financing

How TIF Bonds Help Developers and Municipalities Finance Development with Xiao Yuan – CRE PN #395

Xiao Yuan 0:00

You know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y. But this return is too low that my bank is not willing to do it. My equity partners aren’t willing to do it. It’s not a bankable deal, right. So in order for me to go and engage this project embark on this project, I need some invisible incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it is it’s really buying down the amount of equity needed to really sort of create a more robust real estate return.

Announcer 0:42

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J Darrin Gross 1:02

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 to provide their experience and insight to help you grow your real estate portfolio.

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Today, my guest is Xiao Yuan Xiao is the managing director of Hagmann Capital and manages the day to day operations as well as leading all bond structuring and negotiations or Hagmann capital portfolio. And in just a minute, we’re going to speak with Xiao about TIF bonds. That’s the Tax Increment Financing bonds, and what they are and how they’re used.

But first couple things. If you like our show, you can help us out. You can like share, and comment on our on our podcast here. We always 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, Xiao Yuan, welcome to C R E PN Radio.

Xiao Yuan 2:56

Thanks for having me. I appreciate you taking the time to learn a little bit more about what I do.

J Darrin Gross 3:02

Well, I’m really looking forward to this. I did a little research before or in preparing for this. And it was kind of fascinating and I’m dying to learn more about it. So but before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Xiao Yuan 3:21

Sure. I’m Xiao Yuan. I am the managing director of Hagaman capital. So Hageman Capital is a entity that we created in 20, late 2020 To purchase developer backed TIF bonds. So prior to really creating Hageman Capital, The Hageman family’s farming family out of Remington, Indiana, who feed Hageman, the the patriarch and family started a seed company and sold it in 2013. And so that created a liquidity that for us to really invest in our traditional commercial real estate, and some private equity plays as well. And so our focus, originally Hagaman was mostly commercial real estate. We were LP and JV investors and a lot of multifamily deals. But what we realized was that we saw a trend in the commercial real estate space in at least in Central Indiana and a lot of the Midwest was that developers were asked to essentially buy their own taxes or refinancing bonds. So the way that municipalities used to do it is that they would use you know, really all future property taxes of a maybe a very large TIF district or an entire municipality itself to incentivize the project. But really, the last few years, municipalities realizing that that’s not something they wanted to do. They didn’t want to put their credit on the line. And so instead what they did was asked Developers will support their own projects by essentially promising the future tax revenues generated from their project. And so that created a void and that, you know, what was, you know, municipal that TIF bonds have a pretty high rating, you know, typically very high investment grade rating. What developer bad projects are, is that it really is, I mean, the credit of the developer. And, you know, there, there really isn’t much more to it, right. So it’s, you know, if the developer or the private property owner can pay your taxes and the taxes stay high, you know, you as the bond bond holder, we get paid. And typically, you know, that is not a that’s not a very marketable security, or it just lacks a lot of liquidity. So what you’re going to Hagan realize is that, you know, we were typically really good at understanding commercial real estate risk, all we’re really doing now is applying it to, to, you know, Tax Increment Financing bonds, that, you know, we we understood property taxes, we understood, development risk, we understood construction risk, you know, we’ve taken on those risks ourselves. So, you know, what’s the difference, if we were to essentially do that with a bond that so that’s why that’s how you’re gonna capital was created was to both provide liquidity in a space that lacked liquidity or not a lot of folks were, were engaged in that, you know, our, really our expertise really is not just real estate, but it’s also you know, bond structuring, as well. So my background was in capital markets at a large regional bank. And my specialty was in high yield municipal finance. So prior to joining Hagen, and that’s what I was doing, and TIF really was, was a big part of it. So that’s just a little bit about us. And, you know, kind of how we operate, and really the history of the company.

J Darrin Gross 6:55

Now, I appreciate you sharing that, because it’s kind of fundamental to understanding what you guys are and kind of what to talk about. So, I want to first kind of differentiate them and make sure I understand so. So bonds are debt. Right. I mean, the so the, the TIF bonds. You mentioned the developer back TIF bonds, where they previously be I thought I heard you say that primarily, they were municipality backed bonds. Was that Did I hear that? Right?

Xiao Yuan 7:29

Yeah. So you know, the way that most developers can get incentives on the project, you know, back in the day, you know, what, what ultimately would happen is, you know, a developer would go to a municipality and say, hey, look, you know, my project currently cost x. And you know, it has a return of y, but this return is too low that my bank is not willing to do my equity partners are willing to do it. It’s not a bankable deal. Right. So in order for me to go and engage this project, embark on this project, I need something that’s more incentives. And so you know, TIF is just a form of a municipal incentive for the developer to build a project. So you can kind of think about think about it as it’s really buying down the amount of equity needed to really sort of create, you know, a more robust real estate return, right. But back in the day, what a municipality would do is, they say, hey, we’ll give you the Tax Increment Financing incentives. But so we’ll go out and issue a bond. But if let’s say the property taxes from your bond, doesn’t cover the debt service, because you know, for whatever reason, maybe your project is delayed, or the assessor’s office is, you know, very generous to you, for whatever reason, you know, there may be sort of a shortfall between the bond debt service and the, you know, the revenues that that are generated from just one project. And so what municipalities used to do is say, if that were to happen, we will pledge other revenue sources, typically sort of the gross collective property taxes of the of this plant taxing district to repay the bonds, right. And so, it, you know, obviously, the cost of financing and dosage situation, but it’s really kind of a credit of Municipal Credit at that point, right? The backstop is the municipality. And so while the financing costs were extremely cheap, the risk component for the municipality is much higher, you know, they’re really taken. They’re really taking on higher risk, more risk. By doing so, it especially if a project you know, ends up maybe not being what it what it was built to be. And so, the recent trend at least into Indiana is that municipalities have kind of gone away from the structure. But instead, you know, they’re telling the developers that gay will give you the TIF, you know, the tax the future taxes generated from the property that you’re about to build. But if there’s a shortfall, and you can’t pay your pay the bondholders, we’re not going to back in. Right. So you developer will end up having a back end with your balance sheet or having a back end with you know, sort of it seemed more of like non recourse dad recourse the real estate but non recourse to developers themselves, right. And so, so that’s really the distinction. It’s overnight, you know, you went from these, you know, double a triple eight municipalities that are supporting Tax Increment Financing debt, to really these are just developer support bonds, which, you know, does it just haven’t traded well in the marketplace? And so, so, what we decided to do was essentially invest in the ladder pool, right? Because we understand the risk, we understand, you know, what is what really, what is our worst case scenario if somebody doesn’t pay our bonds? Right. So that’s, that’s kind of the, I would say, the high overview of, you know, what municipalities used to do when they were back in the bonds versus what they’re doing now.

J Darrin Gross 11:26

Got it? So a couple of questions from that. So the, my understanding, and I do a fair amount of like, performance bonding for contractors now. And so having to, to be familiar with their balance sheets, and, and you know, how the, the underwriters always want there to be more cash than they need, you know, so they can pay all their debts. And, you know, not not have a claim against a bond on a performance bond, I’m assuming to be some similar underwriting that you guys look at when you’re looking at these, these contractors, you mentioned, you know, they have enough of the balance sheet to to pay the potential shortfall. Is that? Am I reading that? Right? Is that what a lot of what you guys do when you’re when you’re looking at a bond to buy? Is that? I mean, cuz you’re essentially, are you not providing the capital to the contractor? Or are you are you buying, you’re buying the obligation for a rate of return from the contract? Or how’s that? How’s that structuring?

Xiao Yuan 12:31

Yeah, so I mean, what we’re really doing is we’re providing capital to the developer that is getting this tax increment financing incentives. And so you do have to underwrite plots or risk, but at the end of the day, right, I mean, the project produces income, you know, it’s not just, you know, I mean, these are commercial real estate projects that are income producing, you know, we’re not going to go buy a bond on a, you know, a single family home, that they’re not sort of this perpetual income. And, you know, like, most commercial real estate developers, especially the good ones, right, is that they, they’re, they’re gonna pay their taxes on the property with the income from the property. So we actually, I mean, we spent a lot more time looking at that the actual development project itself, as opposed to, you know, maybe the sponsor Now, granted, sponsor reputation. And sponsor risk is a real thing, that we do really, you know, heavily scrutinized that, but at the end of the day, you know, if it’s a good project, and, you know, good sponsor, good developers, you know, those are really the the aspects that we’re underwriting.

J Darrin Gross 13:36

Got it. So it’s more like just a commercial bank loan, from a standpoint of view, the project, the viability of the project, more so than the than the actual the contractor.

Xiao Yuan 13:48

Correct.

J Darrin Gross 13:49

Gotcha. And, and so that the debt, is there a lien position against the project? If there was a, something went wrong? Are you in a position where you have any kind of a lien against the property?

