Anton Mattli 0:00
So right now everyone says, well, with interest rates low, the cap rates will stay low cap rates are not going to go up, as we have seen in 2008 and 2009. Even though interest rates came down, cap rates still moved up because everyone was scared of the old buyer pool that was available before disappeared. And that still in my view is going to happen at some point.
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J Darrin Gross 0:48
Welcome to Commercial Real Estate Pro Networks, CRE PN Radio. Thanks for joining us. My name is J. Darrin Gross. This is a 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, my guest is Anton Mattli. Anton is the CEO at Peak Financing, where he brings his decades of experience in commercial and investment banking, private equity and commercial real estate. And in just a minute, we’re gonna speak with Anton about commercial debt financing, the changes terms and the challenges we’re currently facing in this market. But first, a quick reminder, if you like our show, CRE PN Radio, there are a couple things you can do to help us 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’d like to see how handsome our guests are, be sure to check out our YouTube channel. And you can find this at commercial real estate pro network. And while you’re there, please subscribe. With that I want to welcome my guest, Anton Welcome to CRE PN Radio.
Anton Mattli 2:09
Hi Darrin. Thanks for having me.
J Darrin Gross 2:13
I’m looking forward to our talk today. Before we get started, if you could take just a minute and share with the listeners a little bit about your background.
Anton Mattli 2:22
Sure, we’d love to. As you can hear him though I’m based in Dallas Fort Worth, Texas, I’ve been living in for roughly 15 years that accent is not from East Texas nor West Texas. I was born in Switzerland, right after school. When I graduated, I joined an investment bank, then join them for a training program in New York. And I worked in New York and Tokyo and Hong Kong for a number of years in various positions in investment, corporate banking. And after that I left banking directly. And I’ve helped high net worth individuals family offices with their direct investments. And out of that, we also saw the needs to help them on the debt financing side. And that was the reason why we founded peak financing. And our role is is a commercial real estate broker. So we are not a direct lender, we essentially help our investors to find the most appropriate debt for a particular project and market and them as a sponsor. So they are 1000s of lenders out there and among them a few 100 or might be appropriate. And we help to identify the ones that are actually making sense for a particular project.
J Darrin Gross 3:55
But your experiences certainly kind of wide ranging and commercial finance as far as like with the trade, say Wall Street the the What do you call those banks, the big commercial banks, investment banks, this makes us sound like a complete brain vendor. So when you’re working at that level, I mean in and also the family offices and stuff. That’s pretty high level financing is anonymous. That’s not somebody trying to buy a little building kind of thing. That’s a that’s more can you talk a little bit about your experience here with it with the investment banking and then also
Anton Mattli 4:38
Definitely yes, the transactions tend to be much more complex, because the sponsors or the borrowers have more complicated structures, the transactions themselves sometimes the really easy, even if it’s 100 200 or $300 million Building, if the transaction is straightforward, it’s not that more difficult to do than a $5 million building. The challenge very often really comes into play when they are complicated, porous structures, as well as when, when you have complicated deal structures, whether it’s real estate, particularly in some markets, like New York City, you have air rights that have to be considered, you have land leases, and so on. So that’s where a lot of these difficulties Come come into play. But other than that, it’s just a lot to deal. But I wouldn’t say that there, it’s that much of a difference compared to even a five or a $10 million acquisition, when it comes down to it. I was also involved in a lot of cross border transactions. So there, you have another element that obviously comes into play, which are the associated risks with cross border investing, as well as all the tax issues that are related to that. So luckily, for most us base investors, the tax situation is pretty straightforward. And as you know, and as many of our listeners know, the tax structure and what is available from a tax perspective in the US is probably one of the most attractive reasons why you want to invest in commercial real estate.
J Darrin Gross 6:37
Yeah, no, and I want to ask you a little bit, you mentioned the structure of like the the participants as well as the deal. Is the financing. Is it only those larger deals? Are they? Is it often that you’ll have one lender? Or will you have like layers of financing? That the different people participated different different points or met different people but different lenders?
