John Atwater | Prime Finance’s Co-Founder and Managing Partner
Feb 2026 | 59 min
John Atwater, Prime Finance’s Co-Founder and Managing Partner, explains how credit platforms create yield, leverage, and compete through tech and scale.
John-Atwater_Real-Estate-Capital-20260205 R02
John Atwater: [00:00:00] AI will change an awful lot of things. I don't know exactly the time frame, but it'll be certainly in my working life and pretty soon. I think whether it enables more, in essence, revenues, or it's a cost cutting that everyone is so worried about.
The signs so far, and no one knows the answer to this, and I'm not suggesting that I know the answer to this, but the signs so far is that it's going to, in essence, enhance the scale of the business.
Nancy Lashine: Hello, and thanks for tuning in to Real Estate Capital. I'm your host, Nancy Lashine of Park Madison Partners. Capital is a lifeblood of the real estate industry, but the decisions on where and how it's allocated are driven by people and personalities.
Who are they? What motivates them? What can we learn from their experiences?
On this show, we introduce you to some of the real estate industry's most influential thought leaders and decision makers, and we talk about what is important to them, [00:01:00] how they make critical decisions, who has influenced them, and a lot more. Our guest on today's episode is John Atwater, co-founder and managing partner at Prime Finance, a diversified commercial real estate credit platform. John co-founded Prime Finance in 2008 at the onset of the global financial crisis.
The company manages over $11 billion across three complementary strategies, bridge lending, CMBS, and special situations. John has decades of experience in real estate, both as an owner, operator, and as a lender, investing through multiple market cycles. His career began on the equity side when he founded Prime Residential in 1989, just two years after graduating from Stanford Business School.
Over the next two decades, he built it into one of the largest private multifamily owners on the West Coast. In our conversation, we discussed John's early entrepreneurial activities, his decision [00:02:00] to start his own business, how his experience as an owner operator shaped his approach to lending. And we also talked about the reasons for the growth of private lending. The use of match funding and bank lines, and the role of insurance company in today's credit business, and we talked about what institutional investors want today.
I know you will enjoy getting to know John Atwater through this conversation. John, welcome to the podcast. Thank you. I'm really so excited to have you here. As we were saying, you are our first real debt investor who we've had in almost five years of doing this, so thank you for joining us and appreciate this.
John Atwater: Well, Nancy, I'm honored to be here. It is a well-known podcast and exciting to do it.
Nancy Lashine: No, that's great. When you were just saying that people have taken their marks and prices have come down. I live on the backside of your world in some ways on the equity side and it feels like we're still in the middle of that [00:03:00] process. And to the extent of debt having not come due and mark's not having to be fully taken, we are still to some extent, we haven't seen equity portfolios in the institutional market be fully written down yet. And while we are seeing some transaction volume, we're not seeing the robust transaction volume we've seen in other periods.
John Atwater: Yeah. So, we have an equity business as well, and we are seeing the same thing. There's certain things in the equity market that are interesting if you pay taxes that are less interesting. Obviously, if you're a non-taxable,
Nancy Lashine: What do you mean by that?
John Atwater: So, if you, if you think about what are the opportunities in the market today, if you're a non-taxable debt is still very, very, very attractive.
Debt, in fact, has outperformed commercial real estate equity for the last three, five, and 10 year timeframes. And the-
Nancy Lashine: 10 years, I wasn't sure about, three years. [00:04:00] I give you hands down.
John Atwater: I can give you the-
Nancy Lashine: We'll have to check those stats.
John Atwater: I can give you the stats here. I'll send them to you later.
Nancy Lashine: Okay.
John Atwater: Here. And the yields are quite high and the risk is pretty low and the transaction volume, now that things are at a little more of a values that are at equilibrium the transaction volume is actually up a lot. So there's a lot of opportunity in debt where institutional investors can get that stability, they can get the yield that they want on equity side.
Nancy Lashine: But going back to the taxable, what are the nuances there?
John Atwater: An equity transaction today, if you're non-taxable, you go in, you, you buy it, you're getting maybe a three or 4% yield with some kind of leverage, right?
Nancy Lashine: Well, assuming you're buying a multifamily apartment building at a five cap. Yes?
John Atwater: Right.
Nancy Lashine: And you're leveraging it flat, more or less.
John Atwater: You're leveraging it right.
Nancy Lashine: [00:05:00] And maybe you're doing 60-65%.
John Atwater: You probably need to buy it at higher than a five cap. And those are available if your fund size isn't too big and you can be careful.
Nancy Lashine: Right.
John Atwater: But you get a relatively low yield and so you're depending for return on a lots of appreciation going forward. So, if you're getting 4%, you're getting, you need-
Nancy Lashine: Why do you mean rental growth?
John Atwater: you need rental growth, you need rental growth, and you need appreciation.
It's not just rental growth, but you need that multiple to be adequate in the end, and you need appreciation of six, seven, 8% a year for the holding period. And so that is a bet that's worth thinking about. If you're taxable and you're a long term investor-
Nancy Lashine: Oh I see what you’re saying, okay
John Atwater: There are tremendous tax advantages. Sure. It's a very, very interesting part of investing.
Nancy Lashine: Sure. By taking depreciation and the tax benefits, you can [00:06:00] effectively defer paying any tax on the income you receive. And therefore, it's like buying a muni bond versus a taxable bond. Your equivalent yield is lower if you're taxable brcause part of your benefits are coming from tax savings.
John Atwater: Right. And so essentially you go in and you get an immediate yield. Not including the accelerated depreciation just from cash, it's effectively 8% and you got a giant write off upfront you can earn in that business, 9, 10, 11% net compounded after tax returns for the long term and that's pretty attractive.
