“Quality Is Liquidity Wearing a Different Suit”: A Private Equity Investor on Real Estate, Debt and Risk

Let's start with the record. 25 years, $2.8 billion transacted, 4,400 hotel rooms, 1.7 million square feet of commercial space. Assets operating under Marriott, Hilton, Sofitel and Le Méridien flags. What's the most important thing you've learned?

That I spent the first part of my career thinking I was in the real estate business, and I wasn't.

25 years across several platforms, by the way. That number reflects transactions I led or participated in over a career, not any one firm's volume.

What business were you in?

The capital structure business. Nobody tells you that at the beginning. You think the game is picking buildings, picking markets, negotiating hard. Then one day you line up every deal you've ever done and ask what separated the great ones from the ugly ones.

It was almost never the building. The buildings were mostly fine. It was the loan.

Say more.

Good operators lose good assets all the time. It almost never happens because the property failed. It happens because a loan came due at the wrong point in the cycle. A lender will work with you on plenty of things, but never on the calendar. He doesn't care what the building will be worth in three years. He cares what it's worth the day it matures.

I've watched people who were right about everything get taken out because they were right on the wrong schedule. Once you've seen that up close, it changes everything about how you build.

A lender will work with you on plenty of things, but never on the calendar.

So what is BEO?

A private equity firm. Based in Miami, Florida, focused on private families and family offices. Real estate is our backbone, because it's what I've done most of my life and it's the backbone of the economy. Quality assets, conservative debt, extra capital behind every position.

What changes is the seat. On some transactions we can be the sponsor: we find it, we structure it, we run it, and we own it next to you. On others we can come in alongside a sponsor already in the deal, as a partner in the general partner, because they need the capital structure solved and we specialize. And on others we work only on the capital side of someone else's transaction. The seat is different every time. The knowledge is the same, and we say which seat we're in before anyone signs.

A private equity firm. Not a real estate company?

Not a real estate company, and that distinction took me 20 years to earn.

Do enough deals and one day you see it: the mechanics never change. The product changes, the structure adapts to the product, but every deal in any industry needs the same elements. Real value, the right structure, aligned people, capital that can wait. Once you see that, you can't unsee it, and you start recognizing the same opportunity in essential sectors, in technology, in places that have nothing to do with buildings. Wherever the knowledge applies, we're willing to look.

The second realization was scope. I've always done everything in a deal, from A to Z. That's still in the house, but you don't have to do everything every time. We can take one portion of a transaction, the structuring or the financing, and do that portion extremely well. Which portion depends on what the deal needs and what the sponsor already has, and we're direct about which one we're doing. That means more transactions, and many more clients we can help.

You're known for being conservative about leverage. In this industry that's almost a character flaw. Defend it.

Let me clear something up first.

The benchmarks I'm about to quote measure core institutional real estate. Big stabilized buildings owned by pension funds, averaging around 5% a year. If you actually do deals you'll think, that's terrible, I've done 18% and 20% on individual assets. You're right. So have I. These are not a target.

I use them for one thing. The same organization publishes an unlevered index and a levered one covering the same kind of core real estate. Not a perfect comparison, but the closest published test of what debt actually contributes.

And what does the test show?

Over the last 10 years the unlevered index returned just under 5% a year. The levered funds, carrying roughly a quarter of their value in debt, returned about the same before fees and roughly a point less after them. A decade of borrowing, covenants and refinancing exposure, and the investor ends up behind the man who owned it free and clear.

Now, to be fair, leverage won plenty of individual years while money was nearly free. I'll grant them all. But the wins went to fees, to idle cash, and then to one bad year. In 2023 the unlevered index fell about 8% and the levered funds fell about 12%. Half again the loss.

And notice: that's not leverage misbehaving. Add the interest to the debt those funds carried and a fall like that is close to what the arithmetic predicts. It did precisely what it was built to do. Getting taken apart on schedule isn't bad luck. It's a design choice you made years earlier, on a day when everything was fine.

Those are published industry benchmarks, by the way. Not mine. Anyone can pull them.

Then why carry any debt at all?

Because the question was never debt or no debt. It's what you need it for.

Buy the right asset in the right place and it gives you more than you underwrote. Rents come in above the projection. The appreciation surprises you on the upside. That's where the return actually comes from, and no lender contributed a dollar of it. The wrong asset does the opposite, and that's exactly when people reach for leverage, to manufacture a return the building itself will never produce. That's the tell. If a deal needs debt to be interesting, the deal isn't interesting.

How much debt is right?

Low leverage, long dated, and overcapitalized.

The amount decides whether a bad year is painful or fatal. At 65% leverage, a 35% decline takes you to zero. The same decline at low leverage is a bad year you survive. Nobody goes broke from a bad year. They go broke from a bad year they must settle immediately.

The maturity decides who controls your timing. Every mortgage is a clock, and the day you sign it, somebody else gets a vote on when your patience runs out.

