The Business Of Billion Dollar Public Projects With Ray Garfield – RFP 77 Transcript
Gordon Lamphere (00:06): Hi, I’m Gordon Lamphere, and welcome to The Real Finds Podcast, where we have real conversations with key entrepreneurs, activists, and researchers shaping the real estate industry and, as a result, our world. On today’s podcast, we will be speaking with Raymond Garfield, chairman of Garfield Public/Private. Ray is an industry legend, with decades of experience and a history of delivering complex nine-figure transactions. He reveals what scales in big deals, what doesn’t, and how teams can adapt. With experience on the team that pioneered commercial mortgage-backed securities and running national capital markets groups, we take a journey through real estate history and finance, and we look at the power of public-private partnerships that few ever get access to. If you’re a broker, investor, or developer, today’s episode is well worth a listen.
Gordon Lamphere (01:20): Ray, thank you for hopping on the podcast today.
Ray Garfield (01:23): Pleasure to be with you, Gordon.
From Naval Aviator to Real Estate
Gordon Lamphere (01:25): So how do you get from being a naval aviator into the world of finance and real estate?
Ray Garfield (01:34): As old as I am, it’s a pretty long story. My naval service was strictly going to the Naval Academy and then doing what all Naval Academy graduates do, which is serve their country for some years after they graduate, which I was proud to do as an aviator. Toward the end of my second tour, I injured a leg pretty badly and ended up in Bethesda Naval Hospital getting surgery, with the docs telling me I couldn’t fly and I couldn’t go on board a ship because I couldn’t climb ladders. So I had to figure out what my next career was going to be, and I headed back to Texas, where I was from, and entered the civilian world.
Gordon Lamphere (02:37): And in the civilian world, what got you into real estate and finance? There are a lot of paths you could have taken.
Ray Garfield (02:47): I guess a little bit like you, my family had been in real estate for decades. My grandfather started his firm in the early 1900s, and my uncle took over from him. They both had stints as president of the Texas Association of Realtors and were involved in the National Association of Realtors.
Coming back to Dallas with my Naval Academy degree and my experience in the Navy, it was easy to get an interview, because I think they figured I could walk and chew gum at the same time. So I was presented with a number of opportunities. One was to go into the aviation world and work with Ling-Temco-Vought or one of the big manufacturers, and I had a friend in the insurance business, et cetera. I ended up spending two years with Ross Perot, a Naval Academy graduate, when he was starting up his firm, EDS, Electronic Data Systems. But I was traveling more for him than I did when I was deployed flying for the Navy, and my wife and my little kiddies wanted me home more.
That led me back to thinking about real estate, which back in the early 1970s was defined as local in nature. Little did we know it wouldn’t stay local, but back then it was. I was able to join a commercial real estate group and spend my days and nights in Dallas, not only working, but being a good husband and father and developing that family unit. I really didn’t have any desire to work for the family real estate business. By then it was really managed by cousins and so forth, so I took a different route.
Ray Garfield (05:11): I started in syndications, land syndications as a matter of fact. I worked with some partners who were doing industrial and retail buildings, but I liked the land business. I started in North Dallas, which is the way Dallas grows, north, and was able to do some very successful syndications and build up a nice reputation.
Merrill Lynch and the Leap to Big Deals
By 1981, we were contacted by an executive recruiting firm that had been hired by Merrill Lynch, of all companies, to find an organization that could operate commercial real estate within their securities business. Our firm was purchased by Merrill Lynch in 1981, and that was really the first opportunity for me to make a giant leap from traditional, local commercial real estate, listing properties, selling properties, and so on.
The first time I carried a Merrill Lynch card, there was a hundred-plus million dollar building that was going to be for sale in North Dallas, Blue Cross Blue Shield. I couldn’t get a meeting when my Garfield name was on the card. When it was Merrill Lynch, he said, “Well, come on over and let’s talk.” So I found myself in a position to do huge deals all of a sudden, instead of modest-sized deals. Going from one to five million dollar deals to fifty to a hundred million dollar deals was pretty intriguing and pretty exciting to me.
Gordon Lamphere (07:04): What’s the biggest difference between doing a small or medium-size deal and doing some of these larger deals, from the agent’s perspective?
Ray Garfield (07:18): Bigger commission.
The basics are pretty much the same. You underwrite the asset, you value it, you package it, you market it, you close it. It just puts you into a different sphere of operating. So that was a great step. I worked with Merrill Lynch for four years and found myself in New York running the entire national group.
I don’t think they’d mind me saying it at this point, but there was a time when they wanted to be all things to all people. We had this national commercial real estate division, and we wanted to work with the corporate securities people who were doing IPOs and financings for major corporations. When those corporations had real estate needs, we really expected that in the brotherhood of the company, we’d be brought in: “You want to sell this building, buy a bigger building, build a bigger building? Our Merrill Lynch commercial real estate people can do this for you.” And there was real resistance. I can appreciate it, I really can, because they had worked for years developing those relationships on their own. They didn’t understand real estate, and they were afraid we’d mess up a relationship they’d had for years.