Anton Mattli 7:03
Yes, that’s a very good question. It’s virus varies a lot. In most instances, a lender of particularly for large deals is not lending from its own balance sheet, there are two main options that are really being used on an ongoing basis, I rates, as we call it, syndicating it or participating it with auto lenders that are similar lenders like the bank. So it’s essentially spreading the risk among multiple participants. And that’s kind of a negotiated structure of that deal. The order one that is is has become extremely common, and this is a core piece, particularly in commercial real estate is securitizing these loans after they’ve originated. So they are essentially, you have a lender that originates along, let’s say 50 million, or whatever it might be. And for that, usually it sits on balance sheet that is being used, but very often it’s also has access to as we call it warehouse loans from an older lender that provides the funding for these for for that initial loan. And then the lenders starts packaging that loan together with auto loans that are being originated over the course of let’s say, three or six months, and packages that answer so called securitizers it and then these loans are essentially sold as a as a as a bond into the market where investors can buy a piece of that of that loan. It’s not just that loan that is being bought, but it’s essentially a pool of loans that are part of that bond that is being issued.
J Darrin Gross 9:06
Got it. That’s that’s fascinating, and I can’t remember what’s the I was just thinking that the technology that’s kind of the cornerstone for like Bitcoin and and all these digital currencies is, and I can’t remember what the name of that is. I don’t know, I’m just having kind of complete brain failure today. But for for those securitizing when they have those large deals in there, they’re selling, you know, tranches or however they’re they’re doing that is that is that basically to institutions that they do that or or is there other opportunities for accredited investors to get in on the on those.
Anton Mattli 9:54
It depends what type of, of security is being created. Sometimes It’s it’s sold just to institutions, sometimes it’s to accredited investors, but very often it’s also sold to the, to the public marketplace. There, anyone really can acquire these securities, I would say probably the best known ones that are out there all the Fannie and Freddie backed mortgage backed securities, which we obviously have become aware of those during the Great Recession, with with with all the the housing market issues, and the financing that was, was a was a big element of it. But that is not just on the residential side, it’s also on the commercial multifamily side. So when we talk about multifamily properties, a big chunk of that more than half is is financed through Freddie Mac or Fannie Mae, but through their multifamily programs, and these these loans are packaged, they are ultimately pulled into into various pools that and are being sold as securities. And anyone who has was a brokerage account, essentially has access directly or indirectly through through their, through their brokerage account to some of these investments. But then you also have so called cmbs loans, which are not agency bank, but are more privately securitized and private backed, and there it’s the same thing, a lot of these commercial cmbs loans as it’s being called, they are being put together into into pools that are then securitized pools that are sold into the marketplace, and not all of them are publicly traded, but some of them are, right. So it’s, it’s only possible that the private in the weed will, in addition to the institutional investors have access to some of these securities,
J Darrin Gross 12:22
That fascinating, when you kind of look at it from a 30,000 foot view of just all the different ways that financing is structured, and, and, you know, put together and in, you know, just the, just the the huge volume of financing that’s done and how much of the, you know, the world economy is tied to commercial commercial lending. I mean, it’s just it’s kind of boggles the mind when you really look at how it’s all kind of tied together. Like that’s, that’s, that’s awesome. So, okay, so now you’re you mentioned that you’re working with like family offices and and others. Is there a particular size of, you know, deal that you you typically do, are you? Is there a sweet spot for you guys right now?
Anton Mattli 13:16
Yeah, I would say our sweet spot is typically alone size of 2 million, up to maybe 50 to 75 million. We can do any long size really. But what we typically see is one, once you get above the 75 or $100 million mark for traditional assets, at least, you it’s mostly institutional investors, and to have the in house full time staff that is able to, to do what we are doing, right finding the most appropriate lending solutions. Vera, whereas in as we call it, the middle market, which is up to the 50, maybe 75 million, depending on how one defines it. Typically, middle market owners do not have that capability in house. Technically, they could hire them, but it’s it’s very costly to do. When you when you do, let’s say, a dozen transaction of half a dozen transactions per year. So then it’s easier to just hire us on a transaction by transaction basis. Be have been involved in larger size of deals when it’s a little bit more of a complicated structure. But I would say the majority is in that 2 million to $50 million range. And our clients, a lot of them again, when we talk about middle market that also includes a lot of syndicators, and that’s particularly in the multifamily space, right. in retail buildings, office buildings, industrial buildings. tend to be more private investors, institutional investors, and less so. So indicators. But when you look at the multifamily space in that 5 million to 50 75 million size range, you have a massive amount of syndicators that are that are active in that space. And I would say there we certainly our client base contains quite a number of of those groups.
