All Forum Posts by: Kim Hopkins

Quote from @Doug Smith:

Two things. I don't think borrowers truly understand how much work goes into a loan. We don't like to borrowers to see how the sausage is made, but there is a ton of work that goes into it. The stress can be overwhelming. Charging a fee for a refinance is more than reasonable. The other major thing that most people don't understand is that lenders have a clause called an "EPO"...an Early Pay Off clause which requires the broker to pay a lender back if the loan is paid off or refinanced within a certain period of time. Five years does sound like a very, very long time, but that's the only part of your post that I would question. 

 But the broker isn't doing any work for the refinance. We would literally be working directly with the bank... 

Hello!

We have a great new mortgage broker but I was just reading his engagement letter and they want us to agree that we will pay them another fee if we REFINANCE with the lender they've introduced us to within 5 years from the effective date of the agreement. 

We specifically went with one of their lenders that doesn't charge a prepayment penalty so we could refinance if rates are lowered in the next 1-2 years. 

With this agreement, we pay them a fee when we close on the loan now.

Then if rates go down and we want to refinance with this lender, we owe them ANOTHER fee (they said it might be half of the full fee but still) on the refinance. 

Is this standard? We like these guys a lot but it doesn't seem like they're contributing any work to the refinance and I'm surprised this is expected. 

Thanks!

Kim

Quote from @Andrew Davis:

@Kim Hopkins A. long time no see - hope you're well!

Paying distributions out of raised equity is fairly common among sponsors, especially in recent years as the early years of acquisitions are often very cash constrained (see years 1-2/3 DSCR).

While some investors like the reliable/higher cashflows, in my opinion, equity raised for the express purpose of paying higher cashflows in the early years is a disservice to the investor, as it increases the risk in the deal, and dilutes the overall return.

Just my $.02!

 Hey Andrew! Hope you're doing well!

Yes I totally agree. And it increases the cash on cash return totally artificially. That return will only last as long as the reserves are available unless they have truly increased cash flow to the same level as they were paying from the reserves. But the problem is the reserves are often for recurring expenses such as tenant improvements that will turn every time a lease turns. 

It's actually made me completely dubious about passively investing. I just can't trust the numbers. We lucked out on this one that we had access to their actual spreadsheet and underwriting but otherwise it's usually impossible to tell what kinds of things like this are being baked in to the pro forma. 

Quote from @Ronald Rohde:

Quote from @Kim Hopkins:

Quote from @Ronald Rohde:

WALT is 4.5 years. See comment above on cash flow. 

 Thats not bad for small retail, if they have history (not initial term at this location or otherwise) I think you have a solid retail strip that won't hit you with 40% vacancy after 18 months. 

Again, we haven't seen any rent roll or photos or traffic counts, you have all that information so there's always a bit of a disconnect on perception.

 For sure. Yes it's in a fantastic location. Sandwiched on both sides by million and multi-million dollar homes. Houses nearby currently being flipped into the low million range. Restaurant and other retail chains next door that are much better at picking real estate locations than I am. :-) I will definitely provide an update as things go along!

Quote from @Ronald Rohde:

WALT is 4.5 years. See comment above on cash flow. 

@John McKee It's a 6.75% cap rate. At the purchase price we just agreed to, it's a 5-6% COC return. Not great at all. But my reasoning is that the COC would have to be a LOT higher next year for my AFTER TAX investment to make a higher return, and factoring in the decrease from 80% to 60% bonus depreciation. In other words, I will have a lot less money to invest next year if I pay hundreds of thousands of dollars to the government in taxes, so the returns would have to be MUCH higher. And there's the lower bonus. Better IMO to buy a property this year and next rather than wait.

Quote from @Ronald Rohde:

Quote from @Kim Hopkins:

Quote from @Ronald Rohde:

Nothing about this deal sounds appealing. Its not a juicy upside for you to jump into a new asset class.

I do a ton of retail leasing for my landlord clients, we pay between $20-50 psf for TI on older buildings for nationals. 