Salomon Brothers and the Birth of CMBS
So I had lunch with a cousin of mine in New York who was in a building with Salomon Brothers. He was working for Oppenheimer. In fact, he was the fellow who redeveloped Union Station in St. Louis
Ray Garfield (09:22): when he was with Oppenheimer. Over lunch he said, “Ray, if you don’t want to stay with Merrill much longer, I’d go to Salomon Brothers. You ought to go upstairs and meet these people and get to know them.” So after lunch, I took the elevator up to the Salomon Brothers floor, got off, asked who was responsible for real estate, sat down, and gave him my card: national manager, Merrill Lynch Commercial Real Estate. It was intriguing enough for him to want a further conversation.
I went to work for Salomon Brothers in the commercial real estate capital markets group. You may recognize the name Lew Ranieri, who in a lot of the Wall Street movies made twenty years ago was the guy who kind of got blamed for inventing mortgage-backed securities. But it was great, because we did pioneer it. We were a very solid organization. Salomon Brothers was the king of Wall Street, and I got to participate in underwriting the first commercial mortgage securities in America and work with the biggest trading floor on Wall Street at the time. The fellows on those phones were talking to every insurance company in America, every banking institution, trust departments, and so on, selling these securities.
So it was a fast-track educational process for me. I got my securities license, but basically I was an investment banker. I was bringing in clients who needed to capitalize or recapitalize their companies or their portfolios. We were doing a couple of billion dollars a year in financing all over the country. I had a wonderful opportunity to go to Europe for one of our American clients and do a Euro convertible financing for them.
Ray Garfield (11:49): That was me going for my master’s and my PhD in finance while I was there, and but for that, I probably wouldn’t be doing what I’m doing today. The quick step from there: I was recruited by the Rockefellers to run their Western United States commercial real estate finance, under the Cushman & Wakefield name when they owned it, and I did that out of San Francisco.
Vista Properties: Steering a Company Out of Chapter 11
Then, interestingly and coincidentally, the recruiter who called me for Merrill Lynch back in ’81 called me back in ’89 or ’90 and recruited me for the CEO position of a company called Vista Properties. It was a major spinoff of the largest mortgage company in America, Lomas & Nettleton, or Lomas Financial. It went by both. I took these six subsidiaries out of bankruptcy in early 1992 and had the opportunity to shepherd a mess of a Chapter 11 restructuring and try to guide about fourteen thousand shareholders. We were a publicly held company, and there were also some very sophisticated bondholders, the likes of Equitable and some of the other large holders, who owned a lot of our securities.
Ray Garfield (13:50): Lomas was the largest mortgage company in America, a 75-year-old company. But they took their eye off the ball and started getting into land acquisition and development, and that’s what took them under. So to get them out of Chapter 11, the plan was: we’ll take all the bad stuff, the bad bank, if you will. We’ll couple all these companies together and spin them out as a separate company, and Lomas & Nettleton, Lomas Financial, can keep a nineteen percent unconsolidated interest in the firm.
The new board consisted of creditor representatives and equity representatives. When I became chairman and met them the first day they all joined, we found our company with about a billion and a half dollars’ worth of built-in losses on the books, 10,000 acres across the country, from Florida to California, literally, and no income, no revenue. Ad valorem taxes to pay, but no income to pay them with. So I had to figure out the least damage I could do in those early years to at least pay the taxes on the properties while we waited out that 1990s recession.
Gordon Lamphere (15:33): Can you talk about that a little bit? What I think is so interesting, as someone who grew up fourth generation in commercial real estate, is that there are always these periods where people say, as you mentioned, “Wait till ’95.” I remember in 2008 people were saying, just wait till 2009, wait till 2010, we can survive. Or during the COVID pandemic, people would say if we just make it a couple of years, the office market will be all right. What was it like then? And do you think that’s just a mentality?
Ray Garfield (16:10): It’s really interesting. The first recession I endured was the ’73 to ’75 recession. That was when I had my first company, the one that got sold to Merrill Lynch in 1981, so my partners and I were really struggling through that period. It ended in mid-’75, thankfully. Then there were some downturns along the way, ’81, ’82. Then the 1990-91 recession was deep, and you’re right, the adage was “stay alive until ’95.”
I took this company over in January of ’92. Ernst & Young, the accountants for the company, had estimated our land value coming out of bankruptcy at about three hundred fifty million dollars. Well, if you had to fire-sale a land company in 1992, you can guess what you’d get for that portfolio. I knew immediately that we were underwater, that we were probably truly valued at less than a hundred million dollars, sitting on a billion and a half dollars of losses from the bankruptcy. The great incentive was to preserve those losses and then, at the right moment, sell the company to a white knight: another real estate company that was making a lot of money and could see that it could shelter its gains with the losses it acquired by buying our company.