Xiao Yuan 14:08

Yeah, so taxable refinancing is essentially taxes, right? So you don’t, you know, these are just future property taxes that are generated from from your project. So the debt service on these bonds are correctly correctly from the taxes generated from the project. So, you know, if you don’t pay, you know, that service on your bond, you know, typically what happened is you just didn’t pay your taxes. So, in that sense, we do have a lien, right. We have a, you know, we essentially had a tax lien that if you didn’t pay your taxes, then you know, the there could be essentially a trigger foreclosure or tax sale. Now, what’s more likely happening the developers construction lender or first mortgage holder is probably going to pay those taxes. Just because they don’t Want to be wiped out by a position that is, you know, essentially maybe 10 to 15% of the capital that. But But ultimately, you know, it’s treated like a tax lien. Now, the only caveat is that if, you know, let’s say the assessor assesses the properties lower than what the debt service would be, then you technically wouldn’t have you know, how to tax lien in those situations unless you have maybe some sort of a side agreement or a taxpayer agreement of some sort. So that’s the caveat, right? That if there’s enough taxes to pay debt service, and somebody doesn’t pay their taxes, then that’s a tax lien. But if there’s not enough assessed value in taxes to pay the debt service, and somebody does pay their taxes, that’s not necessarily a tax rate.

J Darrin Gross 15:54

So in just a brought up a couple of things, that is a bond, it’s a debt, but it’s, it’s strictly through the taxes that are that the payments to the bond are being made. Is that understood that? Right? Correct. Okay. And so, if there’s a lender, like you said that if the taxes aren’t getting paid, the lender would likely pay those. So your your position in the the discharge of the, the property, if it were to go to foreclosure, you’re not in first position, I assume that the lender would be in first positions that

Xiao Yuan 16:36

No, you are in first position, because it’s a tax lien.

J Darrin Gross 16:39

it’s above taxes, that the lender can’t. So I thought that

Xiao Yuan 16:43

Which, which is always the case, right? I mean, right. Right. It doesn’t matter, you know, you don’t pay property taxes on your house. I mean, it doesn’t matter how big your mortgage is, your mortgage lender is gonna get wiped out. And, you know, that is kind of the nuance that, I think, you know, you have to understand, when you’re looking at these deals is that each different state has, you know, slightly different sorts of tax do procedures. In Indiana, it’s generally pretty favorable, who, you know, I would say it’s more municipal municipally favor? And so, you know, we have really well, we say, you know, we have first position, you know, we do right. Now, granted, the, sort of the other side of it is our capital comes in before the construction lender, you know, it’s really TIF capital, TIF equity is really treated as, you know, equity in the capital stack, and chances are that that lender is going to want to see that money comes in first, right? So it’s not sort of this, you know, you’re in the super protected position, it’s that, you know, taxes for whatever reason, if your project under taxes don’t, don’t tend to do well, you know, or the set values decrease, you know, you’re subject to those types of risks.

J Darrin Gross 17:59

Got it? So, as far as the, the the capital that you guys are, are putting up, and, you know, it’s used, is it, is it designated on more like infrastructure? Or is it or is it just a part of the whole project? Or is there any primary way that that the funds are used?

Xiao Yuan 18:24

Yeah, so my answer is yes. Or, hey, that’s the joke is it, you know, tip kind of falls in the gamut of infrastructure use. So, you know, if you, let’s say, you build a commercial warehouse, and you need to have roads leading up to it, you know, TIF dollars can be used for that, or it can be used for parking garages. That is, you know, resonant and creative, to your multifamily deal. You know, but I mean, typically, would also go as far as potentially supporting bricks and sticks. So as really just kind of a part of the capital stack. So it’s, there’s a wide range to it, that also kind of change the taxability of the income from the bonds. So if you’re essentially buying a bond that is only supporting infrastructure, there’s some tax advantages compared to if you’re buying a bond that potentially supports bricks and sticks, where you really, really can’t get tax advantages from that at that point.

J Darrin Gross 19:23

Got it. And the bonds who so you guys are putting up the capital, the bond? Is that? How is it I guess what I’m trying to understand this, the municipal agreement is just baked into the tax or is there is part of what you’re doing? Is that going to affect tax rates? You know, if I’m a member of the community, am I affected or is it strictly related to that property and the tax base or the access to buy the property

Xiao Yuan 19:54

that’s strictly related to the property itself? Right. So you know, the really Uh, you know, we kind of joke, the best thing for the community is, you know, some developer, getting a tip that falls off after a certain amount of years. Because all that tax base is gonna go back to the community. And so, you know, you as the, you as the resident is really not impacted by, you know, it says the developer back bond, right? If, if there’s a shortfall for any reason, if they can’t pay that service, you know, your property taxes are gonna go up, because you, you know, you own a house, that’s, you know, three blocks away. But, you know, ultimately, that’s kind of an advantage, right? That is really sort of more more on the developer shoulder. So it’s not, it really doesn’t impact tax rates. It’s more just, you know, what is the actual taxes generated from the property you’re going to build?

J Darrin Gross 20:50

Got it? Okay, well, this is all starting to make more sense now that it is specific to the property. Because I was thinking when I was preparing for this more like, you know, a tax bond, measure that you you’re, you know, you vote on, based on they’re gonna do new schools, or roads, or whatever it is, or renew a bond for whatever it might be, and you the public votes on that. But in this case, it sounds like, is there a need for a vote? Or is it more about the just it’s the municipalities able to grant the status to the property itself? And that property then carries the weight of the bond? And I say, the municipality, but I want to make sure I understand, doesn’t municipality have to grant any status? Or is that something strictly between you? And the issuer of the bond and the payer? The developer?

Xiao Yuan 21:52

Yeah. So a couple of couple of answers. I, you asked a couple of questions. So the first question is that there need to be a vote, the answer is not from the public, because it doesn’t impact their pet tax rates, it doesn’t impact how much taxes they’re going to be paying as a result of this development. So there doesn’t need to be a vote from the public. The second part is, you know, the municipality ultimately needs to grant you the right for the for TIF, right, because what you’re really taking aways are taken away their future taxes for a number of years that you get to monetize. So so the only way that you can do that and use essentially going through a municipal process that they’re in which they’re granting you the ability for TIF, right, because you know, what, what’s ultimately happening is, you know, on day one, if you just have a vacant piece of land, that doesn’t generate a lot of tax revenue, the increment really comes from the fact that you build something that is more than just, you know, dirt, the you know, let’s call it 300 units of apartments. You know, in that case, right, the taxes on 300 units is a lot more than no units. And so the difference of those taxes is the increment, right? So if you didn’t do the project, you know, what, what, what would have been the what would have been the taxes, versus if you did do the project, what other than the taxes and the difference in that is increment. And so that is really what the municipalities allowing you to capture. So it’s not that, you know, they’re really taking money out of their pocket, in that sense, it’s that there has to be development in order for taxes to be there. And by allowing you to capture the increment, they’re allowing, essentially building their their tax base in the future, right, because once the sort of the test period runs off, the municipality captures the taxes that is generated from your development.

J Darrin Gross 23:50

No, makes sense. I am kind of slow at this, but I’m getting that as we’re going through it here. It’s just an interest. So it basically it’s the part of the capital stack, you get it by appealing to the municipality to grant the status, and then that allows the developer then to do they then, you know, engage with somebody like your firm or, or who who issues the I mean, because it’s capital at that time. I mean, it’s, it’s, it’s debt, you’re part of the project. So they, they have a plan, they have a budget. They have a lender that says they’ll meet, you know, this much, or they’ll, you know, lend this much. I’m assuming they have to come with some sort of equity themselves, so that the developer, the owner of the project, and then you’re a part of that, that stack in my mind, is that yeah, my writer, okay. And then my next question would be so if, if a project does have a TIF bond that you guys are the issuer of what’s the right person Sure, okay. Yeah. So that’s the, I’m not saying a word right there. But because you’re putting the capital up, right? Or you’re,

Xiao Yuan 25:09

we’re just buying the bond. Yeah, I’m not lending against that we’re buying the bond.

J Darrin Gross 25:15

But when you buy it, then you’re gonna receive payments from the revenue right? Now, you own the debt. Correct. So who issues the debt than originally say, is it that the municipality?

Xiao Yuan 25:27

Yeah, that’s part of the that’s part of the granting process, right, is that they, they allow the issuance of a bond? So this, you know, what a bond is? It’s like a no, right? I mean, memorializes, the obligation. And so what we’re doing is we’re essentially buying that obligation.

J Darrin Gross 25:44

So is there any coordination between you and the municipality? I mean, what have, you know, so that they don’t over obligates the property?

