Shlomi Ronen is the principal and founder of Dekel Capital, a real estate merchant bank based in Century City.
He has worked in real estate for more than 25 years and spent the last 22 in commercial real estate investment and finance, where he has invested or sourced more than $5 billion worth of capital.
Ronen founded Dekel Capital in 2011. Prior to Dekel Capital, he was a founding partner at Lucent Group and opened the L.A. office for New York-based Carlton Group.
Ronen sat down with the Business Journal to discuss his career, today’s high interest rates and the firm’s multifamily credit platform. His answers have been edited for length and clarity.
What got you interested in real estate financing?
I worked in construction management for about five years building things. I was in my early 20s, and as I was sitting across the table from investors and developers, I realized that I really wanted to be on the other side of the table. So it led me to go back to school. I got my MBA at USC and I really used that as a stepping stone to essentially do a career shift to focus on the finance side of the business.
How do you balance raising capital from third-party sources and deploying your own capital? How do you manage those interests?
What we do is we really just focus on places where there are gaps in the capital market. We find areas where it’s really hard for us to raise capital for those opportunities. And to the extent we think that there’s a good risk-adjusted return in providing capital in that space, we try to raise capital around it.
On the preferred and mezzanine equity side, we’re really providing small balance checks, they’re being funded by family office relationships that we have. We’re looking at $3 to $10 million investments that average around $5 million.
What else do you look for when evaluating investments?
First and foremost is good sponsorship behind the deal because as good as a piece of real estate can be, if you don’t have a good sponsor that can execute on the business plan, you’re taking on a lot more risk than in you need to and you should. And secondly, the fundamentals. We do kind of a top-down approach, start with the markets and the submarkets and then focus on the building itself and the neighborhood that it’s in.
In L.A., what would make something attractive?
L.A.’s become a very tough place to invest, especially on the multifamily side. There’s been too much regulation that has taken the ability of an owner to actually own and operate their building out of their hands and that creates a lot of risk. Conversely, for us it would require a higher return than we’re generally seeing in the market, so we haven’t been super active historically in L.A.
We did do a preferred equity investment earlier this year in L.A. and that was a brand-new multifamily community. So we’ve been looking at more of those opportunities in L.A. where somebody was able to build it, (but it) took them a little bit longer, cost a little bit more and are now in a position where they’re not interested in selling. And so they have an equity gap in terms of refinancing their assets. Which can come in and provide (mezzanine financing) and preferred equity behind either bank financing or agency or whatever fixed rate form of financing they end up opting to go with.
What are some of the rules and regulations that have impacted the way you view the market?
First and foremost, the risk of the city stepping in and implementing a moratorium ad hoc is the risk that needs to be underwritten because it’s happened already. So while that doesn’t exist today, eviction in L.A. and California and L.A. specifically are extremely difficult.
As an owner, you need to have a basic fundamental right to be able to collect rent for people that are living in your apartment. And what we’ve seen is certain residents abuse that and abuse the system. That makes the investment environment difficult on existing (assets).
From a development standpoint, the city still has a long way to go in terms of simplifying the process to get through not only the entitlements, but also the permit process with the city, all the way through inspections and providing a certificate of occupancy. You used to be able to build and deliver a building in 18 to 24 months. Now it’s 36 months and you’re hoping and praying that DWP will come and energize a building.
There has to be a shift in the way the city looks at investors and developers. The commercial real estate community has been vilified, quite frankly, over the last 10 years, more so than they have historically. And because of that, the interaction is fractured or challenging between the city and staff and developers.
Ultimately, the city needs housing but on the other hand, it’s very easy to pick the real estate industry as the source of all ill will in what’s going on with the city that needs to be fixed, quite frankly, by the city.
How have high interest rates impacted the market?
High interest rates are causing that gap in equity that’s needed or leverage that’s needed on deals. So that’s created an opportunity for us to provide preferred equity and (mezzanine financing). Our focus has been specifically on multifamily investments throughout the U.S. and second to that is also smaller check sizes.
You are active in senior housing. Can you tell me why it’s of interest?
We saw the demographics and the aging population, especially in urban locations like Los Angeles and at the time there had been little new development happening in the markets that we were in so that attracted us to it as well. We felt that we could get outsized returns, quite frankly, for the risk that we were taking.
And has that been the case?
It hasn’t but it’s an operating business and Covid was a black swan event for the industry. Historically, even during recessions, the industry did continue to do well because the population is somewhat immune to the to the impacts of economic slowdowns. In this case, Covid had seniors in its bullseye. So you got hit on occupancy and then coming out of Covid, all the inflationary pressure was challenging.
We’re finally at a point where we feel like we can manage expenses and inflation is under control. Food costs and labor costs are big inputs to the expenses and in the business. And then lastly, employment costs and even being able to find employees was challenging and, finally, all three of those have settled. So we’re seeing opportunity and, quite frankly, right now there are opportunities to come in and buy existing, underperforming assets, which is what we’ve been focusing on.
Last year you launched a multifamily credit platform. How has that been going?
We’ve seen a lot of restructuring and loan modifications that have kicked the can down the road. But we continue to remain focused on the sector because there’s only so much time that the lenders and borrowers can continue to drag their feet before they have to face reality. And we’re starting to see that now. We’ve seen a pickup in that reality and we’re seeing also lenders starting to become a little bit less amenable to just kicking the can down the road without having some sort of economic shift in the loan metrics.
How much are you looking to deploy this year and next year?
Our goal is to do $50 million this year and hopefully do $100 million next year.
Do you have any other new programs in the works?
We’re a small company, so remaining focused on a few things is critical for us. The credit platform with (preferred equity), the (mezzanine financing), the senior housing and investing around distress in the senior housing space is keeping us very busy.
Any plans to grow the company?
Limited. I really enjoy staying involved with the deals, and I find that the more people we bring on to the company, the more removed I become from the real estate aspect of the business and transition into more of a management role. I think 10, 12 years ago when I started the company, I kind of imagined that we’d end up a seven- to 10-person company and that’s probably the biggest I’d want to grow this platform.
What’s next for the firm?
There’s going to be some interesting opportunities throughout this year and into next year with the economy, with where interest rates are, with the amount of loan maturities that are going to be coming to market, so we really try to capitalize on that, either with our capital advisory, our correspondent lending arm or with our credit platform.
