Kevin Swill  0:00  

So people that had a CMBS loan that was 10 years, and they’re six years into it, they have almost four years that these people that bought the securitized portions or tranches of that I wouldn’t say that property, but of the whole portfolio which included that property. They’re expecting their interest payments all the way through the 10th year. And now they’re stuck with a situation where Hold on a second, this borrower wants to sell in year six, where are we getting that interest for the last four years? So the way that defeasance is set up is and in the loan documents, it’s very, very specific. It says, you can sell your property early, you must defease the loan and that is what we call the prepayment penalty. So it’d be under the paragraph of prepayment or paying off early. And what they’re saying is okay, you can prepay. Here’s your penalty.

Announcer  1:04  

Welcome. Do you CRE PN Radio for influential commercial real estate professionals who work with investors, buyers and sellers of commercial real estate coast to coast whether you’re an investor, broker, lender, property manager, attorney or accountant we are here to learn from the experts.

J Darrin Gross  1:24  

Welcome to Commercial Real Estate Pro Networks CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is the podcast focused on commercial real estate investment and risk management strategies. Weekly we have conversations with commercial real estate investors and professionals who provide their experience and insight to help you grow your real estate portfolio. 

Today’s episode is sponsored by building insurance and risk when you invest in real estate. Work with the experts at building insurance and risk you will receive multiple coverage offers with a side by side coverage comparison. To learn more, go to building insurance risk.com. 

Today, my guest is Kevin Swill. Kevin is the CEO of Thirty Capital Financial, a commercial real estate debt advisory firm and pioneer in the defeasance space. Kevin is an accomplished executive with experience in acquisitions does dispositions, financing, capital raising asset and property management. And in just a minute, we’re going to speak with Kevin about defeasance how to avoid pre made prepayment penalties on commercial real estate debt hedging and our new finance academy or his new finance Academy. 

But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us out. You can like share and subscribe. And as always, we encourage you to leave a comment. We’d love to hear from our listeners. Also, if you want to see how handsome Our guests are, be sure to check out our YouTube channel. You can find us on YouTube at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Kevin Swill. Welcome to CRE PN Radio.

Kevin Swill  3:18  

Nice to speak with you, Darrin, thank you for having me on today.

J Darrin Gross  3:21  

Well, I’m excited to talk with you today. Before we get started, if you could take just a minute to share with the listeners a little bit about your background.

Kevin Swill  3:31  

So my background started almost 30 years ago in investment, real estate. I started with Citibank, in their domestic real estate group moved over and in 1994 was part of the pioneering team that started the CMBS, which is commercial mortgage backed securities. And we started doing a lot of real estate CMBS loans. I stayed in that business for probably about eight years. And then I went over to the development side and became president of a nationally known real estate development company that covered any all asset classes. From there, I did equity raising around the world, raising billions of dollars for New York developers for those skyscrapers that we see today in the city. And then from there, I’ve had my own investments, my own real estate I manage that for a little bit. And now I’m I’m running a defeasance and interest rate swap desk for a wonderful company called 30 capital.

J Darrin Gross  4:43  

Got it? Well, your experience in real estate financing and all sorts of levels of capital or sound like you you’re definitely more than qualified to handle the the conversation and what you’re doing Now, that’s great. So maybe an easy place to start just in this probably as much for me, as it would be for our listeners, commercial real estate lending. Now there’s multiple, multiple forms. You know, I think at the base level, you’ve got maybe we’re like a commercial bank where somebody, you know, talks to their local bank, and they they, you know, put out their idea and loan committee meets, and they hear back on Tuesday that they’ve been approved or not. And then from there, it escalates and it gets rather varied and opportunistic. Depending on where the capital is coming from, can you kind of share with the listeners myself where and how, because we get to defeasance defeasance is not something that happens on a on a loan that you have with a commercial bank, it’s more of a feature of a more of a hybrid or a more complicated loan product, can you share with with us just for kind of a basis of understanding what you know, how those different layers are?