Xiao Yuan 25:53

Yeah, you know, typically, what we’ll do is we’ll sort of limit that. Based on any TIF obligation, our bond is really the only obligation that can be encumbered on that, you know, on that property itself. Right. So, I mean, there’s definitely some coordination. You know, also, there’s really through throughout the throughout the deal. I mean, we’re really negotiating the terms of the bonds. You know, what we like to see what is our repayment source? How long the bond is, right, sometimes they’re statutorily, you know, you’re only allowed a certain number of years for TIF, just because the municipality needs to be able to capture the future increment at some point. So there’s, there’s definitely some there’s definitely some high level coordination between the developer and the municipality. But really, I mean, the way we see it is, you know, the developer who’s potentially getting the equity getting the capital, you know, those are the folks that I think we interact with the most.

J Darrin Gross 26:55

Yeah, now, it makes complete sense. And again, it’s, I appreciate you walking, walk me through this, because it’s, I get the concepts, but some of the way the the money moves or the obligation moves. takes little hammer and through there. So you mentioned the length of the term on these, what is an average length of a, of a term on a TIF bond?

Xiao Yuan 27:20

I vary state by state. In Indiana, it’s 25 years. In Ohio, it’s 30 years. You know, Illinois, I think

J Darrin Gross 27:27

you said about how many years in Indiana? 25 or 25. Okay. And it’s like a commercial loan, as far as the length of the of the bond payback time? What is the is it a fixed rate all the way through it, then? Or is there a,

Xiao Yuan 27:47

a Yeah, for us? It’s a fixed rate, you know, what we can’t do is, you know, we’re not buying a floating rate debt. So sort of on day one, right? You you already have, you have to have kind of the capital stack already in place. So the rate floats, right, even though your revenues don’t change, you know, you you can’t really have a situation where there’s essentially less bonds, right? So for at least for us, at least, I mean, we’re our money than there for 25 years, and it’s fixed.

J Darrin Gross 28:16

Got it? So on the commercial lending side of things, a lot of times, you know, loans get sold, or, or not so much on commercial, I guess, but, um, you know, like, residential, there’s been a lot, but is there a market for them? The bonds? Or do you guys you issue them? Or you buy them and hold them? Or do you ever sell them? Or,

Xiao Yuan 28:39

you know, historically, no, we we, you know, our intent really, is to buy and hold. And, you know, I think, I think folks kind of like that as well, just from the sense that we’re really long term money, you know, this is not a sort of, get it in, flip it out, you know, get out type of play, you know, the kind of the way that we’re structured to, you know, we’re a family office, we’re very long term money, than the way that we look at, you know, a lot of these transactions have very long time horizons. So, you know, because of the lack of liquidity and the fact that, you know, we, you know, that’s really not the investment thesis, you know, we we really have a we have full intent that we’re going to keep them.

J Darrin Gross 29:21

Yeah, that’s, that’s interesting. What’s a an average rate on a on a tiff bond?

Xiao Yuan 29:29

So, you know, I think that question really kind of comes down to a couple of factors, right? The the easy way to answer that is, you know, we’re really going to be about between what a commercial lender is going to charge on a first mortgage, versus what your preferred rate on equity is going to be. You know, the reason is, you know, what a preferred lender what a first mortgage lenders really going to get is, you know, their money is going to go in last and they kind of take the least amount of cash such a risk. But you know, we’re so so we really, you know, our rate really needs to be a little bit higher than theirs. But on the other end is, you know, we were really not getting the press upside, you know, from from an equity position. And you know, our capital is just not as risky is that is equity, right, especially kind of based on based on where we are in the tax lien. So my comment has always been really that’s the sweet spot, right? It’s between what a first mortgage is and what equity is.

J Darrin Gross 30:33

Got it. And as far as the repayment of the bond, does it have a a declining principal owed? Or is it just a length of time? Or is there a, you know, like on a on a, on a regular commercial loan, amortized over, you know, X number of years? Here’s a declining balance. Is that similar in the bond?

Xiao Yuan 30:56

Yeah, I would say, you know, bonds typically have like, six domination. So really, what we’re doing is, you know, we’re sizing to, you know, we’re sizing to the amount of revenue is available every year. So, you know, typically be looking at Bond amortization schedule the, in the earlier years, right, where if you have a set number of fixed revenue amount, you know, you’re going to pay more interest than principal. And you know, as you kind of move down the amortization schedule, is going to be more principal than interest.

J Darrin Gross 31:28

So in the type of projects that didn’t sound like you’re really limited, it’s all about the revenue side of the, the end use of the project, because I’ve pretty much what what dictates?

Xiao Yuan 31:43

Yeah, you know, we we are selective in the project that, you know, we may be interested in buying the bond for some typically, we don’t like to buy anything that is too special use. So, you know, if you want to build a building that looks like a basket, you know, maybe not right, but if, you know, if it’s just traditional, you know, commercial real estate, retail, multifamily. You know, industrial, I would say, you know, we were very interested in that. So, you know, rule of thumb is nothing too specialized, but generally sort of bread and butter, real estate, the type of stuff that people want to build. You know, those are, those are kind of the deals that we like to see on when we’re buying the tip as well.

J Darrin Gross 32:31

Got it? And is there a sweet spot as far as the size of the tip that you guys purchase?

Xiao Yuan 32:38

Yeah. So, you know, typically, the capital stack tip is anywhere from 10% or 15%, of the full project cost. So, you know, while theory we can buy a 15, or $20 million bond, there’s just not that many 150 to $200 million projects. Right. So traditionally, our thought had the sweet spot have been, you know, any anywhere north of a million a half, you know, some of the larger deals that we’ve done have been in the 12 to $15 million range. But what’s that average? It’s about five, five to $6 million, which equates to anywhere from a 40 to $60 million project.

J Darrin Gross 33:17

So on that, on that percentage basis of the total projects of the say, You guys are coming in at 15%? I’m assuming is the the lender, are they coming in at 80? Or 75? Or how much? How much is the developer willing to come in? Yeah, how much do they are they required to bring? Because I’m assuming that this, this kind of you help the project? I’m thinking?

Xiao Yuan 33:44

Sure, sure. Yeah. So you know, it really just depends on what your what the commercial lenders willing to do in terms of loan or cost. So some lenders back in the day, were maybe willing to push 80%. But, you know, I would say these days, you know, maybe we’re closer to 70. So let’s say worth 15% of the capital stack, and the lenders 70%, then, you know, the developer needs to find another 15 somewhere, and typically, it’s from them or, you know, they’re their LP investors, for example.

J Darrin Gross 34:18

That’s fascinating. The, just the, the whole, you know, kind of the nature of the capital stack and, and, you know, just the, the TIF bonds, I mean, I’ve heard of TIF bonds, but I never really paid that much attention to him. And you mentioned that, that the, at least in Indiana and kind of the state you’re working in that this has changed from more of the municipality back to the to the developer back. Is that a trend nationwide? Are you seeing that?

Xiao Yuan 34:50

You know, I would say some states or maybe even further along, just you know, just because I would say, you know, if you look at deals in Illinois, I mean, there’s traditionally always been You got the TIF, but you didn’t get the municipal backing. So it kind of just depends, you know, in cities and towns that are that are further along in their development cycle, you know, there’s just more attractive places to build, you know, they’re sort of less likely to give you really, really strong incentives. Right. And so those municipalities may have already been, you know, sort of pushing developer back bonds for years and years. So it’s, you know, it’s, I don’t want to say it’s a nationwide trend, you know, because we’re right now is we’re still pretty focused on the Midwest. But it’s, you know, if you think about it, from a policy perspective, it probably makes sense, right, that, you know, you, what you don’t want to happen is to have a failed commercial development project, and the rest of your tax base has to pick up, you know, so. So that’s been the appeal for a lot of municipalities that they don’t have to give, you know, sort of a big credit enhancement in order for deals to still happen.

J Darrin Gross 36:03

Right. And like you said, the goal, their goal is to have the project where you have a, you know, potential downstream tax benefit, as opposed to just the raw ground, and also it fills a need, and that there’s likely a need for the project. If you’re talking about multifamily, or, or, I mean, just the just the nature of demand, and, and also its jobs, jobs and housing, and whatever else. So yeah, yeah, I’m guessing there’s a lot of support from municipalities for this type of financing.

Xiao Yuan 36:41

Yeah, exactly. You know, you’re spot on in that.

J Darrin Gross 36:47

Way shall if we could, I’d like to shift gears here for a second. My day, I’m an insurance broker. And as much I work with my clients to assess risk, and determine what to do with the risk. And there’s three strategies we typically considered, we first look to see if there’s a way we can avoid the risk. If that’s not an option, we’ll see if there’s a way we can minimize the risk. And when those are not options, we look to see if there’s a way we can transfer the risk. That’s what an insurance policy is. risk transfer vehicle. And, as such, I like to ask my guests if they can look at their own situation, could be clients, the economy, the political market, however you want to identify and whatever you considered be the biggest risk. And, again, for clarification, while I am a insurance broker, I’m not necessarily looking for an insurance related answer. And so if you’re willing, I’d like to ask you, Xiao Yuan what is the biggest risk?