Nancy Lashine: Do you spend any time thinking about a backlash when this administration and maybe any successors are gone. That's a dirty little secret that's out. Right? That real estate is the greatest tax advantage investment an individual can have, that the tax laws are changed and we lose that benefit.
John Atwater: Well, there's no question that you worry about backlash on a lot of fronts, [00:07:00] regulation and otherwise, real estate is a pretty unique asset in that there's a constituent in every voting area in the United States. There's a real estate player, there's real estate in every congressional district…
Nancy Lashine: Interesting. Yeah.
John Atwater: And so there are, there are some things that are advantages, politically.
Nancy Lashine: Real estate votes everywhere.
John Atwater: Real estate votes everywhere.
Nancy Lashine: Right. It just doesn't necessarily have as many votes as the people.
John Atwater: Doesn't have as many votes as the people. There's other regulatory things vis-a-vis what happens in your estate and other things that are probably a more risk than things like depreciation that actually have a real purpose in society.
Nancy Lashine: So we just went down a rabbit hole.
John Atwater: Yeah. Sorry about that.
Nancy Lashine: No, I have a feeling there are lots of rabbit holes on our path. John, you graduated from college, worked for a couple of years and then started your own business, is that right?
John Atwater: I grew up in Minnesota, which, during this [00:08:00] period I wanna just say out loud and it's terrible what's happening there.
Nancy Lashine: Yeah.
John Atwater: I went to college, I went to Brown University. I went to Wall Street. And then I went to Stanford Business School.
Nancy Lashine: Okay. Right.
John Atwater: Right. And so after Stanford Business School, I worked for a couple years for what was then Jones Lang Wooten is now of course, Jones Lang LaSalle, a great company. What happened then is you had the savings and loan crisis. So just to recount for the audience, that was a period when every lending institution borrower in the country pretty much either was exhausted or bankrupt.
Nancy Lashine: So you're talking about 1991, 1990, 1991. Yeah.
John Atwater: So I started Prime in ‘89. Right, in ‘89.
Nancy Lashine: How did you have the gumption to go off and start your own business? You were, how old [00:09:00] were you?
John Atwater: 29.
Nancy Lashine: Okay. 29-year-old entrepreneur in a world where, I guess in 1989 was still, was the end of the tech, that first tech wave with Intel and Tandem computers and SRI at Stanford and all those great biotech companies. So everybody still wanted to be in tech. If you were at Stanford, right. How did you even think about being in real estate and then starting this business just a couple years outta school?
John Atwater: I've had a business since I was 10 or 11 years old.
I've been an entrepreneur literally my whole life. And so I was always going to try to start a business. I was in a mentality that I would much rather try and fail than never have tried. And it's the thing that I've been most interested in since I was quite young.
Nancy Lashine: What were you doing when you were a young teenager business-wise?
John Atwater: I think my first business is, if you [00:10:00] remember, Charms Pops, which I don't know if your audience do, but you and I probably remember, right?
Nancy Lashine: Yeah. Yeah.
John Atwater: So I figured out that if you went to the drugstore and you bought a box of them, they would give you a giant discount. And then I would go to school and sell them basically at the same price. No markup. But I was in fifth, sixth grade making $20 a week, which was a lot of money during that period.
Nancy Lashine: Right.
John Atwater: And, not too popular with the school administration ultimately. And my parents were called in, but anyhow, there were many many things like that.
And it's really the thing that I was most interested in. And I did it all the way through college. I did it through graduate school. I was a decent student obviously, but the thing I was more interested in was working and being an entrepreneur. So it was going to happen one way or another. The thing about the thing about anytime you start a business, it's one of the biggest decisions you're making. Is it a [00:11:00] fertile area. Right?
Nancy Lashine: Yep.
John Atwater: And it's very hard to start a business and think you're gonna be successful in something that is a bad business to begin with.
Nancy Lashine: Right. You should not be selling fax machines today.
John Atwater: Correct. Yeah. I looked at this, I had nothing to lose. And everybody was on their back heel and way on their back heels, like, more in real estate, even more than the global financial crisis.
Nancy Lashine: Did you think about having a partner when you started the business?
John Atwater: I really didn't think of having a partner. I mean, basically I had enough money to cover my own overhead. Barely.
Nancy Lashine: You compounded the $20.
John Atwater: Right. I had enough money to cover my own overhead. Barely. And the first thing we did is.Or that I did, is I have to focus on something. I can't just say, “Hey, I'm here and maybe I can raise some money and let's go.”
Nancy Lashine: Right. Right.
John Atwater: So, [00:12:00] because I knew I had no money, I knew that I would have a lot of leverage in the business, and so I focused on asset categories in real estate that have pretty steady cash flow and steady financing, in this case, in the form of the agencies.
Nancy Lashine: Right. And in the late eighties, institutional investors were not active in multifamily. It was really a high net individual business.
John Atwater: There's no question. It was a mom and pop business. In fact, many institutional investors wanted to avoid it.
Nancy Lashine: Right.
John Atwater: Because they really didn't want to be seen as raising rents on folks. And, but the real decision for me really had more to do with the fact that I knew that I'd have leverage and if you have volatile cash flows, leverage, your outcome will either be a great hero if it goes up or you'll be bankrupt.
And the bankruptcy part didn't appeal to me.
Nancy Lashine: So understand, I guess you were a good student.
John Atwater: Yeah.
Nancy Lashine: So you tell us the story of buying your first building, [00:13:00] if you recall.
John Atwater: It's interesting. So it's the RTC era. And I focused on apartments. And then it quickly became clear that the largest apartment buildings, people were the most scared of, there was the most relative value. At that moment in time, everyone was worried about concentration of risk. And so if you had a large building, it was viewed as more risk.
