The Recent BP Podcast with Jeff Greenberg on Multi Family

[Michael Worley]

I just finished listening to the Jeff Greenberg Podcast on Multi Family and wanted to comment on that podcast.

First and foremost I'd like to say that I thoroughly enjoy the BP podcasts. I also enjoyed Jeff Greenberg's insight on his experiences with Multi Family investing. I agree in principle with just about everything he said on that podcast but wanted to approach a couple of the topics from a different angle.

As I mentioned on a different thread, I am a commercial banker for a community bank. Most of the time when I'm viewing a deal or reading a book or listening to a podcast I'm doing so from the point of view of a bank. So my comments will come from my banker's point of view.

Jeff commented on having done a deal where he was an investor in a large MF project of around 700 units. He said that presenting that as part of his 'resume' impressed the bank. That is 100% true. When we have a deal we're trying to get approved, we go through a process called loan committee. That process is where the commercial lender/banker puts the entire package together to 'sell the deal' to the powers that be (usually the board of directors, CEO, Chief Lending Officer at my bank). **it bears mentioning that the commercial banker has a huge incentive to not present bad deals (or present potentially good deals in a poor manner) because no one wants to look foolish in front of the board of directors and CEO** Part of selling that deal to the committee is showing the history of this borrower/operator to make projects work. One of the first questions I get in a committee when presenting a deal is 'how many other units does this borrower own'. It's far more difficult to get a borrower approved on a deal, even if it makes sense numbers wise, if it's their first time doing a property this large.

Next Jeff commented on the 30 ammortization versus a shorter 15,20,25 year ammortization. He also commented on using the same bank as the 'mom and pop' who own a property he's buying. I think this part of the capital structuring plan gets glossed over too much by investors. You have a much faster turn time, and a much higher success rate of financing if you have a capital structure plan in place. By that I mean, the 4% 10 year loan maturity based on a 30 year ammortization schedule is the FINAL stage of financing for a fully stabilized property. You should not aim for that financing at aquisition. Basically if you are buying a value add or distressed property, you should look for financing that is to get you through the stabilization time period plus a year or two THEN do a take out loan with the final terms. You will not only have better terms and cash flow in the end, but you will be able to properly leverage the final value of the property and take out the equity from the work you've done to go on to the next deal effectively.

Which then leads to a final comment from the podcast on using private funding. Private funding is THE MOST EXPENSIVE funding you can have in a deal. It can make a ton of sense to do it, but you should try to get out of the private funding game as fast as you can. What I mean by this is (and this all goes to the capital structure of any deal) private funding deals usually have some guaranteed preferred interest rate (let's say 8% is the current going rate) and they typically participate in the upside of the equity capture. So where a bank might lend you money at 6% on a rehab deal, the lender does not participate in equity capture. The total rate of return on the deal is lower than if you used your own equity. Private funding CAN increase your cash on cash return, but if the deal you're purchasing has a good amount of upside, you're losing a ton of money on the back end. I only mention this because private placements are quite popular on various sites / podcasts. In an ideal situation you'd rather have more leverage from a lender, than use mezzanine financing (which is what private placements really are) which participate in the equity capture.

Sorry for the TL:DR post, I could probably fill a whole podcast with just this subject.

[Joel Owens]

It helps also if most of the members of the committee and the President are real estate investors.

They have a deeper understanding of the asset class and can more easily look at a project to loan on.

The vision of the bank makes a difference if they are in rate mode or growth mode. The existing loans come into play as well. If they have been burned in the past with that asset class, have lot's of remaining non-performing junk to dispose of, or are too heavily funded in that asset class already or they do not focus on that asset class then getting a loan from that bank will be tough.

The size of the loan makes a difference as well. To a bank with a 12 billion cap a 8 million loan might not be out of the realm of possibilities. If you have a bank with 100 million total cap then 8 million is likely more than they want to put into a single loan and gives them pause and high risk.

On value add deals the key is to get no-pre pay penalty so you can get out of it anytime you want when the value increases. You can either 1031 the property with enough time or refi out some of the equity. Value add loans tend to be interest only so that it helps with a low payment to service the debt while you turn it around. There is no principal pay down during that time but if you bought correctly you are getting way more on the upside.

On the syndicates your return can be great because you take a fee going in, on going cash flow after the investors are paid, an equity percentage, and a fee when it sells at your target time horizon hold period or before. You have to be careful with the equity slice you take. Too much and the bank/lender wants you to be on the hook and qualify with the other investors. The percentage varies but I have seen people take a 20% equity slice without having to qualify themselves as the sponsor.