J Darrin Gross 15:33
Yeah, that’s interesting. Do you have any kind of theories as to why the syndication is not as I guess, popular or common outside of the multifamily?
Anton Mattli 15:45
I think it’s really has been driven by all the coaching that has been offered over the last primarily 10 years. It was available already, for 20 years, but it’s only has started out around 10 years ago, then your event, a lot of these coaching firms started to focus very specific, specifically on multifamily investing. And that was just mushrooming, particularly over the last five years. So the amount of investors in that space that our new commerce is is, is is, is well beyond what you see in any order commercial real estate asset class. And I think that’s the reason why it you have a lot of these so called boot camps where hundreds of people attend, then they are joining a training program. And as part of that training program, obviously, they are being trained how to buy multifamily property and syndicate deals. And with that, so many groups are offering that now, the amount of in sponsors, as we call them, your sponsors as just mushroom that would last particularly five years.
J Darrin Gross 17:11
So let me ask on that, because, you know, there is the market changes, or the, I guess, the participants, you know, and it sounds like kind of a, probably a level of experience has probably changed quite a bit from say 20 years ago, I’m assuming that more of the sponsors were maybe a little bit more experienced. Is that is that sound? Positive? Yes,
Anton Mattli 17:35
I would say that is certainly a concern of ours. And I would say that’s also a concern of of a lot of lenders that are out there that because of all the new commerce, that the experience level is not nearly as strong as it was with with multifamily owners, let’s say 10 years ago, 15 or 20 years ago. Now, some lenders as a result, have implemented stricter requirements, specifically, when it comes to experience to kind of counter that, that element of of someone just showing up at the boot camp, getting to training and then being able to, to buy multifamily property within six months of hearing about it for the first time. So particularly Fannie and Freddie have implemented stricter rules, so it’s not that easy to do it on your own. So typically, you have to bring in someone with words like experience, and that’s the only role reduce the risk. Having said that, the problem is a lot of these individuals that have that experience. They also have that experience only doing the best of the times in multifamily. So I think there is still a little bit of a concern there that there are a lot of as we call it, the Fairweather investors in multifamily that have seen all the knob boards, right refractory over the last 10 years, but I’ve never seen really any any retraction to speak of YG obviously we have had a very brief one, maybe two years ago and now last year, we had it with COVID-19 very brief situation that was a little bit scary. But after a few months, every everything returned to, to to the to a boom environment. And it actually COVID-19 with all the money that has been put into it. With the liquidity that came into the market actually has further pushed the prices up to levels we have never seen before. So that is only a concern that a significant amount of investors in particularly in the syndication space to have never seen any any downturn yet. Right. And so with that, I think some of them are just a little bit too bullish and are not necessarily recognizing the, the downside risk, but only look for the, for the upside.