Kevin Swill  6:15  

Sure, and no problem Darrin. So let’s look at a typical real estate transaction on a commercial real estate. product. And that is you have your typical borrower, and your borrower is looking to acquire an asset. For this example, let’s just use a multifamily asset. So they take a look at the asset, they look at the financials, they’ve determined they want to acquire this, they work out a deal with the seller, and they have a contract, the first thing that typically a borrower will do will be to call their lender, and that lender can be anywhere from a local regional bank and insurance company, a private lender a debt fund, or even as we will be speaking about commercial commercial mortgage backed securities firm that sells that product. And once we have an understanding, and the borrower has an understanding of what loan to value or loan to cost, they are willing to provide ie 60% of the total purchase price, or 70%, it all depends on the asset class, as well as the strength of the borrower, and the quality of the asset and the location of the asset. So there are a lot of different parts that fall into the criteria of leverage that you can get from the institution. But for an example, let’s say, when you have 100% of the cost, and the bank is willing to give you 70%, that leaves you as the borrower having to provide 30% of equity. Many borrowers, many sophisticated borrowers will say I’m not putting up 30%, I am going to put up 10% of the equity that’s needed. And then the borrower will go out and either find limited partners, mezzanine partners, or just pure code GP partners to put up the other 90% of the equity. And they work out their own contract their own agreement that says look, if I’m putting in 90%, you’re putting in 10%. This is the way the structure is going to work. And when there’s an event. This is how the distributions and the waterfall will work. And that’s fine. That is how your typical structure works. Your senior lender, a possible mezzanine lender, and then all of the equity and the equity can either be the borrower or the sponsor, or he or she may ask for additional equity, which is those LPS that I was talking about that your debt your standard structure

J Darrin Gross  9:10  

Got it. So when you have a you know, again, like a syndication and you’ve got your general partners and your limited partners and in you go in a choir or you’re wanting to acquire an apartment complex, when you go to your lender, at what point is it that the the opportunity to get into a commercial back or commercial mortgage backed security? Is that something that the that the lender structures or is that something that the borrower is seeking? Or is that like a broker that’s that’s, you know, introducing that. Where is that? Where does it originate? I guess

Kevin Swill  9:55  

You know, there’s there’s two there’s two schools of thought as sophisticated bar or will or will not use an intermediary or as you say, a broker, because they’re quite experienced and they go right to their lenders. There are different times where you can see in the market by reading periodicals and looking at the different where the Treasury is on a certain day versus where Sofer is on a certain day. And you can either have the agencies, which is Freddie or Fannie have the best execution, meaning the best interest rate and terms, or you may have an insurance company, that may give you the best terms that are out there, you may have a local regional bank that you ever relationship with, that the loan proceeds are within their guidelines. However, what we have seen since 1993 1994, has been some of these investment houses, ie, Bank of America, Merrill Lynch, Wells Fargo, the list goes on Citibank, Deutsche Bank, that provide an alternative to a standard loan, and that is through commercial mortgage backed securities. And sometimes most of the time, those terms become more creative to the borrower than the terms that have been traditional, over the last, you know, 200 years. So you as a borrower, or you as the intermediary, are trying to find the best execution. And at times, especially in the 90s, and the early 2000s, the CMBS world was the prominent lending opportunities for people. And so that’s really where it comes from, it’s really a matter of understanding the market and knowing where to go to get the best execution.

J Darrin Gross  11:52  

So on the CMBS product, though, is that something that is recognized up front when you originate the loan? Or is that more of a function of the lender, selling the loans and packaging those, and that the the loan RD has this language included, allows them to do that,

Kevin Swill  12:11  

right. So when you’re looking at your bar, or your lenders and what they’re willing to offer, you have to take a seat back and understand that, is it something that I want, because I have a relationship with this bank, and I want them to hold my asset on their books. So if I have a small problem, I can go call Joe Smith, at the bank, and he’s servicing the bank, the loan, and therefore it’s a very simple transaction. A borrower for the most part, when they’re doing a CMBS loan, they know that the lender that they’re doing the loan with will eventually as you had indicated, package the loan, get the loans rated by the rating agencies. And then we’ll go out and securitize and sell those assets. And then you as the borrower are now dealing with a servicer, the borrower, the lender is no longer part of the transaction. However, when you have written your initial loan with the lender, which is a CMBS, lender, the loan documents specify certain criteria that may be different than what a bank loan would give you, or an insurance loan would give you and so forth. And there are insurance companies that also securitize their assets. So, securitizing is something that’s been around since the early 19 1990s. But it has been so prevalent in in commercial lending in borrowers understanding of their assets. And that’s of course, where defeasance comes in, you find defeasance for the most part, only in CMBS loans.