Obviously today it's the reverse, right? So I really started out buying very, very large apartment buildings. And the first or one of the very first transactions was a building called Golden Gateway Center. Which is right on the water in San Francisco. It's 1,254 units and came up with an incredibly complicated structure that, among other things, meant that I didn't have to put in very much money because I didn't have very much money and [00:14:00] close the transaction. If I hadn't closed the transaction, the company that owned that asset would have been bankrupt the next day. So it was facilitated by Citicorp, there was debt upon debt upon debt to give you an idea, the most junior debt was provided by Citicorp. The security was a partnership interest. And I think it was LIBOR plus 50.
Nancy Lashine: Oh my gosh.
John Atwater: That was the non-recourse.
Nancy Lashine: And what was the attachment point on your valuation? 90 something percent?
John Atwater: Yes. It was very, very high. But that was a time when banks could still facilitate things of, things of that nature. And, so then-
Nancy Lashine: We did a few of those.
John Atwater: Then we went on and then we bought some other things. But the most important asset that we bought was Park La Brea in Southern California. So Park La Brea is the largest apartment complex west of the [00:15:00] Mississippi.
Nancy Lashine: It's like SkyTown in New York.
John Atwater: It's the same blueprint, actually, at SkyTown. With 10,000 residents, it's its own census tract.
The dominant ownership was May Department Store, which is a bit of an oddity today.
Nancy Lashine: Became federated ultimately, I think.
John Atwater: Yeah. But it was still a May Department Store then and they had a joint venture with Four City.
Nancy Lashine: Oh, wow.
John Atwater: Again, a very, very, very complicated transaction that took months and months and months to put together and was quite little money. Because we had a little more money, but not too much money. We closed on that and at this point we had a pretty sizable business.
Nancy Lashine: Right. When you think back to that young John Atwater, what are the qualities that made you successful? Because so many people, I'm sure wanted to do what you were doing, but didn't have the gumption.
John Atwater: Yeah. So I really think that the fact my mentality is really one of [00:16:00] being an entrepreneur forever and so what I was always looking for and continue to look for is places that you can differentiate. What can you do that's different than what everyone else is doing?
Because , that's the only place you're gonna make, margin. So for example, in Park La Brea, it looked like a lot of risk. And I think true entrepreneurs are actually pretty risk adverse.
Nancy Lashine: Well, the ones that you learn about. The ones that survive to tell the story.
John Atwater: But what true entrepreneurs are is they're risk adverse. But they study something in such a way so that what looks like a risk, they figured out that it's less of a risk than it looks like.
Nancy Lashine: Right.
John Atwater: And that's the trick. They're not wild, “Hey, let's go for it”, people. Typically, they get in there. And I knew that when we got in that we were really levered, but I knew that there was some vacancy issue and that vacancy is the easiest thing to correct, particularly in apartments.
And I knew that you could increase the NOI upward of 50% very, very, very quickly just through that.
Nancy Lashine: just through occupancy. Did you build your own leasing business?
John Atwater: We did it. Yeah, we did. At that moment, we managed it ourselves.
Nancy Lashine: Right.
John Atwater: And have always made it ourselves.
Nancy Lashine: So you were busy figuring out how to build a leasing team, hiring people and figuring out who to hire so you could build a successful leasing team.
John Atwater: Yeah. And so in the larger assets that we had initially we manage ourselves And the smaller assets, we actually third party.
Nancy Lashine: Okay.
John Atwater: Yeah, today, today we're fully integrated.
Nancy Lashine: Right.
John Atwater: Yeah.
Nancy Lashine: We could go down that path about building an asset management business. It's interesting. We raised several funds for Waterton. One of the things that David Schwartz said to me that really resonated was he built that company [00:18:00] Well, I guess we started working together in 2010, and he'd already had about a 10 year history at that point, but 10 years later he said, we could never build this business today.
So the barriers to entry have really changed in that whole business.
John Atwater: Quite dramatically. You really have a hard time doing exactly what we did.
Nancy Lashine: Yeah. Did you do it in SFR or BTR today? Is that business as nascent today as that multifamily business was? 20 something years ago?
John Atwater: possibly, but, but I would think about it differently. Really what's happened over time is that you've gone from our businesses being an amalgamation of deals to platforms.
Nancy Lashine: Yeah.
John Atwater: What you do in your platform itself is differentiating. You need to have deep tech, you need to have deep HR, you need to have things like culture. You need to think about governance, the basic managerial tools. We're pretty late to come to the real estate business. [00:19:00] when I got into the business it was a bunch of crazy cowboys that they do some transactions and that was it. Right? And everything else was pretty second.
Nancy Lashine: And very few cow girls I would add.
John Atwater: Almost.
Nancy Lashine: Yeah. Almost none. Yeah.
John Atwater: Yeah.
Nancy Lashine: So, that's a great segue too, and I'm going to jump to kind of there are so many debt businesses out there today. And if you're raising capital from the institutional market for a debt fund, you're competing with at least a couple of hundred other funds.
So what is it about a platform in the credit business today that you need to be successful?
John Atwater: It's a good point because the fact is you can raise money for debt. And everyone has realized this. And so, they're out trying to raise money for debt and everyone's a, everyone's a debt player. Debt is such a different business than equity. It is a true business, and you're really in the solutions business. [00:20:00] So, you're trying to create solutions for your borrowers that are better than the others. And for your borrowers, for your counterparties on Wall Street and it's a solution or you can think of it as a service business.
Nancy Lashine: So how much of that solution is really a commodity on cheapest price versus all the other terms and bells and whistles that go with a loan?
John Atwater: Yes. If you are really good at it. Here, and that includes not just going in. The most value added actually happens after the loan is closed. How is it that you approve the leases, you approve the capital expenditures? How do you do that? Have you proven it in the past? As the servicers in this business are not loved because they're slow, they don't really know the assets. If you can do that better than the next people, they will pay you more on the front end.