There were tricks to it, because we couldn’t sell the company for at least three years. Federal law basically says that if you sell more than fifty percent of a loss company in any three-year period,
Ray Garfield (18:33): you’ll limit the losses to $3 million. I had a billion and a half. And I’m going, my gosh, okay, so we can’t do anything, right? So I had a plan to guide this company out of the doldrums of the early ’90s into the mid-’90s, benefit from an improving economy, preserve our most important assets, and make sure we were an operating real estate company. That’s part of it too. I couldn’t sell the company if it wasn’t an operating company. If I only had losses, I’d be valueless. I had to have real assets.
You’ll appreciate this story. A vulture fund representative came to see me in Dallas in my first month as the new CEO of Vista Properties. He sat down across from me, and I’m sure he’d flown from New York to Dallas thinking, “I’ve got this hayseed running this company, and I’ll walk all over him.” He said, “Mr. Garfield, I want you to sell the company immediately.” He had bought his interest from the old creditors of Lomas. At the exit from bankruptcy, there were secured bonds issued to the old creditors.
The bonds were structured beautifully for me as captain of the company, because I didn’t have to pay any interest on them if I didn’t have the money. I just issued more bonds. The bonds were probably in the three hundred million dollar range, and they thought that’s what the company was worth. They thought I could sell the company for three hundred fifty million dollars. But they had purchased their bonds at the exit from bankruptcy from the old creditors for probably ten cents on the dollar. They probably paid thirty or forty million for them. They had $300 million in bonds they paid $30 million for, so they thought they were going to make a killing. He was very disappointed to hear that we couldn’t sell the company for any more than what he’d probably paid for those bonds. It infuriated him,
Ray Garfield (20:57): and he said, “Well, ultimately, we’ll take care of you, Garfield. You can’t do this to us.” But we proceeded to run the company for the next three years. We hired some of the great lawyers in the country, securities attorneys, real estate attorneys, and bankruptcy attorneys, understood the laws, and developed a plan to market the company to really capable, profitable real estate firms.
We ended up, in 1995 or maybe early ’96, getting an offer to buy the company from Centex Corporation, which after Pulte was the next biggest home builder in America, headquartered in Dallas, which was nice because that’s where we were. They underwrote our company for about six months, studying everything, and then they made an offer.
Then, fortuitously, another company came in. I won’t mention their name, but they’re one of the largest developers in America as well. They sent three people out of their headquarters in Florida to see us. They entered our offices on a Monday morning and promptly asked my CFO, my chief financial officer, who was a woman, by the way, to go get coffee. Right there, any chance of a cordial relationship was probably shot. They spent three days underwriting the company, and on the strength of Centex’s offer, they decided Centex must know what it was doing. So they offered one million dollars more than Centex did, and it went back and forth for several months.
Ray Garfield (23:08): Each company continued to overbid to purchase our company, which was very nice for our shareholders and our creditors. Long story short, Centex was the ultimate winner. They acquired our company, and it was very, very successful for them. Their stock grew from, I think, fifteen dollars a share in 1996 to probably sixty or seventy dollars a share by 1998. All the taxes they would have been paying to the government were being sheltered, so they were plowing that money back into home building and everything else. It’s a great tool for operating and building a company.
But I was out of a job. I interviewed with several companies and got some nice offers to become the number two or number three person at other companies. After being the number one person at my age, I said no, I’d rather do something myself.
Turner Construction and Design-Build
Gordon Lamphere (24:28): What do you think is the big difference between being number one at a company and being in a supporting role?
Ray Garfield (24:36): I think it really was the age issue. If I’d been thirty-five years old at that time instead of fifty-five or whatever I was, I probably would have jumped at the chance to be number two at a larger, very successful company. But at that point, I really felt I had learned so much along the way that I could develop a successful organization. I know you can appreciate that, working in your family business. Two of my boys work for me. If my younger son, who’s the president of the company, heard me say that, he’d be throwing rocks at me, because he can’t wait for me to retire. Maybe it was an ego thing, maybe it was an age thing, but I just wanted to do my own thing. And I knew I could do a couple of things very quickly.
That led us to develop Garfield Public/Private, the foundation of which began in January 1997, right after we finished our merger and sale with Centex.
Our advertising and public relations firm interviewed me some months ago about mentors, and one of my great mentors was a fellow by the name of Bud Gravette, who was on my board. Bud had been chairman of the Bowery Savings Bank in New York, and before that chairman of two or three public companies. A hugely successful businessman.
Ray Garfield (26:32): He had been on the board of Turner Construction, America’s largest commercial construction firm, for fourteen years. And they had an issue in 1996 similar to what Lomas went through in the late ’80s. The largest commercial builder in America had started getting into development. If they were building a high-rise tower for Jerry Hines and there was an extra piece of land next door where they could build an apartment building, well, okay, Turner would do that. By the mid-’90s, it had hurt them badly. They had a lot of Class B and C development properties. But their base business was building bricks and mortar for major developers around the country.
