the U.S., in that our capital market here is kind of insulated to Puerto Rico to a certain extent, and there’s good and bad things that come with that. Bad thing is, I say we have three and a half banks and Banco Popular is more than half the market, and we got two others. And there is a fourth bank that’s relatively small, but it’s actually gonna…will probably be growing very quickly over the next few years. But those are really your only options for any kind of bank debt.

There’s a few private money debt funds here that are very sophisticated, very good, and we know them well and are doing deals with them. But for the size of the market, there should probably be something like 10 or 15. And so, you know, the capital markets here are constrained. But what that means today is that this increase in interest rates isn’t really affecting the market here that much. Because it was such a credit-constrained market, the cost of debt was always higher here than it was in the mainland.

So, even a year ago, you know, a construction loan from a bank was probably 8%, maybe 7.5%. Today, you know, it’s that 9.5% over prime. So, yes, it’s gone up a little bit, but we haven’t felt the full brunt of, you know, 450 bips of increase. We’ve kind of felt locally here, more, I would say, something like 200 to 250. So, that hasn’t really cooled the market off.

And on top of that, because Puerto Rico was in a depression for so long, and property values here got so depressed relative to where they should be, that if you’re doing any kind of a, you know, a development project here, repositioning and I’m buying an asset to convert it to a hotel, or maybe something small. I’m, you know, buying a four-unit, and I’m gonna turn it into Airbnbs, whatever that is, right? Your yield on cost that you’re looking at here, just, kind of by default, because of where your acquisition cost is gonna be, was probably already north of 10%, maybe 15%, maybe 20%.

And so, given that, the deals you’re gonna do here can handle, just, overall, a much higher debt burden than a lot of stuff you would see in the mainland. So, that’s a long way of saying, I mean, the market is still very good. We’re actively doing deals here. As I mentioned, I’m a partner in a development project that Jose is a partner in. And we have other deals that we’re working on here. So, I said earlier, you know, I think the best place to invest in commercial real estate over the next year and a half or so is gonna be on the distressed debt side. And I think it’s very much true, really, all over the mainland U.S. Here, I still think there’s a lot of interesting opportunities here to…you know, for hospitality, industrial, housing, etc., that still make a lot of sense.

Jimmy: Well, that’s great. Nate, it’s been fascinating catching up with you, talking with you. Really appreciate your insights into the capital markets space and the commercial real estate space as well. Before we go, just to zoom out, I wanted to get your thoughts on what do you think are some of the most powerful trends that you see playing out over the next few years across the commercial real estate industry from a global macro perspective?

Nathan: Yeah, that’s a really interesting question. And there’s a lot of ways to answer that. The one that I’m personally really interested in and very bullish on is all of this activity of manufacturing coming back to North America from China. And we’re seeing a tremendous amount of activity on that front, at all levels of the supply chain, you know, and products.

So, obviously, you have everything that’s going on with chip manufacturing through the CHIPS Act, but a lot of other things as well. And I actually spend a lot of time in Mexico because my wife’s from Mexico, so we spend, usually, about four or five months outta the year there. So I see, kind of, what’s going on there. And I think that the northern Mexico, call it Texas Triangle area, and then, kind of, the U.S., you know, Southwest is gonna do phenomenally well over the next 10 or 20 years, as most of those supply chains and the manufacturing activity, you know, leaves China, comes back to the U.S. Anything that is not so sophisticated that it has to be manufactured in the U.S. is gonna get manufactured probably in northern Mexico.

And so I think that’s gonna create a lot of industrial real estate opportunity, you know, on both sides of the border, and I’m interested in, you know, looking at both sides. And then in Texas, I think, you know, all your warehousing distribution activities, or types of, property types, are gonna do very, very well. I think demand is gonna just be sky-high for a really long time. And then, in Mexico, I think, you know, if you’re willing to, you know, do a deal in Mexico to get a higher yield, which you can, I think there’s really interesting opportunities on, or just general industrial that’s gonna be leased to U.S. and Canadian companies.

In fact, I’m looking at a deal right now in Carretero, with a local developer who’s looking to build about 400,000 square feet, and the tenants will mostly be U.S. and Canadian firms, and you have dollar-denominated leases, so you’re not even taking currency risk. But if you’re going to another country like that, you’re gonna command a higher yield on cost than you would in the U.S., but you’d have very good credit on the tenant side. So I think all those opportunities are really interesting, and we’re just gonna see a lot more of those over time.

Jimmy: Great thoughts, Nate. Hey, thanks again for sharing all of your insights today. Before I let you go, can you tell our audience of high-net-worth investors and advisors where they can go to learn more about you and EN Capital?

Nathan: Yeah, absolutely. So, website, You know, it’s funny. When I created the firm, I called it EN Capital. But now that I’m in Puerto Rico, I’m thinking I should call it “In Capital,” which was totally unintended, but I think works. But yeah, you can go to my website,, or you can find me on LinkedIn. I’ve got, like, 20-something thousand LinkedIn connection, so you just punch in my name, and I’m gonna pop up pretty quick.

Jimmy: He’s a well-connected man, ladies and gentlemen. We’ll be sure to link to his website,, and his LinkedIn as well on our show notes for today’s episode, which you’ll be able to find, as always, on our website, at Please also be sure to subscribe to us on YouTube or your favorite podcast listening platform, to always get the latest episodes. Nate, thanks again so much for joining me today. Really appreciate your time.

Nathan: Absolutely. Thanks a bunch.