J Darrin Gross  14:02  

Right. And in so the CMBS loan, does it not have a promise that the loan will continue? Or is it a pre made prepayment penalty that that kicks in? If you don’t? I mean, is that essentially what the defeasance is, is that if you, you know, if you if you opt out, so you get a great offer to make a big windfall, little ahead of schedule. And, you know, you’re all you agree, agree to do that, but then you get into your loan, you find out Wait a minute, I can’t get out of this loan yet. Because the big penalty is that essentially what a defeasance is that

Kevin Swill  14:43  

Well, you know, in very straight terms, it just gives you the definition, then I’ll give you a little bit more color. You know, defeasance enables a borrower to refinance or sell their property. The provisions that are in those original loan documents, it restricts the borrower from paying off their loan early, ie if it was a 10 year loan, and they want to sell it in the eighth year, so it allows them to pay off their loan early and release them from their mortgage obligations. But what defeasance does is it substitutes a very skillfully constructed basket of low risk securities that will replace the bar was property as collateral for the mortgage. So by way of example, you have, as you indicated, a very strong market for a seller. markets have been inflated, as we saw, pretty much at the beginning of COVID. For example, we saw that real estate prices were inflated to the point where it was almost ludicrous. But there were people still buying. So people that had a CMBS loan that was 10 years, and they’re six years into it. They have almost four years that these people that bought the securitized portions or tranches of that I wouldn’t say that property, but of the whole portfolio which included that property, they’re expecting their interest payments, all the way through the 10th year. And now they’re stuck with a situation where Hold on a second, this borrower wants to sell in year six, where are we getting that interest for the last four years. So the way that defeasance is set up is and in the loan documents, it’s very, very specific, it says you can sell your property early, you must defer fees, the loan. And that is what we call the prepayment penalty. So it’d be under the paragraph of prepayment or paying off early. And what they’re saying is okay, you can prepay. Here’s your penalty. And, for example, on our website, at 30, capital financial, we have a defeasance calculator. So a borrower can go there and actually get an estimate because again, we know that the market and the treasuries and all the different various securities change on a daily basis. So but you can get a snapshot picture of what it’s going to cost you to get out of that loan. One is that it may say what type of securities we can substitute. So what we would typically do at our shop, and we’ve been the longest running defeasance shop in the industry, we’ve been in business since 2000. Right when people started to have that ability that CMBS was really taking off is that we will review your loan documents, and we will see what kind of securities you need to substitute for the remaining period of time, either through the maturity, or there are times where there are loan documents would say the last six months or open, you can prepay without penalty. And what we do is we go through that formula, we look at what securities we can buy. And then we go out. And we find the least expensive securities that still fulfill the obligations that are written in the original loan documents. So that way we at our shop, we don’t just go to one place and say here you go, we actually scour the market, we’re all about white glove service. So at 30, capital financial, we will literally scour the market and find the least expensive, but secure securities to pay off that loan. And you know, that process is probably about a 30 day process. So you’ve already at this point, you have decided internally as a borrower that you’re going to be selling or refinancing your transaction, your asset. And then you go through and you read those loan documents and you realize that you have prepayment, and you say to yourself, Okay, I have to make sure that I’m selling this asset or refinancing this asset, so that when I take that prepayment penalty, and what it’s going to cost me into consideration for what I’m selling the property for, so that I get my IRR, my return on investment, including that cost that I have to play out at the end of this transaction. I hope that makes a little bit of sense.

J Darrin Gross  19:51  

It makes a lot of sense and it you know just the kind of the slowdown and because it’s all its contractual, it’s basically the the the defeasance is is a function of the commercial mortgage backed security in that when the loans are sold, they’re sold to investors that are expecting a rate of return for an amount of time. Yes. And that’s it. Are they bonds at that point? Are they? I guess, I don’t know what,

Kevin Swill  20:18  

they’re all different types of securities. Okay.