Xiao Yuan 37:50

Yeah, you know, like any financial product, I mean, it truly is interest rate risk. So, you know, it’s not something that you can eliminate, you can, you know, transfer to some extent, you can minimize, to some extent, but, you know, on a day to day perspective, I mean, we do have a fee, it is, you know, anytime we buy a bond, anytime we, you know, look at look at any type of these financings day to day, you know, proceeds can essentially get diminished simply because, you know, 10 year Treasury goes up by 1520 basis points, right. And so, you know, that’s something that, at least we spent a lot of time thinking about is just how do we minimize the interest rate risk, and we do have kind of a few vehicles that we, we utilize that minimize interest rate risk, both for ourselves and also for the developers that are, you know, seeking our capital. And, you know, kind of a big way that we do that is, you know, we created a rate lock mechanism, anytime we buy a bond. So, you know, whatever the interest rate is on the bonds, what we would do is, you know, we can say, hey, we can lock in the rate for the next five to six months, and typically, the way we do that is through kind of a series of different slots, and, and then, you know, sort of other interest rate management tools, right. So, but, you know, on any given day, I mean, what I think about the most is, you know, how do we minimize interest rate risk, because that’s ultimately sort of the, you know, volatile interest rate risk is really the sort of the enemy of, you know, slow, solid, consistent return.

J Darrin Gross 39:26

Yeah, no, sounds like some challenging times right now, just based on you know, the, as the rates are changing and how it’s changing the market. I mean, that’s, that’s a real challenge. And it’s funny, because I know that historically rates have been you know, higher. But having been so low for so long, kind of that adjustment for people to to adjust to in the market to adjust to where the, you know, whatever the market is, and will be so that it functions as kind of the challenge and so I get it, I get it. Hey, shout, where can listeners go if they’d like to learn more or connect with you?

Xiao Yuan 40:13

Sure, they go on our website, HagemanCapital.com. To learn more about, you know what we’re doing in the TIF space. If they want to learn more about the family office and our operations, then go on HagemanGroup.com and I am on LinkedIn under Xi AOUYUAN.

J Darrin Gross 40:33

Awesome. Xiao, I cannot say thanks enough for taking the time to talk today. I’ve thoroughly enjoyed it. Learned a lot. And I look forward to doing it again soon.

Xiao Yuan 40:45

Darrin, thank you so much appreciate you having me on and appreciate and hopefully your listeners can get something out of this as well.

J Darrin Gross 40:53

I’m certain they can. 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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Black Swan Events and Commercial Real Estate Financing with Anton Mattli – CRE PN #319

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.

Announcer 0:28

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 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.

Announcer 55:22

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Lease Purchase Commercial Real Estate with Chris Prefontaine – CREPN #253

Chris Prefontaine 0:00

terms of the answer it’s buying property I don’t care if it’s commercial residential retail a boat a car doesn’t matter it buying things on terms without banks in my case lease purchase owner financing to name two and people say over and over and over I don’t know if I can do that Mary I don’t think sells it no they do because I not just I don’t feel any company here with my son and son in law. We buy homes every month, but in in properties and multis in our own office building, okay, so I know it works. But we’ve got about 80 what we call associates now around North America, mostly us that also do it.

Intro 0:37

Welcome to CREPN 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 0:57

Welcome to commercial real estate pro network. CREPN Radio, Episode Number 253. 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. Let’s get into the show. today. My guest is Chris Prefontaine. He’s got 25 plus years experience in real estate as a builder, developer, a realtor, real estate investor and also a best selling author. And just a minute we’re going to speak with Chris about one of his his books and just the basic topic, real estate on your terms. But first, a quick reminder, if you like the show, CREPN Radio, please let us know. You can like you can share you Subscribe. And as always, if you leave a comment, we would love to hear from you, 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 us at commercial real estate pro network. With that, I want to welcome my guest, Chris, welcome to CREPN Radio.

Chris Prefontaine 2:23

Thank you, Darren, pleasure to be here, my friend. I am looking forward to our talk today.

J Darrin Gross 2:30

Before we get started, if you could take just a minute and share with the listeners a little bit about your background.

Chris Prefontaine 2:36

Sure, the risk of day myself I’ve been at this in some shape form or another since 1991. Actually, so going on almost 30 years. It’s pretty scary.

I did some spot building I called it back then single family homes, way back when he really understood understand what terms meant and we never took out bank loans we would build on someone else’s land and then we would pre sell the home and then at the very end

When the buyer cashes out everybody got paid including contractors did that for a while, then bought a realty executives franchise put my broker hat on had never done that as a realtor ultimately built that and sold it to Coldwell Banker in 2000. And then from 2000 until the lovely crash, we were doing our own properties. We were coaching people throughout North America and thenlike so many people in the US anyway at least got beat up with the crash and that caused us to re engineer everything we do and we have.

J Darrin Gross 3:29

So your your experience definitely from ground up It sounds like as far as of construction and then into sales and and coaching. Maybe the good place to start. It would be the the how deals are financed, pre crash. When you were an investor, how are you negotiating or how are you structuring the dealsYou’re doing

Chris Prefontaine 4:01

Yeah I can remember specifically so so let’s take it from like after I sold my company called bank I was doing what everyone I still think to this day considers to be the conventional way either borrowing hard money you know from some sort of other investor who just has money to put to work or bank loans. And and both of those meant I was signing personally on him. And so I thought nothing of it credit was great. Morocco was great. They’re giving up money Thomas anyone wants a good credit. And so we ran with that. The problem was when things come rolling down when they come knock and whoever signed personally right they don’t care why the market came down or whatever they’re going to go into whether the personal signature is not that was the big problem.

J Darrin Gross 4:43

Right now and in that mess when when everybody was caught I will you know, you weren’t alone.how willing were the the banks to work with you on that?

Chris Prefontaine 4:56

Not to know the we we had like 22 Two or 23 properties back then and they were either going through by force, short sale, some sort of liquidation or foreclosure. We two or three of them had to go foreclosure. So it was pretty ugly. It was, it was a part time job, if not full time. I remember like it was yesterday, my son had shared an opposite. He’s like right next to me. And he learned a boatload do that for those times.

And so it’s very interesting. So they, they weren’t I mean, creditors were because you can call a creditor you can call a credit card, you can call it call a collections, you can call them and you can negotiate. banks don’t care. As long as they know you have assets especially they’re coming. Right. So that yeah, that took me a better part of probably eight or 10 years to be totally done. But but four years it was pretty busy just doing workouts.

J Darrin Gross 5:46

Gotcha. And, and in that you mentioned is kind of a full time job. We’re where the properties that were in question, were they all investments or were these some conStruction projects?

Chris Prefontaine 6:00

Good question. Let me think. I mean, I had I remember specifically I had a six unit construction project going on. I gave that back to the bank amicably. They were they were fine because it was, you know, their costs were low. I had a boatload of my cash investor cash in it. So the bank was good. Had a six unit has a good story, a six unit building, we were doing condominium conversions back then because you could buy a six unit let’s say in this case or three. And before you get the condominium, Doc’s drafted and engineered attorney, an engineer, haven’t pre sold. I mean, it was crazy. So here’s some numbers for you. We had a building six units in Rhode Island, first two, or three. So it’s like 172. I remember like it was just full price, the fourth, third or fourth, whatever the next unit was, it was like a light switch was thrown, we couldn’t get 50 grand. So that’s two thirds in this particular area dropped in Providence around and if our life depended on it, like I remember the owners, the other owners when you touch them for 50 grand and so on.

That’s okay. So what do you do? You got a construction loan you got, you know, bank loans. It was crazy. You couldn’t get out of those no way around it.

J Darrin Gross 7:08

Well, so when those were you basically just selling them out of Florida then or what were you? Did you

Chris Prefontaine 7:14

we couldn’t even sell them at the on the floor at that point. So that, that that one in particular was a hard money lender that to this day, we’re super good friends, because instead of hiding, one of my good friends said, Look, this is back when this happened. He said, Look, you didn’t take the national market down call who you can call and tell them why I’m here. I’m not going anywhere. I’ll work with you. If it takes me 10 years. And I said that to the Sky News. 2020 years, my senior we had lunch. And to this day, I may do with them. And he’s made other deals with us since then. But it was because I communicated. So you said What did they cooperate? Well, he did. But he was private.

