All Forum Posts by: Bobby Larsen

@Chris Seveney

“The reality is in these situations the Operating Agreement is probably poorly written for the LP and not much they can do.”

Is see this statement a lot and it’s not true. I’m not commenting specifically on Ashcroft or what LPs should do in this specific scenario but LP should know that they have significant control if it’s the voice of the majority of the LPs. Especially when it comes to Major Investment Decisions like dilution, additional debt, etc.

If there’s one thing that LPs on Bigger Pockets should know, it’s that they have rights and control over their investments even if it’s not specifically stated in operating agreements. The general sentiment that I see on forums is that they have to accept whatever path or outcome that a GP chooses, which is not correct if the majority of LPs are with you.

Quote from @Lisa Jones:

Absolutely, without question. It's a very uncomfortable position to be in as a sponsor and I suspect that is what drove those decisions but the only thing that investors dislike more than losing their money, is being blindsided by it. Especially if they're simultaneously being pitched on new investments.

Quote from @Lisa Jones:

I don’t understand why they need to bring in Preferred Equity AND do a capital call. Can’t the PE partner just cover all the costs? Or, perhaps, the capital call is specifically for the LP investors to repay their $11M interest free loan? Thought?

They mentioned that the total loan to value was somewhere around 90%+ with the current proposal of debt and preferred equity which means likely 100% LTV, or more, without the capital call. Very unlikely that you would find a preferred equity partner willing to take on that high of an LTV, ie. too much risk. At 100% LTV, there is no benefit to having a priority position in the capital stack because there is no common equity positioned behind it. The capital called equity, or common equity, is the cushion that makes preferred equity more secure so that if values decline further, they can still recoup their investment. But yes, also to repay the $11m in sponsor funds - unlikely a preferred equity partner would be comfortable with that as well when providing rescue capital.

Quote from @John Cho:

Citing loan covenants seems like a weak excuse.

https://www.wallstreetoasis.com/forum/real-estate/another-on...

There's a years worth of posts in that forum but I read the most recent and I recommend LPs do the same. The anonymity of the forum leads to some pretty outlandish comments but overall, correct in their assessments. They are correct regarding the argument surrounding loan covenants, it's not a legitimate issue. Loan covenants restrict placing additional debt that is collateralized (backed) by the property. Uncollateralized debt from the sponsor can just as easily be structured as additional preferred equity. Very unlikely a lender would have an issue with a sponsor providing uncollateralized funds.

I’m particularly bias on the topic but the word syndicator is once again a dirty word and the truth is, there are many many very good syndication groups out there. So when you’re painting a broad brush stroke of “syndicators”, you’re referring specifically to a few select bad actors but mostly the inexperienced syndicators that flooded social media the past 5 years with dreams of getting rich quick. Unfortunately, that message resonates most with unsophisticated investors and they poured money into groups that had no business buying and/or operating real estate. Or, maybe they were even good operators but with a lack of experience they didn’t understand cycles or financing. The largest syndication buyer out there today is still one of these groups and the money continues to pour in.

The forums have become angry and it’s very unfortunate but the same complexities of this industry that get investors in trouble are the same complexities that allow experienced investors to do well. Syndications, leverage, and even debt funds are not at fault, it’s the inexperience of both GPs and LPs and a select few bad actors.

Quote from @Carlos Ptriawan:

 I heard about it that it's common to see loan negotiation/extension to be succesful. What I don't know is whethr it's gov. loan or private lender, some insider in MF should know about it more.

Extensions can be possible if there are reserves to extend a rate cap or cover debt service shortfalls. Lenders have slowed down their willingness to modify loans but I can tell you that the ones that we have seen this past here have looked something like this:

1) Sponsor or LPs are required to contribute capital. If sponsor, this will most of the time be structured as a loan against the property sitting above LP equity in capital stack.
2) Lender agrees to lower and fix the coupon rate that the property has to pay monthly. For example, 7.5%.
3) The difference between the 7.5% and what the actual rate would be (3.75% + SOFR = 9.33% - 7.5% = 1.83%) is then accrued for the lender and collected on the backend, before LPs receive any principal.

Counterintuitive but lenders are more likely to modify into the terms above if there's no common equity left than they are if common equity remains. If common equity remained, they would simply force the sale and receive 100% of the loan proceeds back. If a sale today would translate into a loss of loan proceeds, they're in the same boat as the sponsor and trying to do whatever they can to be made whole again. 

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

 Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.

If deck is saying DSCR should be 1.5 but in reality it is 0.88, it means the biz execution plan has been wrong 40%.

Restructure the capital is okay but the first thing the GP should do is to renegotiate with the lender first.

Capital call is sort of business hostility act when GP can't perform their biz plan (or dumb enough to do business) and/or can't negotiate with lender.

Lenders aren't performing acts of kindness. If they're open to a renegotiation, 99% of the times it means that the common equity is wiped out and the loan is at risk. The 1% is when it's a bank and the sponsor has VERY significant deposits and/or other business with them and uses that as leverage but that's not applicable to anywhere here. I have yet to see a loan modification that has resulted in the common equity better off. Most likely, it kicks the can down the road and provides the lender with additional protection and guarantees the common equity's position is gone.

Have you seen renegotiated loan terms that were accretive to common equity?

Quote from @Scott Trench:

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

Great topic and one that I think is very helpful to many LPs on BP today. 

However, I do disagree on preferred equity. When used correctly and in moderation, it can be an effective tool at times. The first sanity check is if there is a sizeable spread between preferred rates and rates of return that LPs should be expecting on value-add projects. On small balance preferred equity, rates are 15%+ so this fails that test in my opinion. However, with larger balance preferred equity ($5m+), rates become more interest. Typically between 12% to 13%. If it passes the first sanity check, preferred equity should be viewed akin to debt and be analyzed with a blended rate with a potential loan.

Example, Property A was acquired with a loan from a debt fund at 3.75% + SOFR and a 3% interest rate cap that is expiring. Property A does not have reserves to buy a new rate cap or maybe it just doesn't make sense but at the current 3.75% + 3% (rate cap), Property A is cash flowing 1-2% a year. They have the option to do a capital call or preferred equity.

Capital Call - to either buy the rate cap (likely a bad decision) or a capital call to buy down loan principal and execute a fixed rate loan at 6%. Investors need to pony up additional capital and investors that don't, will be diluted. Property will cashflow at 3% with an expected total annual return of 13%.

Preferred Equity at 12% - to either buy the rate cap (definitely a bad decision) or preferred equity to buy down loan principal and execute a fixed rate loan at 6% for an all in (loan + preferred) blended rate of 6.6%. Investors do not need to provide additional capital or be diluted. The property will cashflow at 2.25% with an expected total annual return of 15%.

I don't view either of these to be the right or wrong answer but I would expect different LPs to have different preferences here.

This approach can also be used on new acquisitions. It's very surprising to me that investors will often rather see a property purchased with a 75% loan to cost debt fund at 4% + SOFR (all-in rate today of 9.33%) than a 60% loan to cost agency fixed rate loan at 6% combined with 15% loan to cost preferred equity at a rate of 12% (7.2% blended rate). Both sound risky to me and we're a sponsor that typically executes with 65% agency debt, but if I were choosing between the two as an LP investor, I would be choosing agency debt + preferred.

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

 Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.