And the extra capital is the part everyone skips, because it costs you bragging rights. Reserves drag the projected return down. They also mean that when the roof goes or the insurance doubles, you write a check instead of calling a lender. Undercapitalization has killed more good deals than bad locations ever did.

Every mortgage is a clock.

But there is no formula. The right debt on a building with 10 year leases is the wrong debt on the same building with three tenants rolling next spring. Every deal is its own case, and reading the case only comes with experience.

Every deal you passed on, somebody else took with 80% debt and made a fortune.

In the good years, absolutely. I know those people, some are friends, and in the up cycle I looked slow at dinner parties. Then the cycle turned, it always turns, and a lot of those fortunes went back where they came from. With interest.

There are old investors and there are bold investors, but there are very few old bold investors.

You have a line about spreadsheets.

Excel is a fantasy.

Unpack that.

In 25 years, I have never once been shown a deal that didn't work in the spreadsheet. Not once. Every proforma ends with a beautiful number in the bottom right corner. Rents grow every year, occupancy never dips, the exit is always higher than the entry.

It's not that people are lying, mostly. It's that a spreadsheet has no weather. No hurricane, no tenant that goes bankrupt in the wrong month, no insurance renewal that doubles, no pandemic that empties every office tower in the country in one month. The spreadsheet never blinks. Reality does all of those things, on its own schedule.

So how do you use one?

As a map, never as the territory. The spreadsheet tells me if a deal is worth investigating. It never tells me if it's worth doing.

Experience teaches you which cells are lies. When I see rent growth, I know which markets earned it and which are borrowing it. When I see an expense line, I know what's missing, because I've paid the missing items more than once. A young analyst reads a proforma and sees a return. I see 40 assumptions, and I know from scars which six do all the work.

Excel is a fantasy.

Give me something the numbers can't see.

Two restaurants, side by side on the same street. Same location, same foot traffic, same initial capital, same cost of construction. On the day they open, on paper they're identical twins.

Now stand on that sidewalk six months later, at eight o'clock on a Friday. One has a line of people waiting to get in. The other is empty.

One is beautiful and one is not, and there is no line item anywhere where beauty appears. How do you quantify the feeling a place gives people the moment they walk in? You can't. It doesn't fit in a cell. And it's the entire difference between those two businesses, and between two buildings I'll be shown next week that look identical in the paperwork.

That's what experience gives you. Not a better calculator, everybody has the same calculator. An eye. You walk a property and you feel which restaurant it is.

So experience matters more than talent.

Think of it as a passenger.

Two pilots. Both licensed, both know how to fly the plane. One graduated last month, top of his class. The other has been flying for 20 years. In smooth air it makes no difference. The plane mostly flies itself.

Now the weather turns. An instrument disagrees with the window. Something happens that isn't in the manual. Which one do you want in the captain's seat?

You didn't hesitate. Nobody does. Not because the veteran knows more aerodynamics. The kid probably scored higher on the exam. You want the veteran because he's seen things go wrong, so his hands don't shake, and he knows which problems are noise and which are real.

Investing is exactly this, except the weather turns on a schedule nobody gets in advance. Sometimes 4 years, sometimes 10. And sometimes it's nothing anyone modeled. Nobody's spreadsheet had a pandemic in it, and COVID rewrote the rules of entire property types in one year. The value of 25 years isn't knowing what works. That's published everywhere. The value is knowing what doesn't work, and what to do when the manual doesn't apply. I've been wrong about timing more than once, and being early is the same as being wrong when there's a maturity in front of you. That education cannot be downloaded. It has a tuition, and the tuition is time.

Inflation. The official number is in the mid 3s. You don't buy it.

Ask anyone who pays their own bills. The official number is an average, and an average hides things.

Take the last five years. The official basket is up about 22%. Groceries are up about 24. Shelter is up about 28. Home prices are up roughly 26 to 31 depending on whose index you use. Car insurance is up about 51, and that's after it came back down this past year. Government and index numbers, not mine.

So when somebody at a checkout says it doesn't feel like 3%, they're describing the part of the basket they actually buy, the groceries and the gas, the prices they see every week. The Fed has studied this. In one of their own papers, households put inflation north of 6% when the official number was around 3%. You can argue about which number is more correct. You cannot argue with which one decides how people feel and behave.

Why does that matter here?

Because a building is one of the few investments where your income can keep up. A bond pays a frozen coupon for 30 years. A lease gets rewritten. Rents reset to the world as it is, not the world as it was when you signed.

But be careful, because this gets oversold too. Real estate is not an inflation hedge. The right real estate is. Buy the wrong asset in the wrong market and inflation runs right past you. Your costs reprice, taxes, insurance, repairs, while your rents stay flat, because nobody's fighting to be in that building. Buy the right asset in the right market, where people and money arrive faster than buildings can be built, and rents run ahead of the official number and the real one too. The hedge was never the real estate. The hedge is the scarcity. The building is how you own it.

Real estate is not an inflation hedge. The right real estate is.