J Darrin Gross 20:31
Yeah, no, it’s interesting. I’ve been doing insurance for almost 30 years now. And, and, and I’ve got clients that have lost lot, and also made a lot. And then I have clients that have, they always are finding ways to make money in whatever market, you know, but, but I think the, you know, the, what’s amazing to me is how quickly the weight is forgotten, you know, and for, especially for people that are new in it. And also I think the the the people that got in post Oh, eight, I mean, all they like you said all they’ve seen is up, they’ve never had any kind of a down cycle. And they’re still thinking you just get you know, you just buy buy low, you know, fix it up sell high, or they don’t have any sense of just what normal is? Or what a normal market is kind of thing. And, you know, I don’t know, I’m curious, what are your thoughts? Or, you know, what are you? When you when you work with your lenders, and your investors, your your, you know, working with what, what are their thoughts? What are your thoughts on just where we are? And what’s what’s coming? Yeah,
Anton Mattli 21:49
I would say the majority agrees that we are in uncharted territory, and very few really know or pretend to know where we are going. Right. And I think that’s probably the scariest part that we know, things are extremely strange, right, we have massive amount of liquidity that has been put into the market Embree COVID. And now with COVID-19, it’s it it has mushroom, the more so and we have record low interest rates. And we still have liquidity that is being tossed at us. So we are in an environment that we have never seen before. And the everyone really has to question, well, how is this all going to end? And I don’t think that anyone has an answer to this, right. From my perspective, I feel at some point we have, we will have an inflationary element that will really kick in, we already see it, but the market somehow doesn’t believe in it and still buys into the feds view that it’s only transitory inflation. I personally am not so sure that that is really the case. But ultimately, no one really knows why. So my main fear really as if it’s inflation, when you’re a real estate investor, that’s generally not a bad thing to be in, in real estate. Why because your your, your rents likely can go up your noi will, will follow the the inflation path. So you should be still be reasonably protected. My main concern really is is not just inflation, but stagflation. Right, and obviously, no one knows whether it’s it’s going to happen. But if the economy really gets into into a difficult situation, we have increasing prices, and at the same time we have an economy that is is contracting, then we are in a in a really tough spot. And I’m not so sure how that all will will turn out. Right. So that’s my my fear. I would say a lot of investors have that fear in the in the back of their mind. But obviously, as an investor, you you have two choices, right? So you sit on cash and you know, that’s likely the value goes down, or you invest and you you’ve thrust that your investment is still a better choice than just sitting on cash.
J Darrin Gross 24:50
Yeah, no, it is the kind of a balancing act. I you know, that you mentioned the stagflation I think I would tend to again, I’m not an economist, but I can just tell you That seems like everything I’m buying is costing more than what it did. And I’m not measuring by the consumer price index were the only measure like things like wash machines and, and refrigerators and, you know, but just real live, day to day consumption, whether that’d be fuel, your, you know, food, just the day to day things that you’re, you know, you’re experiencing plus the labor shortage where, you know, I say the labor shortage, I’ve talked with numerous people, and I think that a lot of the a lot of the industries are doing just fine, but some of your more of your retail, especially your hospitality, you know, employment issues are, are really challenging. And then, and but you follow that through the, whether it’s a COVID effect, or whatever it is, but there’s some sort of a lag in that, whether the supply chain or people or whatever, and I haven’t really followed it as closely as I’d like to, but I know that it just exists across almost everything. You know, whether it be, you know, what you could normally expect to be able to go to the store or supplier, and by now you’re telling, you know, being told to be three months or weeks or whatever to, to get in, there’s a cost increase based on just the availability of the products. And, and that’s, I mean, there’s, there’s definitely some inflation under foot. I’m curious, you mentioned stagflation. And is we like to just revisit that for a second? Because I think that’s, to me, that’s, that’s something that’s, you know, I with the Fed, the Federal Reserve, and all of the powers and levers they have, it would seem to me that that would be at a point when they lose control of the train, is that? Does that not make sense? I mean, they were if they, if they kept interest rates so low, they can’t go any lower to where they can stimulate the economy. Is that kind of what that would?
Anton Mattli 27:03
Yes, that’s, that’s really where ultimately we are, right. And that’s what my main concern is, other than just issuing bonds and buying them back and putting more liquidity into the market, I do not have when it comes to interest rates, they do not have any more power left or right. And that is my that is really my main concern.
J Darrin Gross 27:30
So in what do you have any thoughts about, you know, negative, or negative rates as far as a another, you know, gear to shift into to try and, you know, make things get going? Or?