J Darrin Gross 7:47

Right? Right. No, it’s kind of a lesson that I think, you know, hopefully we haven’t forgotten. I think sometimes I wonder if things don’t kind of inch back but I think that everybody. Every market has its own dynamics. And clearly back then the money was, you know, cheap and there was a gold put people on houses. And, you know, there was, rightly or wrongly that the lending got got a little loose. And I don’t think anybody was anticipating. You know that as bad as it could be. I mean, we have always had corrections. I mean, it’s part of the cycle. But anyway, there’s a lot of a lot of stories, a lot of lessons learned. So yeah, so all right, so prior to the crash, you’re doing the traditional thing, hard money and bank finance financing, you’re signing on the line there. And as the situation developed, the signature became worth more kind of assuming you understood more of what you were signing up for.

Chris Prefontaine 8:58

That’s a good way of saying it lightly. The identity Thank you.

J Darrin Gross 9:00

Well, I, you know, I think there’s a lot of things you know, anytime you go sign up alone, there’s How many times are you signing and the volume of paper kind of prevents anyone from Really? I mean, I shouldn’t say anyone I know some people that sit there and will read the whole thing.

Chris Prefontaine 9:14

Or their attorney super shocked, maybe, you know,

J Darrin Gross 9:16

yeah. And, and, and to their credit, at least they have some sort of essentially lease, they’re taking the opportunity whether or not they understand everything they’re signing. Whereas now, I’m still kind of just perplexed by how much like DocuSign and all that is basically, yeah, sent me a PDF and told me to sign that they one time and click the button and, you know, it’s, yep, I’ve signed for everything.

So it’s, I don’t know that the more signatures and all that stuff is improved anything. I think it’s just adding more more layers of, you know, an opportunity for somebody to, to welcome into this way whoever’s authoring the contract is, it’s protecting them. It’s not protecting you, the guy Yep, but sweet well let’s roll forward then so you you you got caught and you know as did many and lessons lessons you learned what what what are the takeaways from that and how have you changed your? Your yeah forward financing

Chris Prefontaine 10:19

So that the same answer right because everything that happened then caused us I got to the point where it’s like I even gonna like go into real estate that’s how spent I was and then it’s okay. So So what could we do if we were to go aggressively? Stay in aggressively real estate well, terms is the answer. It’s buying property. I don’t care if it’s commercial, residential, retail a boat, a car doesn’t matter. It buying things on terms without banks. In my case, lease purchase owner financing to name two. And people say over and over and over. I don’t know if I can do that. Mary I don’t think sells it. No they do. Because I would not just I don’t feel any company here with my son and son in law. We buy homes.

Every month, but in in properties and Maltese in our own office building, okay, so I know we’re spot, we’ve got about 80 of what we call associates now around North America, mostly us, that also do it. So we’ve, we represent a lot of different states now. So that was the lesson was don’t sign personally. So do it by using those vehicles I just said, and don’t use your own cash or leverage your own cash here. As recently as yesterday, my CFO said to me in a meeting with two other employees, did you know instead of doing one of those SBA loans for your company, you could you could take on Ecuador in your house be really cheap. And I said, Absolutely, absolutely knocked does not happen. It’s never gonna happen again, because I did that pre op. And so I said my debt to equity 17% Not, not the inverse, like I like I always was doing it’s next to nothing, and it’s never gonna be higher than that. So, all that to say the lesson was the personal signature, Darren and then when I say no personal I also mean no investor money. Unless we’re doing something really special when we’re taking a seller out or doing something unique. We’re not we’re not going to borrow and signing anything.

J Darrin Gross 12:10

So where I guess let’s back up here. So I get basically the simple answer is it’s not your money. You’re looking at a lease or seller financing. What are some keys that you’re that you look for some tells? Because, you know, I think that anybody is looking on the MLS or through loop net or a commercial broker. The first choice or the first thought that that goes through everybody’s mind is, you know, conventional financing that the seller is going to get cashed out. Mm hmm. So what what is it that you do? Is it just would you go to any deal and ask us or is there a specific type of deal that you’re looking for that makes sense for this kind of thing?

Chris Prefontaine 12:59

Yeah, good question. I’ll give a few answers about a third of the properties in the United States are free and clear. Different pockets, different percentages, but roughly speaking, and so that’s a great Ponte efficient, so to speak, because if they need to cash out, presumably they would have yanked it out. And they’re usually the ones that will be open not only open by inviting people to structure something on terms, and I alluded to it earlier, but this office building is exactly the case. He want is 70 years old or 71. He wanted terms. He wanted 20 year terms, we usually do like three 510. He wanted a long term. In fact, he he forgot to write it in a do on sale. He said, I don’t want to be cashed out on you make sure you’re clear on that. In other words, he doesn’t want me to refinance and never pay him off until 20 years, even though he’s 71. So that was more of an estate and tax issue, I’m sure. So they’re out there. So you got a niche and find them. I’ll give you another example. We bought a six and a four unit in the same town.

How do we buy them? We said Hmm, we’d like to add a multi or two more to our portfolio and we’d like it to be 40 to 10 units so we literally mailed 326 and it was small pieces of mail and we mailed them three times three tweak the letters little differently regular number 10 envelope we bought those two homes for that now what was the criteria four to six units free and clear both of those are free and clear both was structured owner financing no money down and here’s the key for the recession resistant principal only payments no interest no interest they got their price they’re happy to do that and I’ll pay the price for a premium as long as I get my term and principal only payments they both did that

as an example three examples coming office building two

J Darrin Gross 14:37

Principal only? Hmm So that just seems to be kind of counter I mean basically it’s this year you’re reducing every payment goes direct to principal hundred percent. And what so tell me why is it more of just like you said, l ike the tax issues I would primarily one of

Chris Prefontaine 14:56

The taxes of it, yet some of its ego Not they want their price and that’s that’s stuck in their school, their brain no matter what you do. So I gotta get my price. Okay? So if you give me four or five year term, I’ll give you a price. If you give me longer, I’ll give you more than your price. Because let’s just give you an example. One of the houses I did, it was a four year term principal payments, I’ll use round numbers weren’t 1000 bucks a month. Each year, I went to them and said, If I pay 6000, more down on the principal, I’m putting it down expensable will you extend my term? 12 months? Did it two years in a row? They said sure. So I got 12 grand and principle pay down by prepaying some principal.

And then now here’s the twist. So so you know, I’ll do i do incorporate interest if I have to. So this year, it would have been the third year there would have asked for that. I said, they said, Hey, you didn’t do that thing again. And I said, well, instead, why don’t we extend it 15 years, you’ve been getting no interest and I’ll add 4.5% interest in and we’ll amortize it over the next 15 years. And their accountant loved it. So we took a four year deal and made it into a To extension, so went to six years and then 15 went to 21 years.

J Darrin Gross 16:04

So you’re doing combinable paid down there for the first. I mean, the in the front end there. That’s, that’s huge.

Chris Prefontaine 16:10

Yeah, that’s what does it. And now he is a quasi combination. This guy this building said, I want 5.5% interest old school loans, a lot of land big investors. That’s what I want. Okay, well, I usually buy principal only. So let me structure something I think you’ll, you’ll like what I did with him, as I said, we put more cash down as our office. But I think we put like 30 something down, we broke the mold on that we usually don’t put cash down when we do like 30 something grand down. But then when we did heavy principal payments, I think was like 2000 bucks a month, all the way for almost the first full year and then we amortize it at 5.2%. He was happy and I was happy. We hammered the principal right away.

J Darrin Gross 16:46

No, that’s that’s really, I mean, that’s the secret the bank doesn’t want you to know. Right? And I look at, you know, most loans. I mean, it takes you about five years really before you start at that point, you know, at least five years. Feel free to really start, you know, hitting the principal? For sure. Yeah. And to be able to do that on the front end there. That’s, that’s beautiful to get really kind of a running start on your your pay down.

So, you know, you mentioned, like a third of the properties throughout the US are free and clear. Does it matter on the market? Do you find there’s any is it Do you find it more plentiful and in you know, bigger markets smaller markets is just

Chris Prefontaine 17:34

Terms in general lease purchase owner financing subject to existing financing, those are you have to talk to a little a few more people, extra people if the markets hot, hot, hot, right. Even as hot as the markets been with our students spread out where there are some pockets that have been flat since 2012. And it’s great. It’s great to buy in that market. It’s great to buy in a slightly downward trending, but when it’s screaming straight up, it’s a little harder. You just have to talk to more people because the people that are free and clear. They’re not desperate any shape form or fashion they want their number.

J Darrin Gross 18:04

Right, right.

Chris Prefontaine 18:06

That’s the key.

J Darrin Gross 18:07

So it’s kind of a numbers numbers game but you’ve got your parameters figured out. And and you said you market how many how many postcards Are you mailing out?

Chris Prefontaine 18:19

We didn’t do a lot we don’t do a lot of mailings when teach our students so we only mailed out one batch of 300 something and we did that three times and we got two properties out of it.

