All Forum Posts by: Chris Mason

Scenario: This scenario is an amalgamation of a few inquiries that I've had in the last couple months. Person purchased a neglected facility using hard money. Took a few years to get licensing, permits, etc, to either restore it to being an assisted living facility, or convert it into one. Now it's stable, and time to take out the hard money with long term institutional debt. They purchased it for $3m, put $750k into it, we expect it to appraise for $5m, and are seeking loan proceeds of $3m.

Here are three commercial mortgages that might be a good fit (click to enlarge, if necessary):

Not listed there, but from left to right: 

Points are 1.25, 1.5, and 1.

Prepayment penalties are 5 years, no, and no.

The way to read "3/25, 15 years maturity" is that the rate is fixed for 3 years then adjusts, it has a 25 year amortization, and a balloon payment at the 15 year mark. 

Commentary/review on which might be a good fit for which use case or goal-set.

The Bank Option: Best rate hands down, and longest amortization. Someone might want to fire-and-forget this refi and not touch it, so they might not care about the 5 year prepayment penalty. On the other hand, this lender is also very picky, for example they require 100% liquidity of the borrower, meaning someone would need $3m liquid to get this $3m refi (& you don't get to count loan proceeds towards that liquidity). If the ownership of this assisted living facility didn't care about the prepayment penalty, and the bank didn't "swipe left" on the property based on things like experience level of the ownership and/or management team, this might be a clear winner. 

Credit Union #1: This has the longest maturity, so there's an element of "fire and forget" here too. No prepayment penalty is nice. The shorter amortization bumps the payment up $2k/mo, but at the profit levels of these types of facilities, that's a drop in the bucket. If the bank swiped left on the deal, or if the ownership thought rates would be dropping soon, this is a really good option too. If rates did drop, that 3 year fixed period means their rate would automatically drop with it, so they wouldn't have to refinance if they didn't want to, but if they did want to (cash out refi made possible by a recession forcing more elderly people into assisted living facilities, thus driving up rents, and the value of assisted living facilities? Doesn't sound like too crazy a scenario to me...), there wouldn't be any penalty. This is a Florida lender that requires that the property and borrowers be Florida residents. 

Credit Union #2: I think the only reason to really consider this one (I don't think the slightly lower points makes that much of a difference) is if the above two options both passed on the deal, a possible reason for that would be (ahem, guess why I am saying what I'm about to say...) an inexperienced management team trying to justify this refinance based on only 6 months of financials (rather than say a 1-2+ year track record of success, or experience with other facilities, etc). Oddly enough, the small print says California-based owners would get a slightly better rate, but it doesn't specify what. 

"Can I make an offer contingent upon finding a tenant to lease the space within X amount of time? Is this ever done?"

That is 100% commonly done, yes. You can make closing contingent upon finding a tenant that you approve.

The fact that they are being transparent about this is actually a really good thing. I've seen cases where they  try to throw a "straw tenant" in there just for the purposes of finding a buyer, and so that buyer can get good financing. I only know about the times where this was found out prior to closing, obviously I have no way to know about the times this shady behavior wasn't found out.

Since you get a vote in who this tenant is, and it's retail, PSA that commercial lenders (especially the ones offering the best terms...) are starting to vet deals by how 'recession proof' the tenants are, even if they are currently paying on time. An example of not recession resilient would be a karate studio or hair salon, things consumers cut back on when times are tough (and now you, the property owner, aren't getting rent, and thus might have challenges making your mortgage payment). Two classic examples of very recession resilient would be the 2 things certain in life: death and taxes. So an estate planning lawyer and a CPA. Those are the two extremes, obviously most businesses are somewhere in between. 

I like the vending machine idea. Remember that junk food isn't the only thing you can fit in a vending machine. The jury is out on if snacks are the best fit for something like this, or stuff that the customers could use to detail their own cars. 

In your shoes OP, I like the vending machines, but I'd keep my mind open. Do some a/b testing. Maybe buy two of them (used). Put snacks and drinks in one. And put overpriced car detailing stuff in the other. 

Disclaimer: this post may or may not have been inspired wholesale from me stealing ideas from a mortgage client (but not a car wash in Georgia, so you are not their competition). :P

If you have the space, a covered "self-serve car detailing port" area isn't crazy. Post a sign limiting them to 6 hours or something, and enforce it (ie, call the tow truck company whose sign you have posted) at 24 hours.

For the self-help detailing products to put in the vending machine, google search "what extra things do i need to detail my car" and read some car detailing guru's list that you should quickly find (if the post has a bunch of upvotes from other car detailing gurus, that's probably a good sign). And mark these mother-truckers up, they are paying for the convenience... providing you aren't somehow preventing them from buying the stuff themselves beforehand (the way movie theaters do), it's not at all immoral. 

