All Forum Posts by: Brian Burke

Quote from @Nate Marshall:

Did they spell Capital as Capitol? Or a typo? 

Typo by the OP.  It’s Praxis Capital.  :)

Quote from @Chris Seveney:

@Brian Burke

I am also curious what the investor equity position is. I am guessing they probably raised $15-25M from investors for the deal, so while the bank would still be covered investors would appear to collect maybe 10-20 cents on the dollar if they were to liquidate.

if that's the case then I don't see buying one year really does anything unless I am missing something ?

If the market value mentioned above is accurate and the “initial” loan balance hasn’t increased by rehab funding, I wrote above that the proceeds are just a couple million after closing costs and commissions. I don’t know how much initial equity but if your guess is right 10 cents on the dollar is about right. 

The investors can get back to whole, it’ll just take time.  They don’t have time. They can get time, but they’d all have to double or more their investment (if any of these assumptions are right).  I imagine that the investors cannot or would not pony that up.  It’s just too big of an ask.  And therein lies the risk of high-leverage.  If the market moves against you, it takes too much capital to fix it.

Contrast that to this scenario: let's say that the acquisition loan was 60% LTV originally, and after a market drop of 30% the loan is now 85%. To refinance at 70% LTV (new value) you'd need a capital call of around 30-35% of the original equity raise. Thats far different than a 100% capital call to get out of a high-leverage loan.

Quote from @Timothy Hero:

Sorry if this was already asked, but what's an average return per year, in terms of cash flow? If I live a busy life and don't have the time or care to invest on my own, but want to put, lets say $200k to work, is a 15% cash flow return reasonable?

 @Timothy Hero unfortunately not. If anyone tells you that you can get 15% cash-on-cash it's either a scam or ultra high risk. Fifteen percent IRR is possible, and single digit cash on cash is achievable. This would mean that the difference between the cash on cash return and the IRR is appreciation, which you'd receive upon sale. Higher risk structures can achieve higher IRRs, but can also break even or even lose money.

Quote from @Robert Ruschak:

Would you skip the 700+ single family houses and scale up faster into multi-family?

@Robert Ruschak I'm a firm believer in "everything happens for a reason." My first multifamily purchase was my 34th acquisition and my first multifamily syndication was my 103rd acquisition (and wasn't my second multifamily purchase, either). That pace feels pretty good to me...I can get past the "rookie mistake" phase of my career before there is investor money on the line, and I can "fail small" because SFRs and small multifamily doesn't hurt as much as larger properties when things go wrong.

Timing had a role, too. Had I scaled up in 2002 after buying my first multifamily, I'd have had a much larger multifamily portfolio during the great financial collapse and I probably wouldn't have survived it. And I certainly wouldn't have survived it with no investor losses, as I was able to do thanks to having a manageable portfolio at that time.

All that is to say that I wouldn't change a thing. Had I scaled faster, I wouldn't be where I am today--I'd probably be working a job somewhere and have a lot of investors hating me.

@Ram Go "Initial Debt" may or may not be the same thing as the current loan balance.  If the loan was fully funded at closing and since then the loan is in an interest-only payment period, these numbers would equal.  But most of these bridge loans have future funding components where the lender will fund renovation work as the work is completed and add that to the loan balance.  If that was the case here, the current balance could be quite a bit higher than the initial balance.  It's important to find out.

But for now, let's assume that the property is worth $63 million as @Jason Piccolo indicated above and the loan balance is $59.8 million. If this is true, the good news is that the property is worth more than the loan balance. The bad news is the LTV is 95% currently, and after a $4 million paydown it's still 88.6%. If the property sold today, after 1% cost of sale there's only $2.5 million in cash coming from that sale and that's assuming that there's no exit fee on the loan and no outstanding payables. In other words, the investors are nearly wiped out already.

Such a situation is recoverable if there is enough time for a market recovery and the cash flow is at least break-even (or there is enough reserve cash to cover negative cash flow until it can turn positive).  How long would that take?  No one has that answer, but I'm fairly certain that nearly everyone would agree it's longer than a year, and it seems that's all this capital call gets you.

Next, consider why the lender is willing to make this extension. You can tell that the lender isn't granting this extension under the provisions of the loan's 1-year extension options. If they were, they wouldn't be asking for a $4 million paydown. This means that the property doesn't qualify for the extension, probably because it doesn't meet the covenants such as DSCR or debt yield, so the lender is making an exception and is willing to grant the extension in exchange for the $4 million. They don't have to do this, and they don't have to do it again a year from now. They reason why they would do this is to get $4 million, and they won't have to foreclose into a bad resale market. Instead, they can foreclose next year and sell into a better market, and they are starting off $4 million better than they were. They aren't doing it to help syndicate investors.

I don't know anything about this deal other than what I've read here, so take everything I say with a grain of salt...but this plan appears to kick the can for a year.  Then, you'll be in the same boat, but the lender might not be as cooperative.

A better plan would be something that buys you 5-10 years. This would require a refinance into a loan with a 5-10 year maturity. At 70% LTV that loan would size around $44 million (less if cash flow causes a coverage constraint). You'd need a capital call of at least $16-$17 million to make that work, assuming the current loan balance equals the "initial balance". My guess is that's probably around 50% to 100% of the amount of capital initially raised when this deal went out.

This scenario is illustrative of the risks of short-term loans.  If there is a maturity in the midst of an adverse market cycle, the options for escape are pretty thin.