You know, it’s crazy to each one of those. We profited over 100 each, we’ve already flipped them, just improving the noi

J Darrin Gross 18:35

Got it, and you’ve demonstrated it works for single family and commercial multifamily

Chris Prefontaine 18:41

Works for all the above have done all the above. Now we teach on a broader scale, mostly single family. They can make it pre recession proof that because they can pound down principal and they’re always sellable. You know, so we do teach that and we own a lot of those. We own we carry like 50 or 60 of these at any one time in our portfolio, not counting our

Students, and we’re not on one single loan as to my earlier point. So, you know, I go to bed at night knowing I mean, we our contracts are set up properly, where the loans are never in our name on a lease purchase, for example down the loan stays in the sellers name. So I know that’s a no brainer.

J Darrin Gross 19:17

So let’s walk through a lease purchase for a second. So you’ve got you identify a seller and you say the seller has financing already in place.

Chris Prefontaine 19:29

Yeah, so I’ll give you a scenario as if there’s obviously many customer upside down some are debt free. Well, let’s do like a standard. We get all our leads on the single family side from for sale by owner for rent by owner and expired listings that relatives can’t sell, I didn’t sell. Let’s take a let’s use real not round simple numbers. Let’s take a house for 300 and they’ve got 250,000 equity, I’m sorry, 250,000, mortgage 50,000 equity, and for whatever reason that didn’t sell or didn’t sell in that timeframe.

So we come in and say, Okay, Mr. Mrs. seller, provided you don’t need that 50 today, because you didn’t get it, then sell in the market. If you can wait on that I’ll protect the entire 50 you probably weren’t gonna get 50. They agree, yeah, we’re gonna go lower, I would pay some fees, realtor, whatever. So we’re going to protect your 50,000 chunk. But we’re going to do that honor before the end of the term of the lease purchase. Usually, it’s what’s used three years for this one. And at the end of that term, we’re going to give you your 50. And we’re going to pay off the underlying debt. Now it’s 250 today, but it’s not going to be 250 then so that helps us.

So though, that if a silicon wait for that and wants to protect that number, it’s a great way for them to do it. And on our end, what are we doing the single families, we fill it with a buyer that needs more time, or we call it a ringtone, but it’s basically a strong buyer that just needs time to get financing, credit, downpayment, whatever.

J Darrin Gross 20:55

It is there a sweet spot for that kind of operation. tendency for you I mean, you know, the assuming somebody is further along in their mortgage would be more attractive than somebody who just just finance yesterday.

Chris Prefontaine 21:12

A more attractive for us Yes, but another good point efficient just because you brought that up is I have one of my students who’s having a real successful time with buys a list tiny list again a few hundred he buys a list that is little to no equity bought in the last two to five years. Who are they’re looking for debt relief, they’ve got to move out of the area and they can’t sell the thing because it’s no spread. Those people are typically giving us the long term so we can hedge against the market. And we either do a lease purchase or buy it subject to that existing loan staying in the sellers name. That’s another good list. Like there’s all these you know, sub lists, not just those categories. I said that we just listened to our we caught our wicked smart community but we we listen to our students and they we know it’s working in every market.

J Darrin Gross 21:56

So in the lease purchase basically you’ve got a couple of paydays and you get the obviously when you sell, there’s the the cash out. And I’m presuming that’s between the the amount you’ve pre negotiated with the seller plus whatever the pay down of the mortgages that that spread. That’s where you’re going to get that.

Chris Prefontaine 22:15

Plus the markup.

J Darrin Gross 22:16

Yeah. Right. And then are you? Yeah. And then you obviously sell for more than what they what you agreed to? And then are you able to make some more on like a rent spread between what your mortgage payment and ran to that?

Chris Prefontaine 22:32

Yeah. Yeah, we call that payday, too. So what you said for us, we call it payday. 352 is the difference between the outgo and the income, right? It could be the bank or the owner, whatever. But there’s a spread there. We average, we’re lower than our students. Actually, we average like 310 bucks on that one. The back end we average like 3540. And then on the front end pay day one. That’s when a buyer comes in and has to put down a non refundable down payment. And that range is like 2627 grand for us. So our deals are like 75 grand deals. cash out between 18 months and 10 years. So you get this cool spread of here’s my predictable cash flow saying a dozen deals, stop, scale it up, you know you got flexibility versus one flip or one wholesale or one rehab, you know, it’s it’s three paydays.

J Darrin Gross 23:16

Yeah. No, definitely. There’s no lack of capital. I mean, that’s that’s a very appealing, you know, benefit here strategy there. Can you talk about some we talked a little bit about the the benefits I mean, the the sellers or the tax and the the ego are kind of the two things it sounds like you’re you’re appealing to any any challenges explaining this to a seller? I mean, is there any resistance or is it more? Is there a kind of a longer cycle to getting somebody to agree to it or is it more like you, the people you’re finding they’ve been hoping somebody like you would come along?

Chris Prefontaine 23:55

Many of them. good way of saying it fireside too, but many of sells. It’s not difficult to explain it to them if you just use the proper scripts up front and the proper script up front is, hey, Darren, if you got your price I see here. Are you open to doing that on lease purchase or owner financing? Or do you need your money today? If they say, No, no, no, I got to fail me, I need my cash or I got this building. I got to do a 1031. Tomorrow, you know, if they have to do it now. Then I say okay, no worry. I’m not the buyer. if anything changes use me as a plan B. It’s that simple. If they say, Hmm, interesting. I I’m open to that great when it comes to property, I’ll give you the different options. So it’s just that initial conversation and then finding out why they’re selling because if I can fix whatever it is, I want the best price. I can’t talk them upside down. If I can fix that. There is no explaining. I’m just giving them a solution.

J Darrin Gross 24:46

What’s the largest type property you’ve done on a lease, lease purchase?

Chris Prefontaine 24:50

I’ll give you Austin. I’ll give you a student. So we have one currently. We actually did it on our financing 950,000 waterfront at Cape Cod. Massachusetts, we still have it we keep renegotiating extending the term out, which is great. Largest lease purchase for us. Probably around 1.1 million. I have a student in DC who the 800 to the one four is like the norm. So he’s done like a one eight to 2 million. It’s just, you know what the answer is it’s the sweet spot is the median price range in any market and then the higher end item, you know, look for those but don’t like bank on those because they’re slower to cash out. Sometimes they’re slower to find there’s less of them. When the market softens. I was gonna hit you know, all these reasons, don’t do a ton of them. But stick stick to median. You’re safe.

J Darrin Gross 25:43

That’s awesome. So for somebody looking to get started, what would be some some keys that you would suggest they consider how to get started?

Chris Prefontaine 25:57

Well, I would answer this Way regardless of whatever show this was like literally it could be a show about restaurants and I’m gonna answer the same way pick a pick a niche in this case in real estate that you can get excited about just you know so many of them does does Airbnb is apartment there’s all kinds of niches once you find that then find someone so your company go this is it I can get I can get behind this then find someone in that niche that’s like doing it not did it 20 years ago not wrote a book about it not as a really good marketer because just they’re still doing it. They’re in the trenches. Then once you find that, you here’s the big challenge people get like all these shiny objects, I watched it late night commercials and get rich quick. So number three is commit to it. I don’t care whatever it is commit to it for 36 months have blinders on like whatever that group person board of directors or mentor or coach says you do you be with that for 36 months and don’t look left right or backwards. And I don’t care again what business you’re in restaurants, hot dogs in real estate, you’ll have a phenomenal experience.

If you do that simple form, it’s the third piece. It’s so hard for people to manage expectations and patience. And finally, you know, sticking with someone.

J Darrin Gross 27:08

That’s that’s a, you know, I found in my own experience, the three years is really kind of a proven. I think it gives the market a chance to see that you’re still there. You know, I think

Chris Prefontaine 27:21

That’s a huge point. Actually, I don’t you said but that you’re right, because there’s some credibility there, but also not bought and also, like, they’ll do a deal as much sooner than that. But I know if mentally they’re committed three years, they’re not going to waffle on a curveball comes their way, which it will,

J Darrin Gross 27:36

Sure but even that I think even more to be ultimately successful, and it is at that traction, you build the traction along the way. But in three years, everybody’s gonna know that you are the guy that’s still there that’s doing it. Oh, yeah. And whether it be your your reps, I mean, you’re you know, you’re getting plenty of practice to where, you know, you know, the deal. You’ve done deals where it’s going to be around I would think the year

Your long term successes really you know be really strong as opposed to you get any you get the you get the one hit right away and you think is easy and then find that yeah there’s a lot of work and it’s not as easy and and.