My purely hypothetical car wash mortgage client has 3 vending machines full of vastly overpriced car detailing stuff (next to a physical bulletin board showcasing some shiny freshly detailed sexy cars...), and one with snacks at normal vending machine markups (buys either at Costco, or whatever he finds on sale).

GL.

If we assume that once in a while things will not go 100% perfect with one of these small $50/mo storage units... is this really worth your time?

$50/mo is 1/20th of $1000/mo. But will it be 1/20th of the effort? Is the "will you please work with me on the rent" conversations be 1/20th as frequent or 1/20th as long or 1/20th as dramatic? 

The cost to "evict" may actually be 1/20th since 'stuff' doesn't have tenant's rights the way a residential tenant does, but the entire other basked of 'stuff' to deal with seems like it might be closer to 1/2 or 75% of the 'normal' level of time/attention/etc that you as the landlord have to deal with.... but you're only getting 1/20th the income.

Unless of course you are going to tie these to the 7 units themselves, and moving forward every time there is a vacancy, include the storage with the unit as a bundled pair, and increase the rent accordingly. That, I could see making sense. 

I'm confused about the whole conversation. All commercial mortgages have DSCR as a primary component, anything >4 units is commercial, and no one calculates personal DTI on a commercial mortgage (so calling it a "DSCR loan" is a misnomer, if I had a wonky commercial mortgage that calculated DTI and would go for an owner occ SFR, I wouldn't call it a "DTI loan," I would call it a "home loan"). And the majority of commercial lenders have rates in the 6s or 7s right now for most real world scenarios, and being overly worried or concerned about if it's 5 units or 500 units is absurd, both the rents and the loan size will automatically scale up and down accordingly (if anything, the larger unit counts scale better, so limiting someone to X units makes zero sense). And since no one will ("should") be calculating personal DTI on any of these, there's no reason for any dynamic of it "only working if" we go the DSCR route, since there's zero reason to deviate from the standard DSCR route ("I'm going to buy a 500 unit apartment building, here's my personal paystubs to prove I can make the mortgage payment!" -- it sounds absurd b/c it is), why should your personal DTI come into play on an apartment building??? That would be like giving paystubs to the grocery store when buying a gallon of milk.... 

When buying an apartment building, it's reasonable for the buyer to ask the seller for copies of leases and proof that the rent is coming in, and the lender will likely ask for that same paperwork too (since that's what's paying the mortgage, not the buyer's personal W2 income, ha).

I do not think the world is falling.

Hospitality has going for it that you can get gov't backed mortgages (don't ask me why, I'm not in Congress and I don't write the laws). The private sector absolutely pulls back when they see risk on the horizon, but gov't backed mortgages take an act of congress to change. I work with a few lenders that are already making a killing by pivoting exclusively to gov't backed mortgages (read: extra back end profit) for hospitality that can't get financed elsewhere. 

Office buildings have no such backstop. 

Note that I don't have a material interest in supporting either the bull or bear narrative. Happy to do the refis for as long as that's doable (bull). And if the sky does fall and this debt crunch materializes (bear), and I help the buyer who picks up that hotel on the cheap, that works for me too.

This is easier than you think.

Not commonly done for 1-4 unit residential, but very common for commercial.

If you need a 35% capital injection, you find the human person with that capital. You form an LLC with them two weeks before closing, and that's what buys the property. The LLC buys/owns/operates the business of the apartment building located at 123 Banana St. You don't need to establish business credit ahead of time for the A-paper great commercial mortgages, we do them all the time without any established credit.

So you wind up, fast forward a couple years, with a bunch of different LLCs that you share ownership of with different people. Totally normal and fine for commercial real estate & the associated mortgages. 

Hubspot is a great CRM. Starts off free, no credit card required and not a trial period. And then if you want/need the fancy features, you can upgrade piecemeal. I suspect that the volume of leads you are working with and for what you are doing, the free version will do just fine.

Mobile home park financing can be tough. This lender wants 75% LTV one quarter, and boom you blink and they want 55% LTV, or their rates jump up all of a sudden. Meanwhile, another local credit union starts to buy the market, but it's not like you'd know it since there are no TV commercials for mobile home park mortgages. If you'd like a vastly more efficient process to secure financing, my information is below.

"We have discussed Sellers Financing with a 2-3 year balloon, i just don't like all the liability being on me and it not being though a bank and just a contract, if god forbid something happens to be at the end of the balloon ,then my family would be in a pickle they couldn't just sell the building to help with the financial burden, and would have no use for the building if I'm not there working.

My issue is i currently do not have the necessary funds for the down deposit for the purchase.( Roughly 20-25%). [...] So i guess I'm looking for options for help with down payment."

The seller has already given you the solution in a nice little bow. It sounds like they are willing to seller finance the whole amount with no down payment needed. When that 3 year balloon is up and you have to go to the bank, at that point it's a refinance, not a purchase, so if there's equity in the deal, no down payment will be needed... because it's a refinance.

You are right, there's some risk. There is always risk. Thus is life.

Grats!