@Jason Piccolo or @Ram Go, what is the loan balance, interest rate, and when does the loan mature?  Are there maturity extensions built into the loan agreement?  If so, how many, how long, and what are the covenants for qualifying for the extensions?

I get into contract in my operating company and then assign the contract to the new LLC prior to closing. There is a provision in all my contracts that permit me to assign the contract to a newly-formed entity that I control. It's a common practice and I've never had any opposition to this provision.

If you don’t have an operating company, you could get into contract in your own name and then assign it.  Consult with competent legal counsel to guide you regardless of your choice here.

@Obed Calixte The memories that bring me joy from a career perspective are the times when I've had the good fortune of delivering an above-projection return after a successful investment round trip.  Especially the ones where I had doubters saying it couldn't be done or my strategy was wrong.

What's next?  I haven't bought anything in over 3 years--instead I've been watching the multifamily market implode mostly from the sidelines, except for the thousand or so units that I still have.  What is next is getting back in the market and creating more opportunity for our clients to ride the next market upcycle.

@Scott Trench you and I don't always 100% agree on everything, but I think you nailed this one.  As you know, I sold 3/4 of my portfolio (thousands of units) right before the market tanked in 2022 and I haven't bought anything in over 3 years.  During that time I've often described the multifamily market as a traffic collision at a 4-way intersection where you had (lack of or negative) rent growth coming from one direction, and from the other directions: cap rates, expenses, and interest rates.  All lights were green and there was a pileup, leaving behind a mess of twisted metal and broken glass, and a few personal injuries to boot.

The syndicator crowd coined the phrase "survive until '25" under the hope that by 2025 interest rates would correct and their deals would be fine.  I don't expect that to work out for them.

My phrases are: End the dive in '25.  It's fixed in '26. Investor heaven in '27, and if you wait until '28 it'll be too late. '29 will be like a fine wine.  Git 'er done in 31--time to sell and take some profits.

Before "the market" can go up, it first has to stop going down.  I think that '25 will be a transition year ("end the dive in '25") for the reasons you stated--construction will fall off in Q2-3 but demand will remain...that sparks rent growth.

Interest rates:  Yes, flat to up. For those holding hope they will fall and save existing deals, don't hold your breath. Existing deals will instead be saved by NOI growth driven by rent growth--if you have the staying power to hold on long enough.

Supply:  High deliveries remain today mostly because of "hang over" from projects that are taking longer to complete than developers (and industry analysts) expected.  New deliveries are hard to get out of the ground because rents aren't high enough to support the projects at today's costs and interest rates.  Another tailwind to rent growth.  And the reason why your "tale of two halves" will play out as you described.

Demand:  This has actually been high almost all along, but rent growth hasn't materialized in response due to high levels of new supply.  That will change in 2H25 in a lot of markets.

Expenses:  Leveling off and must be accepted as the new normal.  No longer can buyers underwrite to $1,000/unit payroll and $250/unit insurance expense.  Underwrite to reality, not what you hope costs will be, because they aren't going back down.

Post-pandemic vintage syndications:  You are mostly right, Scott, that these investors are cooked.  But not all of them.  Any syndicate that over-leveraged and/or has a near-term maturity will be very challenged to survive.  Syndicates that used lower leverage points and have far-out maturities (such as 2029 or later) are likely to survive as long as they don't run out of cash to maintain the assets for longer-than-planned hold times.  For syndicates with loan maturities after 2030, they even have a shot at making a positive return, and perhaps even a decent one considering what they've endured to get there.

Kicking the can down the road:  Owners and syndicators hoping they can kick the can down the road by negotiating loan maturity extensions are likely to be disappointed.  Lenders have been accommodative for the last couple of years because they were facing a declining market with no buyers.  They didn't extend loan maturities because they were looking out for borrowers--and the moment they feel the market is strong enough for them to liquidate the asset they will foreclose and/or force a sale to recover as much principal as they can.  Be careful about feeding additional capital into syndicates with short-term loan maturities if the only plan is to negotiate lender maturity extensions for another year.  Those may not pay off.

Buyers:  There is a fine line between the first mover and the last sucker.  Finding the exact bottom isn't easy but many have said it's already happened.  I disagree--there are more tough times ahead, but as stated above there is light at the end of the tunnel and this time it's not a train.  There is a case for buying well-located solid assets that produce immediate current cash flow at reasonable leverage.  I have yet to see one of these when underwriting to today's real costs, but I think it'll happen eventually.  One thing is for certain:  The basis in 2025 or 2026 will be a better starting point than 2022.  

Yes, timing really does matter in real estate investing...

Quote from @Dominic Mazzarella:

I would ask this, when raising capital for a real estate syndication, what strategies have you found most effective for building trust and credibility with first-time passive investors? Are there specific tools, presentations, or approaches that help them feel more confident in taking that first step? Thanks!

Dominic, I've found that participating on BiggerPockets forums, appearing on podcasts, and speaking at conferences have built trust with first-time passive investors when those forum posts, podcast discussions, and conference presentations show my experience, track record, and market knowledge to those reading, listening, or attending.

This doesn't mean "selling from the stage", but instead, sharing actionable, useful information that I've gleaned from my many years of experience and from my own research.  Being a subject matter expert, not because you are forcing it, but because you simply ARE, shows through, and investors are rightfully attracted to that.