J Darrin Gross  20:21  

So, so anyway, the individual investor whose loan that’s packaged in this, this portfolio, or tranche, or power, they have the opportunity to sell or refi or whatever it is, and then now also they looking at that loan document, they realize, oh, we we’ve got a situation here, we’ve got to defeat and they your service. Now, you guys then take a look at that and find alternatives to where you can replace that obligation is essentially what it is to where if I have, because the the contract says that I owe this money for the length of time as I originally agreed to, yes. Are you then because you said that you guys are what I thought I heard you say was that you will scour the market and find an alternative. So if I do sell or refinance my, my building, I’m assuming I’m going to have to take a portion of those proceeds or something and and find a a alternative investment that will then continue to to repay the loan, as I originally agreed to is that that is

Kevin Swill  21:45  

Essentially you’re correct. I mean, what we are, what we are doing is not necessarily an alternative, it is a process. defeasance is a process of how to substitute securities for the actual collateral, which is your property. So there is a longer process one, once the borrower decides that he or she wants to sell or refinance, they need to go to their servicer, that’s the group that’s servicing their loan now, not the original bank. And they say, Look, this is what we’re doing, we are selling the property, we are going to be paying off the loan, as well as we are defeating. And we are using 30 Capital financial to help us with our defeasance and our prepayment penalty. And they’ll ask for approval, which most of the time they will always get. And then what we do is not necessarily alternative, what we do is we know what those payments are every month. So we are now following the guidelines, if it is in the loan documents, and finding different types of securities that will pay off enough interest each month. So when you accumulate all these different securities you have, it will continue to pay off those investors on the far up, you know, the end, investors, if you will, that bought the different tranches. So that’s really the the process it’s very technical. It’s it’s sort of complex. But after doing it for 21 years, we are experts, we’re experts in this business, we are very, very confident in what we do we work with all the services and special services have mastered services. So they know and we know exactly what we need when we need it. We have kickoff calls. And on those kickoff calls, you’ll have the borrower you’ll have the lawyers, you’ll have a broker, you may have the service or the services attorney on the phone. So everyone’s kicking off so that we can come up with one, when are we executing on the securities to the borrower, give us everything we need. The servicer give us their opinion, all of those things. And that’s why I was saying it’s about a 30 day window. So you’ve already signed a contract if you will, or about to sign a contract with the buyer. But now in the background, you’re doing all of this work, and we help them get through that process from the time that they are wanting to sell and call us and ask us to give us a quote on what the defeasance cost will be ie the prepayment penalty and what our service fee is for doing that all the way through to the end when there is an actual closing. So we help them we guide them through that process an individual borrower cannot do this on their own

J Darrin Gross  24:43  

Yeah, no it sounds sounds kind of airy from all the different parties involved in suing the dollar amounts. And in by replacing it here’s here’s what I’m biggest the gap I’m not necessarily can’t but it’s gonna make sure I understand so. So let’s say that I, let’s just use some numbers that say I’ve got a $20 million property that I bought, and now I’ve got a chance to sell it for 40. So there’s a big windfall, that debt that I’ve gotten that $20 million property, call it, you know, $15 million, or whatever is outstanding. Those the payments have been making to that to that loan. The now now I’ve got to engage your services? Because we have, we still have, say, you know, six years left on this loan. Is, is the capital required to, I’m assuming, I guess is I kind of talked through this, you’re right, you’re correct, you are going to calculate the amount of capital required in order to invest into an alternative investment, to then continue to, you know, that is Khurana the obligation, that

Kevin Swill  26:04  

that that is correct. And that is that is less expensive than paying off all of the principal and interest that the people that bought all the different pieces of your loan or the pool and the securitization.

J Darrin Gross  26:19  

So that is a Netivot, that if you’re able to minimize that cost,

Kevin Swill  26:23  

that’s correct, reduce reduce the cost. But you know, again, it’s the cost, it’s our fee, which is, you know, de minimis compared to the amount that is being traded, if you will, you know, $150 million transaction versus a $10 million transaction, right, things are a lot different. But in summary, you hit it on the nose, I mean, that is what we are doing. And, and for us, we want our customers and our clients to come back, we have over 20,000 clients, that list grows all the time. And the key is to be able to walk them through it educates them so that they understand it, and that they don’t feel like anyone’s taking advantage of what they do. And there are shops out there that do take advantages of the non sophisticated borrower, when they when it comes to defeasance. It angers us, but at the same time, we very secure in what we do. And that’s why we’ve been around 21 years.

J Darrin Gross  27:28  

Got it. So when when you know when a seller engages your services, and the deal concentrates where where we have a sale, let’s just use the sale as an easier example. We still have that term that we have to we’re obligated to pay to the to the investors or to the CMBS obligation when when the seller sells a building and engage your services and the money is then invested that’s needed to meet that obligation. Is that something that it’s it’s done? Is the is the borrower that originally entered into the CMBS agreement? Are they then able to walk away from that? Or is there still an obligation tell that the length of the original agreement is so enemies or potential come back? Guess what he’s trying to get it?