So at the end of ’96, during a board meeting, Bud Gravette was pulled aside by his fellow board members, who said, “Bud, if you’ll be the new chairman, we’re going to ask the existing chairman to take a hike.” In an hour’s time, he went from board member to chairman and CEO of Turner. We had developed such a nice relationship during the four years we were board members at Vista that he called me and said, “My first important job is to get rid of Turner Development Corporation.” He asked what I was going to be doing. I said, “I’m going to start my little company.” He said, “Well, I’d like to hire half of your year, and you work on selling Turner Development Corporation.”
That was great, because it was the first step into the next venture. By the end of ’97, we’d sold Turner Development Corporation, and Bud very nicely invited me back to New York, sat me down, and said, “Great job, Ray. Now I’ve got a new job for you. We’ve been building buildings for a hundred years,
Ray Garfield (28:59): and of course we build for lots of private developers, so I don’t want to threaten any of those guys. But we build a lot of things for the public sector. We build for the federal government, cities, counties, states, and so on. Those jobs, private developers aren’t interested in.”
The process at the time, Gordon, was that to win a job with the public sector, you had to be the low bidder. Remember, they’re trying to protect taxpayers’ money. So if they needed a new school, a new airport, a new courthouse, whatever the building was going to be, they’d put out a request for proposals to architects. You hire an architect, and he designs the entire project. Then you take the designs and do another RFP, this time for contractors. You give them plans that have now been worked on for a year by the architect and say, “Bid these plans,” and they know they have to be the low bidder to be selected.
Over the years, it had become such a slipshod business that you couldn’t depend on the guaranteed maximum price or the schedule. You know how complex plans are, from the soils and foundations to the superstructure, the MEP, the civil, everything that goes into these buildings. You put those plans in front of a contractor and say, “Get your estimators to look at these plans and come back in forty-five to sixty days with a price and a schedule.” You can’t do it. But they did it, and so the contractors built in contingencies. They expected tons of change orders, and that’s the way projects went.
Ray Garfield (31:25): I hadn’t heard the term before, but when I was talking to Bud in his offices in New York, he said that process is known as design, bid, build, litigate, and then occupy. He said there’s a new approach to doing this business, which is design-build, and we want to do more of it. “We’ve done four design-build projects in the last four years, and our margins have been two to three times what they are on bid jobs. I want to do more, but only with my best offices.” They had forty-four offices at the time, and more now. “I just want the offices I can depend on.”
If you can win these design-build jobs early on, when they’re first put out, you put a team together that includes the contractor, the architect, subcontractors, interior design folks, everything you can imagine. You start from concept plans, then work through schematic plans, design development documents, and construction documents. That’s a year-long process on these hundred-million-dollar deals. If the contractors are at the table with the architect and engineers all the way along, they’re resolving all the conflicts. So when they bid the job and give a guaranteed maximum price, it can be relied upon. The schedule can be relied upon. And by the way, it’s riskier for the contractor, because he’s taking all the reins of responsibility and therefore the liability. So they make a bigger margin, and since they take more risk, they should get more return.
We developed that program beginning in early 1998, and over the next four years we were retained. I didn’t work for Turner. I was on a retainer, because they didn’t want an analyst from Wall Street to come back and find they were still in the development business. So we were retained as the design-build-finance-operate company for them, supporting
Ray Garfield (33:46): their marketing people across the country, going out, bidding for, and winning public sector jobs. Again, not threatening all the great developers in the country and what they do for a living. We looked at building buildings for cities, counties, state agencies, airport authorities, college campuses, healthcare campuses, and so on.
We did about six hundred million dollars’ worth of business with Turner collaboratively in those four years. Turner had great success with its stock once it got rid of the development company and the other albatrosses around its neck. They soared, their stock went from the American Exchange to the New York Exchange, and they were purchased by a German company. I guess the rest is history. They’re still the largest general builder in America and a great firm. But when the new ownership arrived, my mentor Bud retired, along with my retainer. Thankfully, we had been able to meet other contractors, architects, engineering firms, hotel brands and operators, convention center operators, and so on, so that in 2002, when our retainer with Turner was gone, we were able to continue and grow the company.
Why Public Infrastructure Is So Hard to Build
Gordon Lamphere (35:42): So why do you think it’s still so hard to build public infrastructure in the US? It seems like you established a pretty good method. We’ve done a lot of private development deals and some public, but 99.9 percent of our deals have been private. It’s hard, but it’s not rocket science. Why is public infrastructure so difficult to build?
Ray Garfield (36:20): Politics is probably one of the big explanations. I can’t win a job in Dallas to save my soul, and I’m here. Literally, for the first seven years of my company’s existence, I didn’t win a deal in Texas. I had to be viewed as the expert from afar. I’d go to New York to do the Department of Transportation headquarters with Turner, and they’d say, “Well, I’ve never heard of Garfield, but he’s with Turner, so he must be okay. And he’s from Texas, so he’s probably pretty smart.” A big turnaround from that vulture guy who came to see me when I was running Vista. But yes, you’re never a prophet in your own land.