You have a reputation for paying up for quality. In a business obsessed with buying cheap, explain yourself.

Because I've run the experiment both ways for 25 years, with my own capital and with capital families trusted me to steward, and the results came back conclusive.

The cheaper building always looks better in Excel. Always. Higher yield going in, more upside on paper. That's the fantasy again. Then you own them both through a real cycle and learn what the spreadsheet couldn't tell you.

The cheap building charges you rent. Something breaks every month, the tenants are weaker, and when the economy sneezes they stop paying first. And when you finally want out, the buyers are picky. Cheap assets are easy to buy and hard to sell at your basis. There's always a bid at some number. The question is whether it's yours.

The quality asset is the mirror image. It looks expensive the day you buy it and spends every year after that being cheap. The best tenants want it, sign longer, and stay through the rough years. Even in the worst markets, the best building on the street still clears while everything below it competes on price. Quality is liquidity wearing a different suit.

So is that what you buy? The best office towers?

No, and I don't want to leave that impression. Office is just the example everybody knows, because it took the hardest hit in memory, and a hard hit is what makes differences visible. When everything is going up, every building looks smart.

What I like is multifamily, hotels and industrial. Hotels because I've operated thousands of rooms and know where the money hides in that business. Multifamily because people always need somewhere to live. Industrial because of what has happened to the way goods move. Office I'll look at in the right circumstances at the right basis, not where I spend my time.

And the property type is close to the last question I ask, not the first. What matters is the specific asset, the location, the demographics, where that market is heading. Get those right and the label matters far less than people think. Get them wrong and no sector saves you. Every deal is its own case.

Is the quality preference physical, or is it taste?

Physical. A newer building has the ceiling height, the floor plate, the systems, the light. If the bones are wrong, no capital fixes it. But old isn't the same as bad. The Empire State Building is nearly a hundred years old and leases beautifully, after serious investment. The rule is that certain constraints are permanent, and you'd better know which ones you're buying.

And something that took me years to notice: many times I walked away from a building because it seemed too expensive, and two or three years later I'd look at it and say, that was a great deal, we should have bought it. It happened often enough that I changed the question. Not is this expensive today, but will this look cheap in three years. The skill is telling apart a building that's expensive because it's the best from one that's expensive because the seller is dreaming.

So yes, I pay up, and I've stopped apologizing for it. The best assets have performed better for me, sold better, and, I'll say it plainly, they let me sleep. A building that doesn't let you sleep in peace is not an investment, whatever the yield says. It's a job you paid for.

Paying up means a lower yield going in. You're giving up return.

I'm giving up projected return. I'm usually gaining realized return. Those are two different numbers, and the entire industry is organized around confusing them.

The projection is the spreadsheet number. The realization is what actually lands in your account after every surprise takes its bite. The cheap asset wins the projection almost every time. The quality asset wins the realization more often than not, because the surprises live in the gap between the two, and quality has fewer surprises.

Time matters too. A typical plan for us runs around 5 years, ideally 10 when the investor's appetite allows it. The longer the runway, the smaller every surprise looks. We'd rather match the timeline to the family than force the family into one.

Show me projections and I'll shrug. Show me 20 years of realizations and I'll tell you who the investor really is.

Some of these numbers will look different in a few years. If cheap debt comes back, doesn't this conversation age badly?

I hope somebody asks me that in five years. Every number I quoted about today's market is a photograph, and photographs go stale. If borrowing gets meaningfully cheaper than what buildings earn, leverage will pay again, and I'll say so.

But notice what I never claimed: that low leverage beats high leverage forever. That claim has a shelf life, so I refuse to make it. What I said is that debt adds specific risks. The maturity, the refinancing, the debt service, the wipeout. Those exist at every interest rate, in every cycle since lending was invented. Cheap debt doesn't remove them. It just pays you better to carry them.

The rest doesn't move with rates. Spreadsheets will still be fantasies at 3%. Scarcity will still be the real hedge. Quality will still sell when average can't find a bidder. The numbers were the photograph. The rest was the argument. Judge me on the argument.

Last question. You've argued against your own interests half a dozen times today. Why talk this way?

Because everything I said will be checked by somebody's accountant, somebody's lawyer, and somebody's skeptical brother in law, and I want it to survive all three.

25 years around private families taught me this: you don't win by being the most impressive man in the meeting. You win by being the one whose statements hold up later. Anybody can build a great first meeting. Almost nobody survives the third one. I build for the third one.

This industry sells excitement. Higher returns, faster deals, bigger numbers in the corner of the spreadsheet. I sell the opposite. Fewer deals, but better deals. The right asset, the right structure, real capital behind it, and the patience to let time compound. It will never be the best story at the dinner party. It just quietly ends up being the best result in the room, held by the person who slept well the whole time.

Fewer deals, but better deals.

The plane mostly flies itself, right up until the day it doesn't. What you're paying for, in a pilot or in a partner, is that day.

Jean Paul Szita is Founder and Chief Executive Officer of BEO Investments in Miami.