Kevin Swill  28:28  

You know, there’s there are risks with with a lot of different things. And you bring up a good point, because what we do as part of this whole process is there’s another paragraph usually right below the prepayment penalty, which talks about something called a successor borrower. And who designates the successor borrower, I would say more than 75% of all servicers or lenders will recommend that they come to 30 Capital financial, to help them create a successor borrower. And to simplify it, it’s it’s as if you’re setting up a shell entity, a new LLC, and then what you do is you’re buying all those securities and you’re putting it in that success of borrower the success of borrower does have small but does have some liability. If for whatever reason, some of those securities or what have you failed to make the payments. So that’s where there could be some risk. I have not heard of any of those risks ever taking effect that I’ve been doing on any of my deals or any deals that I have seen over the years, but there is that potential risk. So there’s always something out there that you know, you have to concern you have to underwrite, you have to look, you know, risk is everywhere in real estate, but you have to try How to protect yourself as best you can, just as if just like the, the lenders do the same and the servicers do the same and services, for example, you know, they’re the ones collecting your interest payments every month. So they can see your financials on an annual basis. And they can see if you’re starting to falter based on your, you know, whatever’s going on in the market, and then it ends up going to a special servicer. So you’re, you know, there are different mechanisms across the entire loan process, to monitor and to seek, which assets may become a problem in the future. And hopefully, for example, the servicer can then contact the borrower and try to make alternative arrangements to fix their their issues or the defaults, if you will,

J Darrin Gross  30:50  

got it in the nature of the investments that that you find in the defeasance process. When that time is up, do they are they kind of like annuity type products are they do they? Do they end up with a is there any potential for a sale and still be some assets there that are due back to the to this replacement LLC or the the entity that was set up the shell entity

Kevin Swill  31:18  

know for the most part, it’s it’s it’s right down to the penny, they work it out that that a straight, straight line all the way through without an issue. But again, in the olden days, I like to say in the 70s, in the 80s, you know, you had banks, and some of them still do it that you know, in the last five years alone, you pay 5% of the outstanding balance, then 4% and 3%, and 2% 1%. And you also have yield maintenance, which you know, is another option, but most lenders now have defeasance as their go to if you want to prepay the loan. And this is all related. For all of the listeners out there. This is all related to fixed rate. These are fixed rate typically 10 year deals with either a 25 year amortization or a 30 year amortization. But there are seven years as well. But predominantly, it’s the 10 year CMBS deals.

J Darrin Gross  32:19  

Got it. So let’s talk about the current environment we have interest rates are going up. There’s going to be a kind of recalibration in many asset classes. Clearly COVID Is is made a challenge in the office space. The point where I first was made aware of CMBS other than reading, like I read Michael Lewis, liars, poker or something like that, but but was in the crash, the pre was oh eight, when when the crash happened that this became I mean, it was a it was a daily, it was something that you heard regularly in the news or whatever Congress was talking about. And so the product has been around, it’s been been, you know, clearly tested, and it’s a critical piece to commercial real estate financing. Now, my question, I guess, is given the change in environment, do you anticipate more challenges that borrowers will be facing? I mean, what we’ve talked about thus far is more like an opportunity to sell, or refinance or improve your, you know, return to your investors early as as the borrower. But but as the, you know, again, as the situation changes here, with interest rates and just kind of the the Feds determination to get inflation under control, do you anticipate more opportunities for your services, more challenges for borrowers?