Nancy Lashine: Interesting. Yeah. Is that true mostly for Bridge or is this true even for stabilized properties?
John Atwater: It's mostly true for Bridge, [00:21:00] in our fixed rate business. It is true, but it's more of CMBS type execution. And it's generally more conservative in nature.
Nancy Lashine: So wait, just back up for one second. So at Prime you do bridge loans, you do special sits.
John Atwater: So at Prime we have a large bridge business.
Nancy Lashine: Right.
John Atwater: That interesting in the bridge is the market was settling out, volumes were low and, towards the tail end of last year, as equilibrium was largely reached, volumes went up quite a bit.
Nancy Lashine: Is your bridge business mostly residential?
John Atwater: Absolutely not. We do all product types. We don't do development. Really. But we do all product types. We do have, right now we're liking departments in particular, but have everything in there.
Nancy Lashine: You do office conversions to resi though, don't you?
John Atwater: We have done some of those that's more in the special sets business. [00:22:00] So we have a bridge business that is a large business, one of the older bridge businesses. We have a large CMBS business and we have a large special sits business.
Nancy Lashine: So when you say you have a large CMBS business, you are packaging and originating, or you're buying B pieces?
John Atwater: We're buying B pieces.
Nancy Lashine: Okay.
John Atwater: So we're one of the larger participants.
Nancy Lashine: You're of the largest buyer B pieces recently.
John Atwater: I think a couple of years ago, we were the largest. We're typically in the top three though.
Nancy Lashine: Right?
John Atwater: Yeah.
Nancy Lashine: What's the yield today? February, 2026 on B pieces.
John Atwater: So it depends a lot if it's a five year or a 10 year deal. So, the B piece business was historically, almost entirely a 10 year business. As rates went up and the yield curve inverted, many of the fund operators who really can't do 10 year fixed [00:23:00] rate financing because of the terms of their funds.
They're like, “what do we do?” And so, they shifted to a lot of five year and the five year CMBS became more popular. And it's probably the dominant part of the CMBS business today. Now what's interesting in this is typically in debt investing you think of shorter term as lower risk and longer term, but in this business, that is not how it's and so the five year returns. And I'll give you gross returns, what's called zero zero.
Nancy Lashine: Okay.
John Atwater: And zero zero means, zero defaults during the term zero, zero ad maturity.
Nancy Lashine: Okay?
John Atwater: So that's obviously you have to underwrite and put in assumptions, but that might be 21% on a B piece something like that.
Now remember, I haven't applied any losses or anything else.
Nancy Lashine: Right? Okay.
John Atwater: If you have a 10 year, that might be 16-17%.
Nancy Lashine: Okay.
John Atwater: And the reason is because you get so [00:24:00] much more yield over time out of the 10-year that you essentially get your equity back.
Nancy Lashine: Right.
John Atwater: And, that is not true in the five year.
Nancy Lashine: Another way to say it is you're counting less on the reversion. And more of your return comes from the cash flow.
John Atwater: Correct. Yeah. And, and so it's viewed as riskier.
Nancy Lashine: You also have more time to get through a cycle of however long that takes.
John Atwater: That's right. You're sort of, quasi variable rate if that makes sense.
Nancy Lashine: Yeah. Yeah.
John Atwater: Right.
Nancy Lashine: Yeah.
John Atwater: Mathematically.
Nancy Lashine: Yeah. It's also why I think the five to seven year closed end fund structure is being questioned because we've seen such, so many issues with funds coming to the end of their term.
John Atwater: Yes.
Nancy Lashine: Not being ready or able to sell the asset at NAV or having even fully.
Finish the business plan that investors are saying, “give me my capital back”. And the GPS are saying, “but this is the wrong time to sell”. And so the distributed DPI, the [00:25:00] distributed proceeds are relatively low and it's just causing a huge amount of tension in the business.
John Atwater: No question. What you are seeing, and I alluded to this earlier in the conversation, is more interest in longer-term ownership. And so you're seeing some different structures, or we're seeing some different structures, particularly for taxables.
And so once you enjoy those tax benefits, to sell, you give them all back.
But even for institutions, if you think about the business before the savings and loan crisis, it was basically largely long-term owners. And the funds didn't exist. And the funds really came in in reaction to the savings and loan crisis.
And the old-time owners, a lot of them got hurt very badly. And the idea was you buy it and you move along pretty quickly. But there's a little bit of back to the [00:26:00] future today and looking at some longer term structures.
Nancy Lashine: So I had never actually, as I'm thinking about what you do, I never really thought about it this way. A real estate equity manager raises an equity fund, goes out, buys an asset.
That asset is 30% to 50% of the equity in a building. They go figure out the financing. You own the building.
You do what you do. You sell it. You give the equity back with a return.
John Atwater: Right.
Nancy Lashine: You raise equity from your investors in the institutional platform now, on your credit platforms. And then you go out and you make loans.
John Atwater: Yes.
Nancy Lashine: And so your investors are the equity in the loans.
John Atwater: Correct.
Nancy Lashine: You are back leveraging them, or maybe that's not the right term.
John Atwater: That's the right term.
Nancy Lashine: And then you are lending those loans mature, giving the equity back to your investors, obviously with cashflow along the way, and then the return.
So a huge portion of your business is the cost of capital of your back [00:27:00] leverage.
John Atwater: Correct.
Nancy Lashine: Let's talk about that.
John Atwater: Right. And so we talked about the solution in the front end there is arguably more action on the back. And very few of the many debt managers that you talk to really understand how that works.
Nancy Lashine: Explain it to me.
John Atwater: So mathematically, it's pretty simple. You make a loan, at, keep the math easy. You say it's 10%, it's usually less than that for the audience.