In those early years, it was very difficult for us to do anything in Texas, because our name wasn’t Gerald Hines or Trammell Crow. Those were the names they knew. “Ray Garfield? I haven’t heard of you, Ray, so be off with you.” Around 2007, we won a job in Lubbock, Texas, with Texas Tech and the City of Lubbock to develop a headquarters hotel and conference center for both the city and Texas Tech. That was our first Texas victory, and it’s led to probably another billion dollars’ worth of development here in Texas, while we’re still developing across the country.
It’s really important to know that mayors, city managers, and city councils are not experts in these areas. They’re very tentative in what they do, and they’re very subject to being influenced by the friends and advisors within the community they’ve known for years.
Ray Garfield (38:43): For us to come in with a new approach can shock them to their core, and sometimes we know we don’t have an opportunity to move forward there.
Atlanta’s Courthouse: An Early Public-Private Model
We went to Atlanta, Georgia, for Turner in the early 2000s, when they had an almost fifty-year-old courthouse with no security. Shortly after the Murrah bombing in Oklahoma City, they were panicked that they needed a new, secure courthouse. But the mayor had told them they would not put a referendum before the public to approve bonds for a new courthouse for at least four years. Their current bond referendum, coming up in about a year, was already about a billion dollars, and they didn’t want to jeopardize that election by making it even bigger. So they told the judges, “You’re going to have to wait.”
So we came in and created one of the first public-private developments for a courthouse in America. We suggested that the city lease the building and use revenues from its fines and forfeitures. Atlanta is a big city, and at that time it had $25 million a year in fines and forfeiture revenues, which are different from ad valorem taxes and from all the taxes that come into the general fund. If we could use those funds so the city could enter into a 30-year lease, with the lease payments coming from fines and forfeiture revenues, we could avoid a public referendum. That’s exactly what we did.
We used a state agency, the Georgia Municipal Corporation, to nominally act as the owner of the courthouse for the years it had the mortgage on it. The city was the tenant, the state agency was the owner, and the state agency promised to give the city the property back when the mortgage was fully amortized. We could use tax-exempt bonds
Ray Garfield (41:05): at almost the same rate Atlanta would have paid on a general obligation bond at that time, about three basis points off, that’s all. So it made so much sense. We did it design-build, finished it ahead of schedule and under budget, and it was hugely successful. That model is what we took to New York for the Department of Transportation headquarters building, and to Reno, Nevada, for their public safety training campus, and others.
Our first hotel was in 2003, when we delivered the Sheraton Overland Park convention center and hotel in Overland Park, Kansas, which was the third tax-exempt hotel done in America. That really opened the doors for us to do more convention centers with headquarters hotels around the nation. Around 2005, we had an opportunity to go to Durham, North Carolina, and help them plan and develop a new performing arts center, DPAC, the Durham Performing Arts Center, which has been one of the most successful performing arts centers in America since it opened around 2008. Again, public-private: some public bonds amortized by hotel occupancy taxes to the city, plus contributions from foundations and corporations, naming rights, pouring rights, and so on, on the private side. The city thinks it has X amount of dollars to invest, but the project is going to cost Y. So you take that and put in the other private capital, and you merge them into this public-private model.
Making Public-Private Partnerships Work
Gordon Lamphere (43:15): What’s the key to effectively accomplishing the public-private model? We’ve worked with companies that have struggled to do that. How have you been so successful at merging the public sector and the private sector?
Ray Garfield (43:36): Trust is a huge part of it. Education and information are a huge part of it. If they know you’ve had success in the past, you’ve got a good reputation, and your past clients are saying these guys did a great job for us, they listen. And we encourage them: bring in your financial advisors, bring in your bond counsel. We want them sitting at the table with you, listening as we talk this through. This is not an everyday walk in the park. This is kind of like rocket science for these folks. So I think that “trust, but verify” approach is terribly important.
I’m really proud that we have a great reputation and that they know we’re a fiduciary for them. That’s a big difference for us. We’re a public-private development firm. We’re not a private developer that puts our own equity and our friends’ money at risk. That’s good and that’s bad. It’s bad in that fifty years from now, my grandkids and their kids won’t be inheriting a billion-dollar fortune that I’ve built up. That’s the bad part. The good part is that I can literally tell these clients that I am a fiduciary for them, just like their trusted attorneys, accountants, and advisors. And our firm brings decades of capital markets experience and knowledge. We understand the bond markets. Almost everything we do is tax-exempt.
The Westin Irving: How Tax-Exempt Hotel Financing Works
Here’s what that means, and this is the dialogue we have to have with the city. In 2019, we developed and delivered the Westin Irving Convention Center headquarters hotel in Irving, Texas, a suburb of Dallas, in Las Colinas, one of the most successful business parks in America and home to something like forty of the Fortune 500 companies.
Ray Garfield (45:56): They had built their beautiful convention center and opened it in 2011 with no hotel, and they couldn’t develop group business without a headquarters hotel. They had started hiring hotel developers in 2001 and kept at it until 2013, and five developers failed. By 2016, when the fifth developer failed, they were beside themselves. “We’ve got to do this. What’s going wrong?”