Anton Mattli 27:48
I don’t know, obviously, we have we have seen it in Europe, we have seen it in Japan? I’m not so sure that that is, is is going to happen in the US. I think we just are just hovering around virtually zero short term interest rate environment for for quite some some time. Obviously, the question is all day, finally, recognizing that inflation is stair The problem is, I think they recognize that inflation is Stanford, I cannot afford to raise rates, but your standard really would, would would impact a
J Darrin Gross 28:35
stall
Anton Mattli 28:36
would stall it right. So, so they all really stuck in my view. Right?
J Darrin Gross 28:43
Yeah, are you and I’m not exactly entirely familiar with other than just the the references I’ve read about back in the 70s, when the Fed actually increased interest rates to get to break the inflation kind of thing and, and the pain that caused. Do you have any sense? I mean, I just, again, is just somebody that’s trying to make my world work and, you know, loves that maybe with a refinance or something like that on a property or, or whatnot. But I guess my question is, is if if the if we have inflation, and we have stagflation, if they were to increase the, the interest rates, I’m assuming that would automatically be a price reduction because if, if your interest, excuse me, your real estate is priced based on debt cover ratios. And otherwise, and and you know how that whole equation works if, if all of a sudden your interest rate goes up, and you’re at a point where you have to refinance or sell the property. You know, if you’re a syndicator, and you’ve got to get the money back to your investors. I mean, there is kind of a natural cycle in a lot of these. I mean, all the deals have a cycle time, right? I mean, when you get in, you know about when you’re going to get out. And if you’re unfortunate to be in the deal when all of the financing terms change, and you’ve got to sell, it seems to me, that’s where all those people have been waiting for that to happen, and they have cash are, you know, make make big money again, based on patience,
Anton Mattli 30:36
you know? Yes, yeah, it’s it’s a very good point, right? Right now the view is, the Fed will keep the interest rates low, and still not going to, to rock that boat. Right. And I tend to agree with that wide, I’ve obviously on the short end side, they have some flexibility to increase the rates without without the market really being too negatively impacted. When it comes to the 10 year Treasury, I foresee that they are much more concerned about that, and that they will implement some form of over yield control there. So if they’re the market feels that inflation is really kicking off and the 10 year Treasury yield gets vailable. For the 2%. Mark, I believe that they will implement some form of a program to just buy up whatever is necessary to keep the interest rate at maybe somewhere between two and two and a half percent. Right. So I think from that perspective, I’m not that concerned that interest rates are on the boring and would would increase that drastically, strictly from what the Fed is planning to do. My main concern is, and that’s really by how the market looks at at risk itself of lending to the marketplace is and we have seen that in in 2008 and 2009. Even though the day interest rates came down, the actual borrowing cost went up by biggest the spreads increase. So lenders were not really just saying, Okay, now we have lower, lower index to fund from, so we are passing on the spread, they increase the spread. So your borrowing costs still went up on particular assets, even though the Federal Interest rates came down. And so I think that is more of my concern for for owners that they may think, Well, everyone talks about keeping interest rates low. So I have a risk of having some the higher borrowing costs is not really that high. I think one forgets there that there are still private market participants that decide what risk premium they really want to have in order to finance a property. And that also applies to buyers of of real estate, right. So right now everyone says, well, with interest rates low, the cap rates will stay low cap rates are not going to go up, as we have seen in 2008 and 2009. Even though the interest rates came down, cap rates still moved up, because everyone was scared of the old buyer pool that was available before disappeared. And that still in my view is going to happen at some point. And I think that’s really the risk that I think a lot of the new commerce are just not recognizing that despite record low interest rates at federal short term rates and Treasury level, that doesn’t mean that the boring costs will really stayed that at similar low levels, and that cap rates will also stay that low.