Kevin Swill  33:57  

Well, there are a couple of different things that you mentioned, that are very important to us as debt equity advisors, on commercial real estate and securitization. And that brings me up to our whole trading desk that we have with over 30 years of experience just on derivatives. So we spoke about CMBS with fixed, we didn’t speak about variable or floating rate or bridge loans, and those are people that are doing a value at acquisition, or they’re building from ground up. And what we’ve seen in the last few months, and I’ll get back to the change in the environment, but to give you a real drastic change in the environment, people that are building and we’ve seen that during COVID. There are cranes everywhere, because everything has been inflated. It was a seller’s market. They were selling for one and a half to two times the value of the asset or the proposed land or What have you. And typically lenders when they’re giving you a loan, that’s a floating rate or a bridge loan will require an interest rate cap. So that way they they are confirming or based on your projections, you will have enough cash flow or capital at some point to cover the the interest. But interest rates as you know, are going up. And to give you an example, and I pulled one up that we just did two days ago to buy a one year interest rate cap on a $9 million notional value. So that’s the value of the note. A one year cap costs $234,000. Today, five months ago, it was 60,000. Well, if you bought it, if you need to buy a two year cap, keeping everything the same, the 30 days so far, it’s 450,000. But if you need a three year cap, because your project is going to take three years to build, it’s $640,000. You can see the jump it’s becoming cost prohibitive for now people to buy, or to do a floating rate transaction that has to have an interest rate cap. So the market is really changing and the landscape is changing. And it’s unfortunate. What we do at 30. Capital financial is we now that’s where we go back to the alternatives. So a borrower calls us and says, Hey, look, I’m already under contract to buy a value add of the quality multifamily, this is what I plan on doing on, it’s going to take me two years. So I need to get a two year interest rate cap, I needed that, let’s say a strike price of two and a half or three based on where that’s going to be and give me the pricing. And it’s it becomes so if you’re a large company, and you have five of these deals that you’re buying at once like a portfolio, and each one needs an interest rate cap, you’re talking about literally putting up a million dollars, which is just an insurance policy, and you put it up on day one. And you know, that’s where it goes. What people are forgetting today, though, is that there’s an opportunity, when they go and finish the project or get towards the end of the project. Based on where interest rates are at that moment, they can actually be making a windfall. And recently, we had someone that had an interest rate cap that they bought, I think was about a year ago, and they pay $28,000 for that. They just cashed in $2.8 million found money.

J Darrin Gross  38:10  

Explain that one to me, because they saw the the rate cap they had they 2.8 Or excuse me 28,002.8? How does that math work?

Kevin Swill  38:22  

Well, the math works all based on on where the the interest rate is, when they want to terminate, if they bought it high and it’s low, or if they bought it low and it’s higher. It all depends on where you were at your strike price, and you’re all in price, versus when you’re going to sell it. So you can be in the money, or you just or it just is really goes away the cap, and it changes. And so now what we’re seeing in our shop, is we’re getting a lot of borrowers that are calling that are saying, Hey, I bought a cap two years ago. Now it seems like the rates are going, you know, real high. What is it that I can do if I want to cancel or terminate my cap? or terminate my squad? What is it? What’s the value of that? And we’ll give them that. And to them that’s found money as part of the transaction. So it can go either way. And it all depends. So right now, we are we are explaining we are teaching we are actually going out to lenders, we are going out to brokers, we’re going out to lawyers, as well as borrowers and we’re saying look, speak to your clients. Let’s find that let us do the work for you. Let us know what their interest rate cap is, what rate what was the strike price, what’s their all in rate, and what’s the notional value? And we’ll let you know whether or not they’re in the money or not. And if they are they should give us a call. Now some lenders might say okay, fine. If you want to cancel that, that cap, you have to buy a new one. And now it’s the same circle. Now you know that the caps are more expensive today. So it really is beneficial when they’re selling their asset. So if they’re going to sell their asset, because let’s say they did a three year value add, and you know, they’re getting towards the end of the three years, and they’re selling the property at a huge profit, or what have you, or whatever that price is, but they want to terminate the cap early, and the lender is okay with that. And that’s when they’ll come to us, and we’ll discuss it with them. And we’ll make that just justification as well as calculation first, as to whether or not they’re in the money and by how much. So it’s a real interesting phenomena that many, many brokers, many borrowers out there are not even aware of. Because they don’t follow it too closely. And we’re actively my whole sales team is actively pursuing those, those bridge loans, those construction loans, and trying to find those borrowers, to at least call us it doesn’t cost anything to call and ask. And, you know, there are people that can be in, you know, have some considerable found money, if you will, on their insurance policy. So, that’s just, you know, that’s been new, that’s been over the last, I’d say, five or six months because of where interest rates have gone. And it’s really interesting.