Nancy Lashine: Easy is good. Easy is good.
John Atwater: Yeah. So say it's 10%. Okay. And our back leverage and our loan is 65% loan to value.
Nancy Lashine: Right.
John Atwater: And, and someone comes in, that goes up to the 50% attachment point so, we have 15% equity in there, and they lend us the money at 5%. So we're in essence, arbitraging them. And that's how, that's how you make your money. You're really a spread business.
And in that sense, you're a bank. That's exactly what banks do.
Nancy Lashine: [00:28:00] Why are they lending you the money at 5% versus some other rate?
John Atwater: So there's actually, there's two questions in this, “why is it?”, they're a bank, they have obviously lower cost of capital than we have and “why is it that they're not looking at what we do’” and say, “Hey, 10% is better than 5%. I'm just gonna make the loan directly.”
Nancy Lashine: Right.
John Atwater: And that was when we began the business. The big risk. Is this a trade or is it actually a business?
Nancy Lashine: So you're going to compete against the banks once they come out of their issues.
John Atwater: Correct. Competing against the banks, you'll lose. And, they just have-
Nancy Lashine: Cheaper cost of capital.
John Atwater: Way cheaper.
Nancy Lashine: Bigger borrowing base, etcetera. Yeah.
John Atwater: Right. And secondarily “why is it?”, so here's the reason. The regulations after the global financial crisis changed dramatically. And the amount of capital that they have to hold against loans directly to borrowers has [00:29:00] changed significantly. So the math is if they make a loan directly typically their return on their equity, assuming that it all performs is 8, 9%. and if they make a loan to us, even at the lower rate they have to put so little capital against it that their return on equity is like 15-16%. And so you're seeing more and more and more interest lending to people like us.
Nancy Lashine: Right, so there is a lot more to talk about there, but…
John Atwater: Yeah.
Nancy Lashine: What was the insight and what's the importance of what Mark Rowan did when Apollo bought Athene and what you've seen now across the private equity credit business with the very large platforms, buying insurance companies and having the ability to use the insurance company balance sheet?
John Atwater: Correct. So, Apollo today is largely an insurance company with a phenomenal cost of capital. It is a very, very smart move.
Nancy Lashine: Why is the [00:30:00] insurance company cost of capital better than what you can get borrowing from the banks?
John Atwater: Well, insurance companies and banks are regulated in a similar way. It's a different set of regulations, but the concepts are very much the same. And when we borrow from them, they charge us a margin. Whereas if you're the insurance company directly, you-
Nancy Lashine: So they're basically saving the margin.
John Atwater: Correct.
Nancy Lashine: Okay.
John Atwater: And it's just a very powerful tool. And then depending on what kind of insurance, it's very long-term permanent capital.
And that is a strong-
Nancy Lashine: And that’s an easier cost of capital to asset manage than owning, than buying the bank?. Like why wouldn't those private equity shops buy a bank?
John Atwater: Banks are very complicated to buy as you know, you've seen lots of people try to do it. The thing about banks is you have depositors and that creates a whole different form of politics, particularly after the GFC.
So, the insurance companies,[00:31:00] obviously have people that they insure. But it's politically an easier thing.
Nancy Lashine: Do you think that the regulators are on top of what the private credit companies are doing on the insurance side? That we won't end up with a kind of 19. A 2000 sort of debit call, which we saw on the trading floors.
John Atwater: I think so far they're, they're pretty on top of it. There's all this noise right now about private credit that you're reading about in the papers and this is related to the question you're asking.
Nancy Lashine: Right, right.
John Atwater: That's very much a corporate thing. It doesn't actually relate very much to the commercial real estate business, which is smaller and more nascent.
And it's really a very different. Okay. Even in the corporate world, the corporate lenders have gotten so large that they're very direct competitors with banks and a lot of the naysayers are the banks themselves, as they've figured out that they're slowly getting dis intermediated. [00:32:00]
Nancy Lashine: Okay.
John Atwater: I mean, if you think about. Take Apollo, that they're not just making loans. They're going and saying, “Hey, I'll finance your receivables. I'll do this, I'll do, right?” And these are really bank functions. And so suddenly, the banks are waking up to the fact that this is real and these are Giant institutions.
Nancy Lashine: Yeah. Yeah.
John Atwater: But a lot of that is really outside of what we do.
Nancy Lashine: So going back to what you're doing, if Fannie and Freddie were to merge, would that have an impact on what you're doing?
John Atwater: Well, Fannie and Freddie to some degree keep each other honest. Right? They view each other as really the only two competitors they have. So, that would not be a positive for us on the apartment business, it probably would be a positive for us in the lending business.
Nancy Lashine: I've heard that, that it's definitely not gonna happen. That's, that's what, that's the word out there.
John Atwater: Yeah, housing finance, to some degree is nationalized in this country.
Yeah. And so there's been [00:33:00] a theory that it's gonna, come out from under the government here for many, many, many years, and we'll see. I would like to see it happen in some way. I think it'd be good for society.
Nancy Lashine: Right.
John Atwater: But, thus far I'm, I'm skeptical of, of getting to the finish line there.
Nancy Lashine: So circling back to, I know I'm all over the place, but it's because what you do is so fascinating to me. I mean, there's a lot of pieces to it. Cost of capital. You have these back lenders you have. One, do you have two? Like how does that work and how has that evolved for you over time?
John Atwater: So we have, among the largest capital markets groups, of any of our competitors today we have more than 35 different relationships with banks, different facilities.
Nancy Lashine: Right.
John Atwater: The trick is you don't want one or two because then they sort of own you.
Nancy Lashine: Right.
John Atwater: But we're also among the very largest issuer, CLO Bonds. We sell, we [00:34:00] sell A notes.