J Darrin Gross 34:21
Yeah. It is interesting, and I appreciate you sharing or kind of reminding us that the you know, there’s a market element. It’s not just the Federal Interest rates that determine, you know, the the market you know, because I think that, you know, part of what the the oh eight collapse was was just a fundamental lack of underwriting at the borrower level. And how, you know, he was the market was basically being hijacked by all of the the kind of the Are the ratings and, you know, the lenders are the lending criteria and the, you know, the fog, Amir 125% loan to value and in no credit checks and all of that. I mean, I don’t see, I feel like, you know, the one thing that’s, that’s good about the US market it is that if there is something that seems like it’s systemic and it gets corrected, you know, I feel like that element has been, you know, that’s not going to happen again. But I think that this is, the reminder is, is that, you know, while we may have corrected the one thing, like you’ve said, you know, throughout this conversation is, we don’t know what the future is, because we’ve not been there, you know, we’ve not been here yet. And so that’s, I think that’s the, that’s the concern is what what is it? What’s it going to be that’s going to, you know, create the correction, when it happens kind of thing? And, and, you know, stay tuned, and, and we’ll all find out together kind of thing, right? Yeah, absolutely. So are you are you seeing that, you know, you mentioned experience as being kind of, you know, underwritten more as a premium, are you seeing lenders requiring more equity? You know, are they still lending to the same same valuations, the same percentages or are lenders is the the underwriting tightening up as far as the percentage loan to value that lenders are willing to go?
Anton Mattli 36:34
Yeah, so the loan to value and the debt service coverage ratios or debt yields, depending on the program really have not, have not tightened at all. But what we see is because most deals or today’s only in the multifamily space, tend to be not value constraint, but or that service coverage constraint. Why because people buy these properties at at very low cap rates going and cap rates. And the higher you pay for the higher prices, you pay for a property, obviously, your your, if you want, let’s say 75 or 80% leverage, technically, that will be available. But if you apply your minimum 1.25, let’s say that service coverage ratio, you’re not able to get to that 75 or 80. Sometimes we see particularly on the multifamily side, for agency loans in major markets, you may end up at 5560 65%. Right. So that is really where the constraint lies. So lenders Haven’t I would say the positive element there is is that lenders have not moved away from that minimum debt service coverage to allow for higher leverage, right. And I would say that is certainly a positive element there, when it comes to at least a traditional lenders, right? There are more concerned is is on the bridge side, bridge lenders virtually disappeared. Last March in 2020, M and COVID-19, essentially shut the whole country down within the course of just two weeks. And as a result, bridge lenders, most of them disappeared overnight. And they took several months until that the bridge space recovered and restarted. Now look for warning today, a little bit more than a year later, we have more bridge lenders than ever before, there is so much liquidity that goes into into that bridge space. So that’s where I’m more concerned where a lot of bridge lenders are willing to lend very aggressively. And it’s good for us, obviously to help borrowers and buyers to get to get these bridge loans and get higher leverage. But I would say there are soluble or some aspects of bridge loans. If the market turns or when the market turns that the these loans will have a hard time and to actually get into into a permanent loan in two years to three years as it’s being protected, at least on paper. Right. And that is particularly the case. A bridge loan has its base, right if it’s a true value, add property where you have to do rehab but you can increase rents and so on. A bridge loan is justified. What is happening though is as I mentioned before, a lot of these agency loan Now may come in at 60 65% LTV. So in order to overcome that a lot of buyers now are taking out a bridge loan so that they can get to the 75, sometimes even 80% leverage, but it’s all driven by their projections. So if any of their projections are turning out, or if the borrowing environment changes over the next two or three years, they will not be able to get out of that bridge loan. Right. And that is where I think so I’ll leave that space in the in the, in the landings area, solely, in my view is is definitely overheating.
J Darrin Gross 40:45
Yeah, that makes sense, because that’s probably the the riskiest end of the lending spectrum is now where you’ve got kind of a short term and a higher interest rate and very sensitive to, you know, a change in the the economy or, you know, if you’re not able to complete your deal or the, you know, you all of sudden have vacancies instead of it can’t meet your projections. I mean, that is
Anton Mattli 41:09
that’s wrong. Yeah. So So I would say, from a cost perspective, from a interest rate perspective, at least for larger loans for 10 million and up, they are extremely aggressive on the pricing side. So you can get all in rates, still mostly floating rate base, but you can get all in rates in around 3% 3.2% 3.3%. So it’s extremely aggressively priced. So the price insight is not really an issue, it’s more of what you have said, can they perform as per their projections? Right? Can they raise the rents as protected? And then also, most equally important is can they refinance in two or three years, right? Or the is the cap or the cap rates vary or still a lot today, that is an absolute must and or the refinancing rates at the similar where they are today?