J Darrin Gross  41:37  

And is that basically a function of, of your role in this situation, and that you have the person that bought the rate camp a couple of years ago, and they’re still time on their rate cap, and now you have somebody else that needs a rate cap for, say, about a three year rate cap? I’ve got two years left, and now you have somebody that needs a two year rate cap, is that? Am I putting the pieces together? Am I’m making stuff up, because that part of what happens there in that contract that they have, and you have maybe potentially a borrower that needs it? Because

Kevin Swill  42:13  

it’s not necessarily borrower that needs that we you know, we retire, we return we terminate the cat for them. It’s not as if it’s going to someone else, it’s not trading, if that you’re thinking of it’s not that at all. But what makes it interesting that no one ever looked at before is, can they be in the money? Do they not be in the money, and we’re going to every single person we can find out there in the market, using every resource we can to try to educate them and say, hey, look, come to us, call us, we’ll help you out, doesn’t cost you a penny. And we’ll let you know where you stand. And then you can make your educated decision, we can advise you, we can work with you and your service or your lender, and we can figure something out. And we’ll do it together. So that to me is most exciting, from the interest rate cap world and from the floating rate world. And that’s why in this economy that we’re in right now, just getting a floating rate deal today has become almost cost prohibitive, because of where Cap rates are. So one thing that we introduced was a springing interest rate cap, a little less expensive, as I said in that example of buying a one year cap. And during that one year, the borrower is either escrowing some funds or putting up a reserve. So by the end of the one year, the lender, and the borrower can come together and say, Look, I have all this money in reserve, do I really need to buy another two years of a cap? Hopefully the answer is no. But if it is, then maybe I could just buy another one year cap. So rather than buying a three year cap and paying $640,000. Now they’re buying a $225,000 cap. And they’re working with the lender to hopefully figure out how to buy the cap in a year or two years from now. And hopefully, it’s a lot less expensive than it is today. Because our whole markets will change a little bit, which we’re hoping for on the CMBS side. And on the defeasance side. I think the industry as a whole has started to see a little bit of a of a slowdown. We were you know, more than we can ever handle over the last year because it was a seller’s market and everyone was selling. And I think that over the last two or three months, some of those values that you know, almost doubled, are now coming down. bout 20 25% as things are changing in the economy,

J Darrin Gross  45:06  

got it? That’s fascinating the, the world you plan and just the, you know, all of the moving parts and opportunities to make money and or, you know, fill up a need and all that.

Kevin Swill  45:22  

Cool. Yeah, it’s it’s one of those interesting dynamics where you have different things. I mean, we’re going through a lot, yes, we have inflation going on people talking about recession going on, interest rates rising. At the same time, while all of that is going on, we have a situation where people don’t understand what they need to do. So we came up with the idea. And we’ve executed on that, which is having classes, we started an academy. And it’s to educate, whether they’re fresh out of college or university, all the way through a senior management position. We offer different types of classes, purely from educational while you’re working, they’re all certified classes, so they get their certification. So if anyone needed a refresher, or doesn’t understand interest rate caps, and it can be open to borrowers, it can be open to brokers, you know, we offer it to everyone out there. And one of the things that most people don’t understand is everyone wants to get into real estate, it’s an exciting business. But if you come out of college, you don’t have anything on your resume. So you’re just hoping that some company is going to hire you, and teach, you know, people don’t have the time to teach anymore. You know, we’re in a fast paced world now. So what we did is we created this academy that allows the students to learn everything from the definition of debt, and equity, all the way through a full understanding and capability of creating and modeling a waterfall for an IRR, underwriting, reading documents, all of that. And then they can go into other modules as well. And then we have a whole technology side of the education because we have a debt and asset. And now we have a portfolio management, debt management, entity governance management software, that they can learn the data science, so we have that whole side of our academy as well, for people that are on that side. So it’s all about service for us. It’s giving that white glove treatment. And you know, what, if we lose a deal, by $500, you know, we will still call and we will still explain to them, let us just explain to you the business, you can go with the other firms. And that’s fine. And if you come back to us, we’ll welcome you back. But it’s all about service. And that’s what we provide. So we went from a defeasance shop, we went all the way through a full service, whether it’s a trading floor for floating rate, whether it’s education, or whether it’s even just technology, we’ve covered all the different services that people in real estate need to understand and to execute effectively.

J Darrin Gross  48:16  

That’s great. Hey, Kevin, if we could like shift gears here for a quick second. By day, I’m an insurance broker and work with my clients to assess risk and determine what to do with the risk. And there’s a couple of different strategies we typically consider, we first look to see if there’s a way we can avoid the risk. When that’s not an option, we look to see if there’s a way we can minimize the risk. And when avoidance nor minimizing the risk is an option, we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. And as such, I like to ask my guests if they can look at their own situation can be clients investors, the market interest rates, political environment, however you choose to identify what you consider to be the biggest risk. And for clarification, while I’m an insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Kevin Swill, what is the Biggest Risk?