We had the opportunity to suggest to them that they had never understood the capital structure of a world-class, four-star headquarters hotel for a convention center. It costs so much more than a limited-service or select-service hotel. Therefore, the city needed to make an investment for that one hotel. Otherwise, if they did it the old way, they’d hire a private developer and give them a subsidy.
If it was you or me in our private real estate world, we’d underwrite the hotel and say we’ve got to have a 20 or 25% internal rate of return on our equity. That’s the first hurdle. The second hurdle is finding a bank to lend some money, and these days they’re lending at 8, 9, or 10%. That’s half the cost of the hotel. So half the cost is at 8 to 10%, another 20% is at 25%, and then the city has to put in the subsidy. All of a sudden, you’re amortizing this hotel at a double-digit figure. Your blended cost of capital is 12, 13, 14%.
But if the city does this one hotel to support its tourism business, its group business, or its convention center, it can set up a not-for-profit, and the hotel can be financed without a bank and without equity. All the bonds are tax-exempt. The last three hotels we opened in the last twenty-four months were capitalized in 2021, just before the Fed started increasing rates, and those bonds were issued at somewhere between three and four and a half percent.
Ray Garfield (48:23): Three to four and a half percent for the total capital obligation of a hotel, versus double-digit figures. And you can explain to the city: think about this as an investment. The subsidy you’d give to the private developer, and he gets all the cash flow and the residual ownership. But if you convert that subsidy into equity in your own not-for-profit, say $35 million, like Irving gave its not-for-profit, versus giving $35 million to Garfield as a private developer, where it’s gone, then Irving ultimately owns that hotel. They don’t own it yet. Their thirty-five million gives them ownership of the ballroom, the boardrooms, and the meeting spaces, and the hotel tower is owned by the not-for-profit, which keeps that mortgage off the city’s books. But when the mortgage is amortized, the hotel and all the space are owned by the city.
So you have a double positive impact for the city. You have a much lower interest rate, the city gets all excess cash flow after paying the mortgage, and when the mortgage is fully paid, it gets all the value of the hotel at the end of the day. If they can listen to that and understand it, that’s part of the answer to your question of how you get these things done.
There has to be a level of trust, understanding, and commitment. And it has to be a very important piece of real estate that they need. It has to be a new courthouse, like Atlanta, if the old one isn’t safe. It has to be a convention center and headquarters hotel if there’s no
Ray Garfield (50:25): group business in the community, because that’s an important piece of business to bring into a city. If they don’t have a performing arts center, if they don’t have arts support for their population, they can get through that thought process and say, this is important.
Gordon Lamphere (50:45): Let’s dig into that. For anybody who’s a private developer, having a massive financing advantage in a low-liquidity environment is tremendous, right? How do you access that ability? What’s the standard that allows municipalities to save on these kinds of projects, and what kinds of projects does it apply to?
Ray Garfield (51:16): There are two different kinds of projects. There are publicly occupied buildings: courthouses, city halls, libraries, fire stations, all of that, where the city, county, or state agency is occupying the building as the tenant. That’s kind of easy pickings, if you will, because they’ve got to have a building to operate in, and they’ve got to pay either a mortgage or a lease on it. So you can justify that.
The trickier things are performing arts centers, museums, arenas, event centers, hotels, and convention centers, whether it’s cultural arts or association and convention group business. Think about the massive spending and tax revenue a city like Las Vegas gets from its convention business. They’ve got all the casinos, of course, but it’s a city everybody loves to go to if their association or group is having a convention there. They’ll jump at that chance, whereas they won’t go to Tucumcari.
Think of it this way, too. In Irving, when we didn’t have a hotel, the city was getting about twenty to thirty dollars a day in spending from people who’d come to a day event at the convention center, not spend the night, not have a big meal, and stop at McDonald’s for a soda. Once we opened that hotel, that twenty to thirty dollars a day went to three to four hundred dollars a day, because the hotel is probably two hundred fifty to three hundred dollars a night now, maybe more on peak days. People are having banquets and full meals, and they’re going to retail stores or shows or whatever while they’re there. That spending is the best kind of tax money a city can have coming in,
Ray Garfield (53:46): because these people are there for a short time. The police and fire and all of that are on standby, but not supporting an entire citywide residential and retail market. So it’s great new revenue for them. They have to justify it and think it through. Do we want this for our city? Can we afford not to have it?
We’re working with a couple of cities right now, designing new hotels and convention centers. And it’s not just for the XYZ City Convention and Visitors Bureau. That new hotel is going to be a full-service hotel with ballrooms, banquet rooms, meeting rooms, and all the bells and whistles. So you’re going to have graduations there, and weddings. It’s going to serve the community as well as bring two-, three-, and four-day events into the city. It’s a fundamental, essential property, if you will, that’s needed by almost every important city in America. And when I say important, it can be New York City or it can be Irving, Texas. They’re in different regions and do different things, but they have communities, and they need to support their populations.