Nancy Lashine: You're off of the loans that you've originated.
John Atwater: Correct.
Nancy Lashine: Okay.
John Atwater: Correct. And the trick here is match term funding in whatever you're doing.
Nancy Lashine: Okay.
John Atwater: So we're not interested in short-term warehouses to a CLO or something of that nature.
Nancy Lashine: Right. Yeah. We've seen a lot of people get in trouble not being next-
John Atwater: They're your best friends until the day they're not.
Nancy Lashine: How have you been able to build that platform and do you feel like you have a bit of a moat around you because you have built all those relationships, or are you seeing all these other funds trying to do the same thing?
John Atwater: I think today in terms of the breadth and the depth of our business, whether it's the front end or the back end, we have tremendous advantages that result in higher returns with lower risk.
But to be clear, there is going to be more competition and we need to continue to improve the amount of our [00:35:00] service and the amount of solutions that we provide. So, for example, I think you can expect us to really try to get a fixed rate business going. In other words, if the more things that you can do for your borrower, the more advantage you have.
Nancy Lashine: So all of your bridge is variable at this point.
John Atwater: All of our bridge is variable.
Nancy Lashine: And your special sits.
John Atwater: Special. So special sits in a way is misnamed and so, prime Finance originally was frankly a special sits business. It started in the GFC and we were buying loans at a discount and then we always knew that that would come to an end. And, we grew up in origination business, but we've continued our customer still has a variety of needs, including some pretty high octane, but super interesting transactions we found over time as the origination business got bigger [00:36:00] and more stable, that we weren't paying enough attention to those special sets that came in.
In other words, we weren't servicing our borrower base as well as we should. So we split off as opposed to doing it in the bridge business, we split it off, we made it a dedicated business. And most of that business is really servicing the existing client base.
Nancy Lashine: What percentage of your business is repeat business today?
John Atwater: Well over 50% and many people we've done, I don't know, a dozen or more deals with.
Nancy Lashine: Right?
John Atwater: In the CMBS business, it's all repeat. It's over and over and over.It's a relatively small insider group that does all the business.
Nancy Lashine: When you start a fixed rate business, how do you match term that?
John Atwater: There's the whole question.
Nancy Lashine: Yeah.
John Atwater: So in the variable rate business, you can put a together a bunch of loans and do all that. We're not interested in taking the fixed rate risk.
Nancy Lashine: [00:37:00] Right.
John Atwater: So probably you get some insurance money.
Nancy Lashine: Yep.
John Atwater: Something along those lines.
Nancy Lashine: Yeah. One of the things that's really been amazing to me, having been in the business for several decades is watching, I remember-, I think I did a presentation round about 2000 at the first billion dollar funds and then having people say to me in the last few years, “who are raising multi-billion dollar funds?” We're too small as a firm. We're too small to compete. Even with 10 billion in AUM or 20 billion in AUM, we're still very much mid-market. All the things you were talking about of needing a platform, needing the technology, building those relationships.
How do you think about sizing prime today?
John Atwater: Well, sizing, prime and sizing funds are different equations.
Nancy Lashine: Yeah. The company, the business.
John Atwater: Yeah. And when you size a fund, it's a huge decision. The in [00:38:00] institutional investors are right. If you get too big returns, go down. If you're too small you're not credible.
So there is a kind of a sweet spot there and you can figure it out to some degree given the market opportunity and whatnot what I really think about In terms of the size of the business is you have an increasing tax spent. You have an increasing… you really have to focus on HR culture. You know all these kinds of things that no one paid any attention to 20-30 years ago.
Nancy Lashine: Right. Go to work.
John Atwater: Right. And go to work, do the deal, make the money.
Nancy Lashine: Right.
John Atwater: But it's all these types of things and that's how you win. That's how you generate extra returns in this business.
Nancy Lashine: Right.
John Atwater: So it has a lot to do with, I need to do more podcasts.
Right. I mean, who was doing a podcast 20 years ago or anything like this?
Nancy Lashine: Right, right.
John Atwater: So there's branding exercise. There's [00:39:00] just a big spend that goes with a more mature platform. If you have a more mature platform and you do these, you can take an asset and outperform what your competitors do if you do it well.
I could say, “oh, I'm a better manager” and people either believe me or not, but there was no way to prove it.
Nancy Lashine: Right.
John Atwater: Today I can measure that to the fourth decimal point. But, I couldn't do that unless I spent really a lot of money on technology as an example.
Nancy Lashine: Do you have a sense of what percentage of your revenues you're spending on tech every year? Do you think about it that way?
John Atwater: I don't know if I think about it exactly that way but certainly it's millions of dollars. And, again, let's take just the apartment business. And so, today you have to have a very sophisticated social media otherwise to a lot of people. You don't exist. You have variable pricing. You lease online.
Nancy Lashine: Right.
John Atwater: You need AI tools to do the credit checks. [00:40:00] Once a tenant moves in. You're seeing an AI bot take all the calls. Someone has a leaky sink, they want to call at two in the morning on Saturday.
Nancy Lashine: Yep.
John Atwater: And so you need to be able to do that.
Nancy Lashine: Yep.
John Atwater: And not so much as a cost cutting, but actually as an improvement in customer service.
Nancy Lashine: Yeah. Yeah.
John Atwater: People like it better.
Nancy Lashine: I mean, you're in San Francisco, so I think of you as being more tech forward than the New York Fair or not.
John Atwater: Yes.
Nancy Lashine: And when I listen to people from the Mag seven or who are really deep into the AI world, they'll say things like, “everything will be different in as little as two years”.
John Atwater: Yes.
Nancy Lashine: How are you thinking about that in the context of your credit business?
John Atwater: So generally how I think about tech is, you better be experimenting with it all the time. And because by the time it's real if you're not [00:41:00] experimenting and have some knowledge you're just behind and it's very hard to catch up.
