All Forum Posts by: John Blanton

Thanks @Evan Polaski makes sense! Will err on the side of being conservative to make sure my UW assumptions are correct in regards to stabilized and exit potential NOI

When looking at the opportunity to increase NOI through decreasing expenses the ability to bill back water/ utilities to the tenants clearly looks like a winning proposition. In many of the C+/B- areas I am looking for properties in NC many of the are master metered and water is included in the tenants monthly rent.

The rents per unit are below market (ex $50-150/door) and you are looking to increase the rent per door, but also make the tenants responsible for their own utilities. Win-Win right? Increase income and decrease expenses --> increase NOI!!

In my theoretical scenario I am thinking more C+/ B- tenant base. If you increase the rent, but also increase the amount the tenants need to pay for utilities is your tenant base really going to be able to afford both?

Do you really get the Win from the increase in rent and the Win from decreased utilities? Or are you just robbing Peter to pay Paul, by being unable to increase rents more because you are now also making the tenants pay for water? You do increase NOI, but not by the leaps and bounds that were predicted.

I know this can be dependent on comp properties in the respective areas and what they offer in regards to their tenants, just curious if that is the only litmus test for this type of underwriting scenario.

It seems to be an interesting proposition as you can leverage your net worth to gain equity into a deal, but of course there is downside risk if the deal goes belly up, requires additional capital, or if the loan turns recourse (due to operator fraud, etc).

What is a fair expectation of equity split of the GP portion to KP a deal with the potential risks of liability? 

@Jay Helms Yes sounds like we have similar criteria for sure. But I also consider if someone I already trust refers them that may expedite that timeline.

In the end everything has risk--> leaving money in a savings account, investing in the stock market, investing in real estate, investing in commodities, so just being able to define the level of risk you are comfortable with for the projected return is name of the game.

@Jay Helms Very fortunate to get a lot of great feedback on this question. It is going to still be very subjective, but for me the track record of the operator is important to an extent. If they previously faced challenging economic times they at least have some perspective from it, but it isn't always black and white as to how commensurate it is with their next project.

Making sure the operator is being conservative with their underwriting, downside risk and eventual exit. Many assumptions are having to be made right now so a longer track record would lead to more overall experience to unexpected challenges. 

For me the most important part is finding somebody that I feel has operates integrity, has similar values, and is capitalized enough to weather any short term bumps that may come along that were unforeseen. Their experience is a key factor, but akin to the story @Evan Polaski mentioned even the most seemingly trustworthy sponsor there is still risk that they may eventually do wrong or have a deal that loses investor principal.

@Elena Nelson I have a few condos that have an HOA monthly fee. One of the risks of condo ownership is they can implement a 'special assessment' which is an additional payment on top of your monthly HOA dues. This could be due to large scale Capex needing to be done on the property or in the current environment if their reserves start to run low. It can be as low as a few hundred dollars, but can at times run up to be much more. There isn't a guarantee of a special assessment annually, but it is always a potential risk.

As you stated, there are some perks of maintenance issues you won't need to be responsible for. 

Just make sure you are really tight on your numbers as a mortgage payment plus an HOA fee can easily turn your solid return into a negative cash flow if it sits vacant or you have to perform any interior rehab at tenant turn.

Great points @Dan Handford!! I am more in the camp of wait and see right now, not turning away a deal if the risk adjusted returns, conservative underwriting makes sense and the debt/ hold period are far enough out the current situation shouldn't matter too much in 5-10 years.

How do you think investors should view a particular opportunity in the current environment as there is so much uncertainty? Should they be looking for higher returns due to the expected risk? Or lesser returns in a more conservative geography/ higher class asset?

With less capital available for syndicators to raise for projects, should that lead to less competition on properties/ lower sale prices?

Thanks @Kevin Owens, you eluded to it in your post, but have there been any changes to net worth or liquidity requirements for non-recourse debt?

As for escrowed reserves, is there much variance in regards to them being released? Or just 3-6 months of performance by the property post close

@Ian Plocky I am not an attorney so I won't get into all the nuances of what liability an LLC can or cannot protect you/ your assets from.

If the LLC does not have enough income or assets to qualify for the loan itself the bank will require the lendee to personally guarantee the loan. Yes liability against the LLC could theoretically only have recourse against the assets of the LLC, but the personal guarantee you would need to sign would allow the lender to come after your personal assets if the property were unable to continue to pay the mortgage.

There are non-recourse loans that would preclude the lender from coming after your personal assets, but many times those loan balances begin at least $1 million. There are different terms and requirements for those type of loans.

@Ian Plocky based on the size of the property you are looking at the lender will most likely want to look at the rental income of the property, but also as you mentioned your personal financial standing. You will have to have a decent credit score, enough for the down payment, but also enough in assets/ liquidity after the down payment in case the property runs into issues you can personally cover the costs. Right now banks are a lot more strict in their lending practices and may require a higher % down payment.

Even though the property may be owned in an LLC the likelihood is that you will still need to sign a personal guarantee to be personally liable if the property is no longer able to cover the cost of the mortgage, taxes, etc.

When dealing with smaller properties and local lenders a lot of time if comes down to how stable financially they feel you are as well. Ask the lender detailed questions of what they look for and have a breakdown of allocations of your current assets and ability to cover the mortgage payment even if the property isn't able to cover the expenses/ mortgage. The more details about the property and your underwriting along with a breakdown of your personal financial standing will show the lender how serious you are about the transaction and paying back their note if challenges are to arise.