The Final Four
Gordon Lamphere (55:23): One of the things we’ll get into now is our Final Four. It’s a nice way to wrap everything up and dig in a little more to your experience, particularly in financing real estate deals, which for anybody who’s listened to this podcast is unquestioned. What do you think will have changed the most ten years from now about how we finance real estate deals?
Ray Garfield (56:00): I think we’re already seeing the changes with AI. Artificial intelligence is going to technologically streamline the underwriting of financing, mortgage models, and financial models in the future. One thing I’ve run up against, and you’re going to run up against it if you haven’t already, is climate change impacting capitalization, and frankly the expenses on properties. We built a hotel on the coast, and the insurance on that hotel is in excess of a million dollars a year, while on all of our inland hotels it’s three hundred thousand a year. Those things are going to change.
Our economy has grown so fast and is so dynamic that I think more people may not be able to afford homes in the future. I think rental properties are going to increase in demand, whether it’s residential single-family build-to-rent or communities going into that world. But basically, AI-powered efficiencies are going to be doing that.
And frankly, I think there may potentially be more use of variable rate mortgages as well. I went through the swings in interest rates in the 1970s and ’80s. The early ’80s were horrible, sixteen, seventeen, eighteen percent mortgages instead of seven and eight percent mortgages. People don’t realize what those were. But starting in 2010 or so, we had a very stable interest rate market. Rates hardly changed. During COVID they sank to the bottom, but they were never more than a couple of percent
Ray Garfield (58:30): in terms of Fed funds rates. So that stability, that lack of variability, is something that may be utilized more in the future. I think the use of adjustable rate mortgages for residential will grow. We’ve financed a couple of major buildings using variable rate structures, letter-of-credit-backed mortgages with a bank letter of credit guaranteeing the principal. Interest rates in the one to two percent range, when fixed rates were five, made some sense. We had to have confidence that the rate would remain at that low level and not suddenly spike, because that’s the danger of a variable rate mortgage, of course. So I think that’ll be part of the difference as well.
Gordon Lamphere (59:29): One of the things we like to do besides looking forward is look back, and that’s why we love getting voices like yours on the podcast, with a long and successful career. We have some younger listeners. If you could give them one bit of advice as they’re starting out in the industry, what would it be?
Ray Garfield (59:59): Well, if I had it to do over again, there’s one football game I played against the Marine Corps that I’d definitely not play in again, because that ended my Navy career. So if you can, play golf or tennis or something less dangerous than the real physical contact sports.
Trust your own instincts, if they’re good. I had perhaps one experience along the way where I was more tempted by the financial offer and ended up working for an individual who turned out to be almost an insane individual. That was a six-month period of my life I’d like not to do over again. I went from where I was, to there, and back to where I was in six months, just shaking my head going, that was just a mistake. I didn’t need the money that bad.
I don’t think I would change much in my life or my career. I met the perfect woman at an early age, and we’ve been married for fifty-eight years. It’s been a wonderful life in that sense. I have three great kids, all happily married with families. A couple of my sons work in the company with me, which is fun, and I’ve got a lot of other good friends who work in the firm as well, so we have a collegial environment we like working in.
So certainly evaluate what you really think is going to interest and excite you. When I
Ray Garfield (01:02:21): got out of the Navy, I interviewed at Ling-Temco-Vought and Mutual of New York and other industries, asking, can I do this well? Can I succeed in it? I really think I made the right decision in joining a small real estate company and sitting next to the principal, listening to him make phone calls and learning how to find properties, list properties, syndicate properties, and all of that. Each one of these experiences is a stepping stone. When you’ve exhausted those opportunities and made the most of them, look for the next challenge, and don’t be shy about going out and grabbing it.
Gordon Lamphere (01:03:18): One of the things we always like to go out and grab is a new book. I’m an avid reader, and I’m curious, what’s the next book our podcast listeners should pick up?
Ray Garfield (01:03:32): I have varied reading likes and dislikes. When I was running Cushman & Wakefield’s Western region, I had a couple of individuals working for me who were just hard cases. I asked a friend of mine about my approach, and he said, “Grab Nirenberg’s book, Getting Through to People.” So I picked up Getting Through to People and read about all of these personality traits and tics, and it was a great help. So part of my library deals with the psychological approach to leadership.
I learned early on, in my first two years with Perot, how to interview, how to evaluate and pick out the cream of the crop, and that’s always been helpful to me in each of these steps. I’ve been able to recruit really solid talent. If you look at someone’s resume and they’ve had five jobs in ten years, you don’t want them. You want to see purpose, direction, and stability. And if someone does leave one job for another, ask why they decided to leave and why they went there. Look at the achievements, whether from high school to college, military, or business. Perot used to say that eagles don’t flock; you have to find them one at a time. So that was important.
Early on I also read Korda’s Power!, which is a great book as well. That’s why I always have little small stools in front of my desk, so people sit way below me and I can intimidate them. No, but those sorts of books resonated from a business sense. But frankly, I’m kind of like you.