J Darrin Gross 42:16
Right? Now it is, it’s a, it’s a fun thing, if you if you buy something, and the rates compress, and you win on the exit, but it’s all another thing, if you buy on some compressed rates, and and all of a sudden, the market slows down and the value goes down. And you’re but again, that that, that if you’re if your model, I guess, cap rates to me are more of like an entry exit point thing. I mean, they definitely deal with financing. But as far as the operations, and your noi, that’s more a function of what what rent you can get and how you can control your expenses. And if you can keep that number, you know, going forward, I would think you’d least have an opportunity to finance out of your debt, refinance your debt, if you had the 125 coverage ratio, you know, at least that would that would give you some sort of a backstop. And in my in my thinking that right or
Anton Mattli 43:16
Yes, you’re right, as long as the interest rate. Interest rates do not move up by the time you refinance. And the cap rates are not moving up when you refinance. Right. So and that really has happened. Again, going back, you mentioned 2008 2009, where a lot of people were caught there. On the multifamily side, it was not just on the single family side, on the commercial side, the same thing happened, including multifamily. And that’s what I really remind our clients, whenever we talk about the potential risk there is that interest rates may go up, right. So that obviously will have an impact on your debt service coverage. But if it even if you can achieve that, if the cap rates go up, your loan to value also may be more of a challenge, right? Because the higher the cap rates, the lower the valuation is right. So if an appraiser today assumes that in three years from now, it’s a cap rate at 5%. And then the true cap rate might be 6%, in two and a half, three years from now. Keeping the same noi in place, as they projected will result in a lower valuation. So even if the debt service coverage might be too achievable, maybe the valuation at that point could be an issue too.
J Darrin Gross 44:57
Yeah. So you might not be able to get any cash out. up with me, hopefully you would hopefully didn’t go too long on an interest only loan and you’re, you know, knocking out some of your principal there. So yeah. It’s all interesting. Anton, do you have a territory? Are you guys do you work nationwide? Are you heavy
Anton Mattli 45:18
revoked nationwide? It’s mostly in, in in the southern states where we are active and and the Midwest, right. So we, California we do not really that much we also do in some loans and in the western United States like Oregon, where you are based and Washington, but the bulk, certainly particularly when it comes to multifamily, is really and sunbelt, and in the Midwest, there most of the activity is really taking place.
J Darrin Gross 46:02
You mentioned bridge construction and kind of the, you know what I’d consider just traditional operating properties. Do you guys do any new construction funding?
Anton Mattli 46:12
Yes, we do new construction. We also do non multifamily, right. So obviously, we talk a lot about multifamily. But we do Self Storage, we do office buildings, retail, if it works out in hospitality as long as the situation is right. Obviously, if someone is underwater based on, on based on where they bought the property and where it is today, it might not just not be doable without an injection of new equity. That’s only when it comes to acquisitions of, of hotels, financing is available for the right for the right buyer and for the right price.