Chris Prefontaine 28:15

Ya know well said

J Darrin Gross 28:18

I do have a question about tax so for since you’re not taking title to the property is basically the income just treated as ordinary income then or is there any Do you get any depreciation or anything like that with any of the

Chris Prefontaine 28:34

Okay gets it gets even better but but to answer that direct question, no depreciation or anything unless you’re buying it subject to existing financing and taking title you are correct, it follows title that’s what I tell people follows the deed. However, here’s what’s really cool. So let’s say I one of our students asked me this this morning from Florida. He said what do I do what I tell my accountant, he did his first what we call sandwich lease deal where he didn’t take title, it’s just in the middle is what’s neat pay day one that we got up front to pay the The non refundable down payment that’s payday one.

You when you get that you don’t have to you can the IRS would love you if you report it, but they don’t have to report that until and unless the exercise the option is exercised, they’ll default it, then you get to claim it. So I can take a deal where I get my 26 grand up front and doesn’t cash out for three years I get that 26 grand to pay tax until year three. Now, you may want to I’m not an accountant. This is what I do in my accountant we picked a formula so that we don’t get whacked if we had a whole bunch that were turned out the same year we don’t get whacked. So we picked a formula that every deal we do report a percentage of it and the other goes on our books as a deposit. So a the IRS loves us because we’re actually pre reporting income and be we’re not gonna get stuck at some point and be behind. So you just got to plan that out with your accountant. So if you said it’s essentially like an accounts receivable then is that what the mean because it hasn’t you haven’t it hasn’t been recognized until the sales completed and we actually Put on like you were a conventional sale, we put it on as a liability deposit even though it’s non refundable. That’s how he holds it on my books. You know, again, I’m not an accountant. Sure, but and then so let’s take a 20 grand, we put 10 of it as income that year. So it goes to we literally have paid a one on our on our income statement for income coming in order income, and then the other half the 10 will sit in deposit liability paid in one account.

You can spend it, but it’s going to sit on our books as that.

J Darrin Gross 30:28

Sure. And then as far as the installment, it’s just ordinary income and as far as it comes in, or

Chris Prefontaine 30:33

Yeah, because all you’re doing then you don’t have the loan. So all you’re doing is lease income in and lease expense out when you pay it online debt and that difference is you’re just sharing comm Yeah,

J Darrin Gross 30:42

gotcha. Gotcha. But it’s certainly a creative way and I don’t even see creative way because I think that what I do recognize just like you pointed out to there’s so many people out there that you know, they they’ve owned the property forever. How are they going to get out of it? This is an attractive term, it keeps them they don’t have to mess with the property more, they’ve got income coming in. So, definitely a win win for the, you know, for the person that that has this as an option. It seems like a definitely a good solution.

Chris Prefontaine 31:22

And if you’re doing but if you’re doing single film is it’s a win win win because the buyers, I mean, we’ve had some buyers Darren in tears thinking man, because of my bankruptcy because of my divorce. I thought I never could buy again, and we give them this pathway. And so it’s super healthy, in my opinion, energy wise to be win win win. That’s not easy to get, especially these days.

J Darrin Gross 31:39

No, absolutely. Absolutely. Hey, Chris, if we could, I’d like to shift gears here. By day, I’m an insurance broker. And I work with clients to assess risk and try and manage the risk. And there’s a couple of different strategies we typically use.

Unknown Speaker 31:58

The first is we looked at

Unknown Speaker 32:00

See, is there a way to avoid the risk? If we can’t do that, then we look and see if there’s a way to minimize the risk. And if neither of these are an option, then we look to see if we can transfer the risk. And that’s what an insurance policy is. And so, I like to ask my guests

Unknown Speaker 32:20

if they can identify what they consider to be the biggest risk. And just to be clear, I’m not necessarily looking for insurance related answer.

Unknown Speaker 32:32

But with that, if you’re willing, Chris Prefontaine, I’d like to ask you, what is the biggest risk?

Chris Prefontaine 32:41

I don’t want to sound like a redundant broken record, but in my world so comes right to the top of my brain when you ask that is you signing personally and exposing your personal assets to anyone or anything?

Unknown Speaker 32:55

Got to be the number one in my world.

Unknown Speaker 32:59

That’s it.

J Darrin Gross 33:00

That’s definitely is you’ve witnessed. If everything goes bad and you’ve got, well, it is a risk. I mean, that’s just point blank it is it is a risk. And if if the payments aren’t made, as agreed by or as expected by the lender, they’re coming to you, right?

Chris Prefontaine 33:21

Yeah, and I do make I make one exception just to be clear and just full disclosure, and that is a personal residence. But using my methods, my son in law and daughter bought their own house on terms but I wasn’t able to I do mine conventionally. But if you can do that, make that in extremely, extremely excuse me low loan to value. That’s all. I need to get it that way.

J Darrin Gross 33:44

Chris, where can listeners go if they’d like to learn more and connect with you?

Chris Prefontaine 33:51

Simple then go just go to the website. Smart real estate coach calm or smart real estate coach podcast is a show. But what I had said too often

Unknown Speaker 34:00

And I’ll offer everybody is we have a hardcopy, you know hardcover, in hardcopy, Amazon bestseller real estate on your terms that we sent you. And if the listeners go to this link I’ll give them and just say they want they heard us on your show. We’ll go ahead and ship one out to them physically ship it out not electronic, and it’s not one of those Hey, put your credit card in. You gotta pay 10 bucks for shipping. We will ship it out. It cost me a little over six bucks plus the book and we do that as long as they say they’re on your show. The link is free. s r EC stands for smart real estate coach. Free s r ec. Book. calm.

J Darrin Gross 34:38

Got it? s r ec book.com. no free s r e c book.com.

Unknown Speaker 34:46

Gotcha free. Got that on the front end there. Okay.

J Darrin Gross 34:51

Awesome.

Chris Prefontaine 34:52

I’ll give them a lot of what we talked about.

J Darrin Gross 34:54

Yeah, no, I appreciate that. And I’m sure you’ll get some requests for that. appreciate you doing that.

Chris Prefontaine 35:01

Yeah, no, probably my team will be maybe not so psyched with me. But away we go.

J Darrin Gross 35:06

All right. Well, Chris, I can’t say thanks enough for taking the time to talk today. I’ve enjoyed it and learned a lot. And I hope we can do it again soon. Yeah. Thanks for having down. Appreciate it. 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. CREPN Radio.

Unknown Speaker 35:38

You’re listening to CREPN Radio for influential commercial real estate professionals. For more information on this or any of our guests like us on Facebook CREPN Radio

CREPN #174 Cash Flow is Key with Daniel Ameduri

Cash flow from day one is the key to building generational wealth that provides you options regardless of market conditions.

Daniel Ameduri from Future Money Trends has been investing in real estate since he was 18 years old. In a short time, he went from investing in properties that cash flowed to properties he hoped would appreciate in value.

When the market crashed, he lost those properties he was betting on for appreciation. The properties that cash flowed from day one, continued to produce and increased their output while the market was falling.

The lesson was learned. Invest for cash flow and you will be free!

Cash Flow versus Saving

An asset that produces regular recurring cash flow is the goal for any investor looking for a way out of the need for a job. A very simple plan, free from the hocus pocus of the stock market is real estate. For a modest down payment, you can purchase with leverage, a rental property. The tenant pays the rent, the rent pays the mortgage. When the mortgage is paid off, you get all the rent.

Compare this to saving cash, and earning minimal if any interest in the bank. You are way better off to invest in a tried and proven asset class like real estate.

Investing strategies for Cash Flow

Paid off real estate can be a tremendous base for your retirement future. Simple Retirement plan: purchase multiple single family rental properties. Pay them off. Cash flow for life. The key with real estate is time. So, the quicker you acquire, the sooner you will be free.

Financing. Unless you have an unlimited money supply, you will have to borrow to grow your real estate portfolio. If you have strong credit, and a good W-2 job, you can qualify for conventional financing.

However, if you have lesser credit and financial qualifications, you will have to get creative.

Seller Financing: Look for property and a seller with a problem. A property with a problem will not qualify for conventional financing. The seller’s problem is an opportunity for you to negotiate a low price, and determine what the actual cost to repair the problem will cost. A seller with a problem is more likely to agree to seller financing.

If they do not own the property out right, consider assuming their mortgage. All conventional mortgages have a due on sale clause. However, Daniel has never heard of a performing mortgage be called by the lender. So, this is your chance to take over an existing mortgage. Find out what the seller needs to allow them to move on. Most of the time, it is relatively little.

For a few thousand dollars, you can own a property that has a mortgage, and you get the equity the seller has paid down.

If you don’t want to keep the property, you can sell it. You can offer to carry a mortgage. When the original sellers mortgage is still in place, you create a “Wrap Around Mortgage”.