Nancy Lashine: Yeah.
John Atwater: And so in our debt business, it can help with underwriting, it can help with writing investment committee memos, therefore go faster it can help with credit checks. It can help with invest relations, there's so many things that you can do with it, and we're experimenting with it all as a philosophy at Prime, we always experiment. Whether we experiment a little bit. Investing, it's always in proportion. We never bet. And then if something really works then we blow it up and make it a big thing. And if it doesn't work, we try to kill it soon. But the philosophy is an experiment a hundred percent of the time.
Nancy Lashine: Do you have a tech department? How do you do that within the culture?
John Atwater: We have a tech department. Yeah, we have a tech department. And it seems to get bigger and bigger. The thing about tech is they always say, “well, if you do this one thing, you're, [00:42:00] you're kind of done.”
And if I were to get reincarnated and come back, I would come back as a tech company because it's just endless. It's an endless expense. You must see the same thing.
Nancy Lashine: We see the same thing because we are not processing that volume of information.
John Atwater: Yes.
Nancy Lashine: And we're processing much. Because our business is, people reach out to us, they say, we'd like you to raise capital for us.
We have to do a lot of analysis and figure out who they are and what they do. And whether it's a mandate that would make sense for the institutional market, then we have to underwrite it, then we have to package it, and then we have to take it out to the market. I mean that's pretty simple, relative things and, and we don't have the business of asset management for example.
John Atwater: Right.
Nancy Lashine: It's really personal client relationships, so, our tech needs are lighter, I think, than certainly a firm like yours. But we, I mean, literally everybody. [00:43:00] It's a little bit like little kids playing soccer sometimes where we were all using ChatGPT, and then we've all now gone to Claude for the enterprise software and we're trying to figure out and every time we change something it's just a huge time commitment for everybody. And then there's people like me who are slow learners on it. So we've, of course we started with Copilot. I'm just thinking over the past year how many different technologies I've had to try to learn to use and I can see why kids coming outta school are wide-eyed and not quite sure what world they're walking into because it's changing really fast. It's really hard to see sitting in this seat, maybe sitting in your seat, what our business is going to look like in 2, 3, 4 years.
John Atwater: Yeah, I think that's right. I think from our perspective the biggest question is whether [00:44:00] bringing AI in and AI will change an awful lot of things, right? I don't know exactly the timeframe, but it'll be right, certainly in my working life and pretty soon, I think whether it enables more in essence revenues or it's a cost cutting that everyone is so worried about the signs so far, and no one knows the answer to this and I'm not suggesting that I know the answer to this but the sign so far is that it's going to, in essence, enhance the scale of the business.
Nancy Lashine: Right.
John Atwater: More than cut the costs.
Nancy Lashine: Right. Okay. Yeah, there was someone on CNBC this morning talking about the numbers, the GDP growth and saying, yeah, cost cutting didn't seem to be a big thing.
Maybe a little bit on the margin.
John Atwater: Yeah. I mean, it's too early to call it.
Nancy Lashine: Right.
John Atwater: And it's still the doomsayers, they could be correct, but the sign that's not what the signs are, the signs are so far that it'll help the revenues and it'll help the scope of the business.
Nancy Lashine: What gets you [00:45:00] really intrigued? Like what are you, what are you looking forward to over the next year or two.
John Atwater: In a business sense or life.
Nancy Lashine: business and then in life, let's go both places.
John Atwater: Well, in life, I have five children. I'd like to have more grandchildren, but don't tell my kids because they won't like that I said that.
Nancy Lashine: I'm gonna send them all the podcasts.
John Atwater: Yeah. The thing about this business is that it touches people all over the place in every way that they live in their life. And so the thing that I really like about the business is how is it that you can learn more about people all over?
Like, why does someone live right there? Why do they live in this city? Why do they live in this block? Why do they go shopping over there? How is that changing? And then, how is it you can take those trends? And, build businesses around them. These are really increasingly service businesses. [00:46:00] And I find that fascinating. Just absolutely fascinating. And so all of that is gonna change but it'll also stay the same. People, they still have the same motivations and the same type of things that they always have had. It's just expressed a little differently.
Nancy Lashine: So you live full-time in San Francisco, you spend some time in New York. How are the cities feeling to you these days?
John Atwater: Well, it's a great question. So, first of all, it's possible that I actually really live on an airplane. I do spend an awful lot of time in New York although I do love San Francisco. So San Francisco was some years ago in a pretty bad place. And the New York Times had it right. It was in a bad place. Today, San Francisco it's not fully recovered, but boy is it recovering. It's, and in certain areas it's near [00:47:00] booming.
It feels really, really good. It still has some ways to go. The office space is leasing. I do think in the next year you'll see some new office building construction.
Nancy Lashine: Wow.
John Atwater: Right.
Nancy Lashine: Just like here in New York.
John Atwater: Think about that. No one would've seen that. But it's also like here in that these are very high-end office buildings that will get a couple hundred bucks a foot in rent. So that's a very special office building that there's an awful lot of office buildings that are getting filled, but slowly, and it'll take a while. Union Square will take a while, but generally it's good. The AI thing that's going on is very centered in the Bay Area so say that $10 trillion has been created out of AI. Probably 70% of that is in the Bay Area so a lot of it's locked up, but it is coming out and the Bay Area has a very bright future in the next little while.
Nancy Lashine: [00:48:00] Home prices are not going down anytime soon.
John Atwater: Home prices are not going down. Rents are actually up a lot.
Nancy Lashine: Are they?
John Atwater: Apartment rents are up a lot.
Nancy Lashine: Yeah. How do apartment rents compare? San Francisco to New York?
John Atwater: New York, in essence, is ahead of San Francisco. New York is a much bigger place.