J Darrin Gross 47:02
Correct. So overall, is there a kind of a rule of thumb you would express to the listeners for today’s lending environment as far as like, percent leveraged or, you know, percent down payment? Or where is it more just kind of deal to deal to deal and in just, you’re gonna have to make sure that you, you know, have enough equity to get you to the 125 cover ratio? And make sure you have some capital on the sideline in case you need to, you know, per operation or otherwise? Or is there any kind of words of wisdom? Yeah,
Anton Mattli 47:39
yeah, so I would say, on the multifamily side, the availability is really there to get up to 80% leverage as long as that rescore is supporting it. When it comes to order asset classes, I would say it’s somewhere in that 60 to 70% range, typically, maybe 75. So it’s it’s a very apart from retail and hospitality and offices where that still struggle. The markets from the lending side is probably as strong as ever. So for the for the right deal, you’re able to get to very high leverage. And in most sentences, as we discussed before, it’s it’s that’s Risk Coverage constraint. And that might reduce your your leverage down to a lower level
J Darrin Gross 48:43
katra. Anton, my day, I’m an insurance broker. And I work with my clients to assess risk and determine what to do with the risk. And there’s a couple of strategies we look at, we first look to see if we can avoid the risk of can’t avoid it, then we look to see if we can minimize the risk. And if we cannot avoid nor minimize the risk and we look to see if we can transfer the risk. And that’s what an insurance policy is. I like to ask my guests if they can look at their own situation. Could be their clients, investors, tenants the market or or however you want to frame the question in the answer. But the question is about, you know, what, what do you see as the biggest risk? And for clarification, I’m not necessarily looking for an insurance related answer because risk is everywhere. But if you’re willing, I’d like to ask you, Anton, Maddy, what is the biggest risk?
Anton Mattli 49:49
Yeah. Obviously, as you mentioned, risk is everywhere. A lot of risks that can be mitigated at least right and Insurance obviously is a is a is a perfect tool for that some risks cannot be mitigated and they it brings me back to the financing side and forever on investments, as well as for our our clients. I would say the biggest risk is really that when you own a property, that you potentially lose that property, even though it cash flows. And this is we have seen it in 2008 and 2009. And oh, we get back to that time period. But doing market disruptions, you will have a situation potentially, there you may not get financing, as it will be available today. And if you get financing, it might be at at terms that your noi and cash flow cannot support. And this is my view is really the biggest risks that one is, is owning a property and one is in a in a financing situation, and is not ready for for that black swan event, during which one potentially would have to refinance or sell the property. So my solutions recommendation really is for that is is make sure that you have lower leverage, or a longer term of the loan, so that you’re not caught off needing to sell the property, or refi the property the loan that is in place doing such a black swan event, which essentially means is that one should always have at least one year, ideally two years of a remaining term on the long left. To avoid such a black swan event, right, when we look back to 2000 de 2009, if you had to refinance a property right during diverse period of time, it was not available for for for a lot of the borrowers. However, if one was able to wait it out for another year to two years financing came back and didn’t lose the property. And that is I would say is probably my my biggest fear of from a risk perspective, but also something that can be resolved by just keeping the term of the loan locked out for long enough, so that won’t get snow caught in the middle of such a black swan event.
J Darrin Gross 52:49
That’s, that’s good advice. I, you know, I’ve listened to many people that have, you know, said, what, what tripped them up during the crisis, and basically, it was just kind of over leveraged and, and being stuck where they had to, you know, get out or like step the loose property or whatever. And so, I you know, it’s always good to have that kind of perspective, as opposed to a lot of times like that the lenders are all willing to apply you with money and, and, you know, kind of fatten you up there and give you all sorts of cash. But if you don’t have a place to put it, and some of that gonna make money and you can’t, and you know your terms. I mean, that’s that’s just a that’s a bad end to the story, if that’s where you got to end there if you lose your property. So,
Anton Mattli 53:37
yes, that’s right, right. And again, I would say it’s really then poor messages, you may be cash flowing with the current loan that is in place. But that doesn’t mean that you can refinance into a similar type of loan doing doing these black swan events. And that’s really the key message there.
J Darrin Gross 54:00
That’s good. Hey, Anton, where can listeners go if they’d like to learn more or connect with you?
Anton Mattli 54:07
Sure. Our website is peak financing.com. So we have a lot of information. There’s also a link to we call it Ultimate Guide to multifamily financing. So everyone can download it. I can be reached at Anton AMT when that peak financing.com. I’m also pretty active on Facebook on Google, as well as LinkedIn. So I’m sure anyone who wants to reach out to us they can reach me or one of my colleagues spread easily.
J Darrin Gross 54:49
And I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And I look forward to doing it again soon.
Anton Mattli 54:59
Yep, same here. Thanks for having me on.
J Darrin Gross 55:01
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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