This is when your sell the property for more than you purchased it for. The new buyer gives you a down payment. You collect their payment, and make the payment on the original mortgage you assumed. The difference between what you collect and the cost to service the first mortgage is yours to keep.

For more go to:

https://www.futuremoneytrends.com/

Cash Flow Monsters:

https://www.futuremoneytrends.com/cash

CREPN #102 – Should You Lease or Own a Commercial Building with Allen Buchanan

How do you know if you should Lease or Own a Commercial Building for your business needs?

The economy is growing, rents are rising, and commercial real estate space is more difficult to find.

So what questions should you answer to know if you should lease or own a commercial building for your business needs ?

Allen Buchanan is a principal with Lee & Associates in Orange County, CA and a true commercial real estate pro. He has specialized in industrial space sales and leasing since 1984 and provides the following tips for business owners considering purchasing a commercial building.

Questions to Determine if You Should Lease or Own a Commercial Building

Market

Where is the market in the cycle? Commercial real estate is very cyclical. It is important to consider what is the current state of the market. Is space plentiful or limited? Are capital markets willing to lend with favorable terms? Is there an expected growing demand for space like you need?

Who are You?

What type of company is yours? What are the space needs for your business? Do you expect to outgrow your space in the next three years? Are you making money? A lender will look for a favorable track record including, have you been in business for at least five years?

If you are stable, have a proven track record, and anticipate the continuation of your business and have the time to benefit from long term appreciation, buying might fit be for you.

What are the Steps to Buying Commercial Real Estate?

If you have been in business for a while, you likely have received numerous calls from commercial real estate brokers. If you are thinking about buying, interview a couple of theses brokers and find out if they can potentially be a resource for the time it takes to find a property.

Find out if you are eligible for financing. The commercial real estate broker can point you to a potential lender. Typically SBA loans and brokers provide some

How long will it take? To be successful, you should plan on one to two years before you are moving into a new property. The lengthy process includes:

Search
Potential misfire
Loan underwriting
Physical inspection
Appraisal
Build out
Permitted usage question and answer with city

What are the Benefits to Ownership?

Long term, for the right situation, you can benefit significantly through:

Appreciation: rent increases and demand will push the value of the building up over time. Provided you have the time, this is a huge opportunity.
Depreciation: for the owner of the building, the purchase price or the structure can be expensed over 39.5 years.
Cost stability: when you own a building, you can more easily control the cost of space for your business needs.

For more goto:

www.allencbuchanan.com

https://www.youtube.com/user/abuchanan100

CREPN #97 – Local Real Estate Equals BIG Opportunities with Brian Murray

A local real estate investor can grow big, and gain efficiencies not available to investors who spread their portfolio over multiple markets.

Brian Murray, founder of Washington Street Properties shares how he moved from his position as a college professor to a full time real estate investor in Watertown, NY. His focus on local real estate has created multiple opportunities for growth and the ability to contain expenses.

Advantages to investing in local real estate

There is no substitute to seeing your portfolio daily. If you find something is not right, you can address it immediately. This nips the problem in the bud and can reduce the cost of the fix.

Local knowledge provides you the real time ability to know if your rents are too high or too low, and to make adjustments accordingly. This helps maximize income.

Opportunities for growth

When you are visible in the community, brokers, owners and potential tenants know who you are. Brokers and Property owners looking for a buyer will contact you first because they know what you have done and that you can close.

When you have more properties in a single market, you can accommodate tenants needs for more or less space

Contracts for service.

Many investors focus on just one asset class which supports the notion of specialization. However, if you specialize in one local market, you can gain pricing advantages from vendors not otherwise available. The same service provider for roofing, electrical, parking lots, plumbing, carpet cleaning, lawn care, etc. can service multiple properties for you. When vendors have the opportunity to do more work for you, they are willing to provide a discount.

For more go to:

http://www.washingtonstreetproperties.com/

Brian’s book: Crushing It in Apartments and Commercial Real Estate: How a Small Investor Can Make It Big

CREPN #84 – The Value of Buy and Hold with Philip Joseph

Real estate investing strategies vary from investor to investor. Some prefer the fast cash of Flipping, while others prefer the long view of Buy and Hold. Active investors make it a full time occupation, while passive investors may remain employed beyond real estate. There is no one way to invest in real estate. The important thing is to do your homework, and get started.

Why do real estate?

Many people feel they need to get into real estate because it is in the news, low interest rates, big rent increases, and everyone is doing it. Because everyone is doing it is not a reason to get in.

How to get started?

No matter who you are, or when you start, the first deal is always the most difficult. It’s new to you, and there is a lot to learn. Regardless of how much you think you know, you will quickly learn lessons you did not think about before investing in real estate.

Know the numbers!

If you think you are making money because the rent you are collecting is more than what you need to cover the mortgage, you may be upside down. Don’t forget to account for things like, taxes, repairs and vacancies.

For your FREE Deal Workbook, CLICK HERE:

What strategy is right for you?Continue Reading …

CREPN #23: Commercial Financing Tips with Darryl Dahlen

From a post in the Facebook Group, Commercial Real Estate Network regarding a refinance of a 400 unit apartment complex, I learned about Darryl Dahlen & his company Global Solutions. I invited him on CREPN Radio to share commercial financing tips with our audience.

FREE CRE Finance Worksheet http://bit.ly/CREPN-DarrylDahlenCREFinanceWS

We will dive into various topics with Darryl regarding:
Current Marketplace Opportunities for Investors:
Areas of the country where undervalued opportunities still exist
Rates of appreciation year over year
Types of financing
Purchase
Purchase & Rehab
Refinance / Cash Out
Length of ownership operating required for consideration

Global Solutions is an experienced commercial brokerage with years of experience that specializes in funding commercial real estate loans for domestic and international clients.

Our business model is based on leveraging our strong lender relationships that have been formed over many years to bring our clients the best terms possible.

Using a “square peg square hole” approach we use our 10 years of lending experience to match a loan with appropriate lender.

We have an array of loan products which allows us to be extremely flexible and competitive. We can arrange financing using SBA, USDA, HUD, Fannie/Freddie, bank loans, CMBS lenders, bridge loans, and hard money or private money.

While our focus in multifamily properties, we are well-versed in many asset classes and welcome any owner-occupied or non-owner occupied properties that are:

Assisted Living
Office/Medical
Office flex
Light Industrial
Manufacturing
Self-Storage
Strip malls/Shopping Centers
Stabilized Hotels

CREPN #51 – How to Find Deals in a HOT Market with Rick Bean

The Multifamily property marketplace is HOT. Rick Bean with Rose City Commercial Real Estate explains what it takes to compete in a compete and how to find deals in a HOT Market.

Subscribe:
itunes
Stitcher

Return on investment is the goal for every investor. When the stock market is not providing the desired rate of return, so where do investors go? When foreign markets are not providing a positive return, so where do foreign investors go?

They go to the US Multifamily Marketplace

Since the collapse of the mortgage and housing market in 2008, demand for apartments has risen sharply. This demand is expected to continue for the next couple of years, giving investors a place to invest.

The collapse of the mortgage market forced homeowners who lost their home to foreclosure into the renters market. Many potential buyers have decided they are no longer interested in being burdened by a mortgage, or do not qualify for a bank mortgage to buy a single family home.

Combined with baby boomers leaving the suburbs for an urban apartment or condo and the millennials who chose to rent, the housing market has shifted. The housing consumer wants to rent. This demand for urban multifamily living for units that have not yet been built will bode well for developers and investors.

More demand than supply pushes the price up. Rents in urban markets like Portland, have pressed upwards double digits year over year, and has caught the attention of investors looking for return.

Real Estate Investors looking to take advantage of the market conditions, are struggling to find properties to buy. The increased rents, net operating income and demand for properties are squeezing the cap rates to record lows. The rising rents and minimal vacancies have kept many owners from selling their multifamily properties. The available supply is well below the demand.

Most buyers start looking for a property is the internet. Sites like, google, loopnet and zillow, make it easy for investors to get educated on the market. Properties listed on these sites are being actively marketed.

When demand is greater than the supply it is a Sellers Market.

How to Find Deals in a HOT Market

Buyers wanting more options to chose from are turning to working with Commercial Real Estate Brokers that look for Off Market Properties.

Buyers work with Brokers to define what exactly they are looking for. The Broker then approaches Owners of properties fitting the Buyer parameters. Agreeable Owners enter into a contract with the Buyer without ever placing the property on the open market.

Additional tactics used by aggressive Buyers in order to gain an advantage with Sellers is to make the deposit go hard right away. Unlike a refundable deposit a hard deposit goes to the seller right away. This confirms each to each party the deal is going to happen.

For more information about the Portland, OR Multifamily Real Estate Marketplace, contact Rick Bean.

PH: 503.577.1034

EM: rick@rosecitycre.com

Web: www.rosecitycre.com