Nancy Lashine: Much bigger. Right.
John Atwater: It’s hard to talk about them in the same way.
Nancy Lashine: Right.
John Atwater: But rents went up here enormously. So, if you think about it, pre COVID. San Francisco rents per square foot were actually higher than New York.
Nancy Lashine: Yep.
John Atwater: By, I don't know, maybe a couple years ago, New York had very much recovered and San Francisco was still in the doldrums.
Nancy Lashine: Yep.
John Atwater: Rents per square foot in New York were double
Nancy Lashine: Wow.
John Atwater: San Francisco.
Nancy Lashine: Yep.
John Atwater: And so…
Nancy Lashine: and no vacancy.
John Atwater: And no vacancy.
Nancy Lashine: Right.
John Atwater: San Francisco has a little ways. Its rents are up a lot.
Nancy Lashine: Yeah. Kids when they graduate from school still wanna come to New York.
John Atwater: [00:49:00] Kids still want to come to New York. San Francisco's really a gold rush town. It has been since its founding. And so you had social media. In my time living there, it's very volatile. It's always been very volatile. When it's good, it's really good. Then it goes down and then some new thing, almost every new thing in our lifetimes. Has come outta the Bay Area. It's sort of remarkable.
Nancy Lashine: It is somewhat yeah. That's true though. It really is true.
John Atwater: But it's a gold rush.
Nancy Lashine: Maybe not not music, but certainly in technology for sure.
John Atwater: Well, you had the Grateful Dad. You had Summer Live, you had a lot of music things going on there. Not quite like Los Angeles in the day, but-
Nancy Lashine: Right. You just have more diversity in New York, so…
John Atwater: New York is just really one of the true world cities in the US. It's just a giant place.
Nancy Lashine: Do you see yourself ever going back to Minnesota?
John Atwater: No, I [00:50:00] don't. And famous last words I always thought I would go back to Minnesota, as a kid I thought, when you grow up, that's what grownups do. They go to Minnesota because all the grownups I knew that's where they lived. But yeah, I've lived outta Minnesota now for over 40 years.
Nancy Lashine: Yeah. I do see a lot of folks going back to where they came from for a quieter and gentler lifestyle. But Minnesota seems to have found a different rhythm these days.
John Atwater: Boy has it ever For many years the standard part of my sales pitch was, “Hey, I'm from Minnesota and Minnesota nice”. Not so sure that works as well with all the things that have been going on there.
Nancy Lashine: Last topic, I wanna just ask you. You talked about sales pitch. What are investors looking for today when you talk to so many institutional investors?
What are you hearing? What do they like? What don't they like? What's on their minds?
John Atwater: Well, in terms of, in terms of [00:51:00] real estate, what they really want is yield. What they really want is cash flow.
Nancy Lashine: Yep.
John Atwater: And I don't know exactly if it's because they're trying to mitigate risk from having big stock positions.
I don't know. Many, many, many of these investors have been cashflow negative because the realizations haven't happened. And they've been cashflow negative now for years. If you look at capital calls over distributions. What they're really looking for more than anything else is a high yield.
Nancy Lashine: Are they still as comfortable with a closed-end fund structure as when you first started marketing these vehicles?
John Atwater: Compared to the vast-
Nancy Lashine: If you look at the NTRs and their-
John Atwater: They're very comfortable closed end, what they're not comfortable with is open end.
Nancy Lashine: Right.
John Atwater: Right.
Nancy Lashine: Because of what you've seen [00:52:00] with the BDC redemptions and the valuation pickups and..
John Atwater: Right. And can you really get out and what is the valuation and so if you're trying to raise money for anything that looks open-ended. It’s very hard to raise a penny.
Nancy Lashine: Interesting. It depends what it is, to be honest. We're starting to see flows into some of the well established institutional equity funds that have met all of their redemptions. They're back to paying a dividend that has written the assets down and it feels like it's a solid and steady way to get into equity real estate again.
John Atwater: Right.
Nancy Lashine: More in either industrial or more industrial even than residential.
But I think residential will not be far behind.
John Atwater: If you're very large and established, it's possible if you're starting up-
Nancy Lashine: Oh yeah.
John Atwater: More difficult.
Nancy Lashine: Very difficult.
John Atwater: That being said I said that we need to continue to compete at a higher level to the borrowers but there's also a lot that [00:53:00] you need to do with the investors, and there's just an awful lot of, in essence products for the investors.
Whether it's an insurance wrapper, a rated feeder, etcetera. There's so many different ways to go.
Nancy Lashine: Yeah. Yeah.
John Atwater: And so you can also expect to see from us more experimenting in that realm to give the investors more of what they want.
Nancy Lashine: Well, I'm excited to see what comes next from you, John.
And from Prime you've built an unbelievable business. Thank you. And just in awe of all that you've accomplished. And you look like you're still having fun. So that's the best part.
John Atwater: I love it. Yeah, it's great. Thank you.
Nancy Lashine: Tell me, if you could have dinner with anybody dead or alive next week, who might that be?
John Atwater: Interesting question, it might be Gandhi or [00:54:00] I really like history and I spent a lot of time reading history and other things that I think it'd be pretty interesting to have a dinner with Caesar Augustus.
Nancy Lashine: Okay.
John Atwater: One of the greatest politicians in history, not Caesar, but Caesar Augustus.
Nancy Lashine: Caesar Augustus, okay. Yeah. I'm just wondering what language you're speaking, so.
John Atwater: Well, we'd have to speak English.
Nancy Lashine: Right. Fair enough. Thank you. Thank you for joining us. Really pleasure to have you on the show.
John Atwater: All right. Thank you, Nancy.
Nancy Lashine: I hope you enjoyed this episode of Real Estate Capital.
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