Kevin Swill  49:22  

Right now the biggest risk that we have our borrowers that are out there that either need to sell their asset, one because their partner is a fund, and the fund will only hold an asset for five years. And their underwriting and their performers over the last. You know, look, we’ve been in a great situation for the last What 10 to 12 years where interest rates have been historically low. But again, people that have been in the industry for 20 years know that you know, the average loan should be on a commercial real estate should be anywhere between Let’s say six and a half to 9%, based on the asset class, but people have forgotten that. So for me right now, where I see the greatest risk are people that were involved with partners that have a hold period, and are now in a situation right today, as we speak today on this on this call, that have no choice but to sell their asset, or refinance to buy their partners out. And they’re in an environment where they may have a loan that they were only paying two and a half 3% on when they got that loan. But now, they’re looking at paying almost 6%. And the question is, who’s gonna buy that? Who’s gonna buy that if you understand the market, but to understand the underwriting of the asset, it can become cost prohibitive. So I have, for example, the founder of our company, Rob Finley has a portfolio, and he has put up a couple of his assets for sale, every one of them has now been retreated, and retreated to the point where he’s taken it off the market, because it doesn’t make sense. Because interest rates keep rising to the point where for buyer, it’s almost becoming cost prohibitive. And they’re waiting for the markets to really slow down, let’s see what happens. You know, everyone talks about recession, where is the risk for the borrower, it’s when they’re being pushed or forced forced to sell their asset, because they have partners that it’s their mandate. That’s where I find some risk. Whether or not, it makes an opportunity for someone that is going to buy and be able to renegotiate almost like a distressed asset, they may get lucky. Or the borrower is going to have to renegotiate with that fund, or that, that borrower that partner, and ask for a one year extension, because of where the market is. But that’s where I think the risk is, I think the risk is anyone that’s trying to sell right now are being forced to sell is going to have a difficult time finding a buyer that makes the numbers work. Until we can really figure out because, again, for the last 10 to 12 years, anyone that owned property, they were making cash. Just it was like a cash cow. And you know, and unfortunately, we’re in different times now. And the cash slows down. And it’s it’s an interesting, it could be an opportunity for some, but it’s a very high risk for others. And you know, interest rate risk is hurting everybody in every industry, I think, right now until we can figure out what’s going on with the inflation, until we can figure out what really is going on with interest rates. And on top of all of this in commercial real estate, you have no more LIBOR than we’ve had for almost a century. And now all of a sudden, it is converting to Sofer. So again, it goes back to the floating rate and the bridge loans that were based on LIBOR, come July of 2023. If you’re not a sophisticated borrower, overnight, you’re gonna get a letter that just said, By the way, by by, by not law, but by regulation, we have to change your LIBOR to sofr. And your LIBOR might have been when you got it very, very low. But in July of 2023, it might be double. And that’s a risk you’re going to take so we tell everybody, let us help you, or review your loan documents. Make sure that if you have a LIBOR loan, that you call your advisor, you figure out a way to convert it today over to Sofer while they’re pretty pretty close in pricing. Because you don’t know what’s going to happen by next year and July of 23 There isn’t any extension to that there will no longer be any LIBOR. That’s the risks.

J Darrin Gross  54:31  

Got it? Kevin, where can the listeners go if they’d like to learn more or connect with you?

Kevin Swill  54:36  

So if they’d like to connect with me or our company, they can go to either and it’s all spelled out ThirtyCapital.com Or ThirtyCapitalFinancial.com. My email I’m always available, is kswill@thirtycapitalfinancial.com. 

J Darrin Gross  54:58  

Got it 

Kevin Swill  54:59  

Always available to help. We’re all about educating. We’re all about teaching and providing the best service for everyone out there.

J Darrin Gross  55:09  

Well, Kevin, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it, learned a lot, and I look forward to doing it again soon.

Kevin Swill  55:18  

Likewise, Darrin, I appreciate the time today.

J Darrin Gross  55:21  

All right. For our listeners, if you liked this episode, don’t forget to like, share and subscribe. Remember, the more you know, the more you grow? That’s all we’ve got this week. Until next time, thanks for listening to Commercial Real Estate Pro Networks. CRE PN Radio.

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