Ray Garfield (01:05:57): You look at my library, and you’ll know I was in the military. Ironically, as an aviator, I have more submarine books in my library than anything to do with aviation. They just fascinated me. I love The Great Santini as a book. It was a great movie too, but what a great book it was. Jim Webb, from the Naval Academy, wrote his first book, A Sense of Honor. He was two classes behind me at the Academy, and it really resonated with me. It was a great book, kind of like The Lords of Discipline, if you ever read that book or saw the movie.
I kind of like time travel. I’ve always enjoyed Shakespeare and Sherlock Holmes and that stuff, but there was a great book called, I think, From Time to Time, by an author named Jack Finney. When you get away from it all, take a break, go down to the beach, and read a book or two, it’s just a great way to unwind.
Gordon Lamphere (01:07:17): One way we always like to unwind is the final questions. The last of the Final Four is the one we won’t let you get away with. It’s the whole reason we started the podcast: who’s the next person influencing the world of real estate that we should have on?
Ray Garfield (01:07:43): I’ve really tried to think of a good answer each time I’m asked that question. Since my great mentor Bud Gravette passed away, well, he’d have been the ideal guy to interview. There are some captains of industry out there, and certainly some fine real estate firms much better known than Garfield Public/Private, where you could look for the leaders.
Maybe it’s the same reason that, when I was playing golf, and I haven’t played golf for about ten years now, but I used to play a lot of golf, I never had a business meeting on a golf course. Everybody thought I was crazy. I just wanted to go out with friends. When I go fishing, I want to go out with friends and not think about anything. The great part about fishing is that you don’t think about anything. You just sit there, look at the water, look at the fish, and soak it in.
I wish I had a good answer for you. I don’t think I do. I love the guys I work with. I think Greg Garfield, who’s the president of our company, is maybe one of the sharpest individuals in America in understanding cultural arts. He developed the Durham Performing Arts Center, the Eccles Theater in Salt Lake City, Utah, and Buddy Holly Hall in Lubbock. He’s just learned his craft, when you talk about gaining appreciation for that segment of the world of entertainment and promotion. So that’s the one thing I think you’re going to fail me on, having me recommend someone to you.
Gordon Lamphere (01:10:09): Well, we can reach out to Mr. Garfield. That’s fine. There’s one final question we always love to ask, and it’s simply: what’s the best way for someone to get in contact with you, learn more about what you do, and learn a little more about you?
Ray Garfield (01:10:30): Thank you, Gordon, for asking that. I guess the simplest way for folks around the country is our website, garfieldpublicprivate.com. That gives them the opportunity to see what we’ve done over the years, and it has the contact information and everything else. We’re in Dallas, but we’re very mobile, because we’re working literally coast to coast on these public jobs.
Probably eighty percent of the work we do, Gordon, is referred business. A deal comes across our desk, typically sent to us by Hyatt or Hilton or Marriott, or ASM or OVG, the big managers of convention centers and arenas. Or it’s referred to us by one of the contractors. We deal with ten to fifteen percent of the top one or two hundred architects and contractors listed by Engineering News-Record in its top four hundred or top five hundred. That’s where the firms we’ve dealt with over the years reside. So any day we could get a call from an architect like Gensler saying, “Hey, we’ve got a client that wants to do XYZ,” or Turner Construction Company may call and say, “This city is trying to do something, and they can’t do a vote.” That’s where most of our business really comes from, because they’re going to be on a team with us, and then they’ll make money and we’ll make money. So we’d love to have anybody reach out and talk to us.
Gordon Lamphere (01:12:31): Ray, thank you so much for hopping on the podcast, and we’d love to have you on in the future.
Ray Garfield (01:12:36): Thanks very much, Gordon. Great to talk to you too. You have a great day, okay?
Gordon Lamphere (01:12:40): Thanks again to Ray. We appreciate his insights. If you enjoyed the podcast, please give us a like, a five-star rating, and a review. Your comments, interactions, and subscriptions truly matter and help us continue to bring on quality guests. You can find us on YouTube, Spotify, or wherever you get your podcasts. I’m Gordon Lamphere with The Real Finds Podcast. Thank you for listening.
Van Vlissingen and Co. has been the Midwest’s oldest commercial real estate brokerage, development, and management firm since 1879, and today is independently ranked the #1 commercial real estate agency in Chicagoland, home to the #1 independently ranked agent, Gordon Lamphere, and the region’s #1 ranked commercial property management team. If you own, manage, or invest in energy-adjacent, mixed-use, or transit-oriented property across Lake County, the North Shore, the Northwest and O’Hare corridors, DuPage and the I-88 corridor, Will County, or southern Wisconsin’s Pleasant Prairie, Kenosha, and Racine markets, contact Van Vlissingen and Co. at 📞 847-634-2300 or 🌐 vvco.com. For a market-wide view of where these dynamics sit today, see our State of the Chicagoland Commercial Real Estate Market for Q3 2026.