1. How long does it take typically to relet a space? In demand will be at least 3 months for legal, surveys, etc. Otherwise can be 2 years.

2. What is the typical TI ($/SF/Yr or other formula) for new tenants on rollover? And who typically pays it or how is it structured? LL pays a fixed amount unless its a LL deliverable, then tenant responsible for overages

3. What do you typically reserve ($/SF/Yr or other formula) for other reserves and/or capex? n/a

4. How much did your commercial property insurance increase (%) this year and are there any strategies to mitigate? I think you're a bit too focused on NER, insurance is the smallest piece of the pie

5. How much do you typically pay for property management (% - please specify if it's on base rent or gross rent including NNN reimbursements)? 4-6% of gross base, theres a different admin charge of maybe 10-15% on recoverables

6. Is there anything else we should know or look out for that comes to mind? E.g. always check.... X. Are you committing to retail? You need to have great relationships with brokers, other landlords, new set of vendors, retail is historically very risky, tenants go bust, there's a reason they trade at 10 caps.

@Ronald Rohde Always value your opinion, thanks for weighing in. A couple items - 

* This is not big box or large tenant retail. Largest tenant is 3,200 SF but average tenant size is 800 SF. I would have a hard time thinking this takes that long to relet. If the space is in good condition, I would guess 2 months, 3 tops. If it needs a remodel, that's obviously different. But I could still relet it at lower rents than market for remodeled space, which is what I'm using in my underwriting. 

* Our tenants in MT industrial also routinely go bust. I think of this product type as the multifamily of commercial. The idea is lots of tenants with quick time to relet so diversified risk. I agree with you that LARGE units take much longer, which is why we don't invest in those anymore. 

* The BIG question. Is the juice worth the squeeze? I'm sure your clients have been asking you this question. Say hypothetically you're going to have a $400k tax bill. But your deal is only 5% cash on cash return. Math time: how much does the cash on cash return for a deal in 2024 need to be to justify losing the $400k to the tax man in 2023? Follow up question: now factor in 80% to 60% bonus depreciation. Please everyone - do not say that we shouldn't do a deal for taxes - that is obviously obvious. We do deals to make money. It's a question of which one makes more money in the long run, and taxes in this case are simply a figure to factor into that calculation. 

 Yeah, I mean, this just sounds like a huge PM headache, worse than industrial equivalent. Do you want to make money in retail?

Whats your exit? Tiny spaces with high turnover, don't demand low cap rates or a broad pool of buyers.

The leases are actually longer than MT industrial. The leases for this one are an average of 5 years. I think all our properties are PM headaches, but less than multifamily so I guess that question would apply to that very popular asset class as well? But unlike MF, we plan to long term hold and our goal is cash flow. 

Quote from @Ronald Rohde:

Nothing about this deal sounds appealing. Its not a juicy upside for you to jump into a new asset class.

I do a ton of retail leasing for my landlord clients, we pay between $20-50 psf for TI on older buildings for nationals. 

1. How long does it take typically to relet a space? In demand will be at least 3 months for legal, surveys, etc. Otherwise can be 2 years.

2. What is the typical TI ($/SF/Yr or other formula) for new tenants on rollover? And who typically pays it or how is it structured? LL pays a fixed amount unless its a LL deliverable, then tenant responsible for overages

3. What do you typically reserve ($/SF/Yr or other formula) for other reserves and/or capex? n/a

4. How much did your commercial property insurance increase (%) this year and are there any strategies to mitigate? I think you're a bit too focused on NER, insurance is the smallest piece of the pie

5. How much do you typically pay for property management (% - please specify if it's on base rent or gross rent including NNN reimbursements)? 4-6% of gross base, theres a different admin charge of maybe 10-15% on recoverables

6. Is there anything else we should know or look out for that comes to mind? E.g. always check.... X. Are you committing to retail? You need to have great relationships with brokers, other landlords, new set of vendors, retail is historically very risky, tenants go bust, there's a reason they trade at 10 caps.

@Ronald Rohde Always value your opinion, thanks for weighing in. A couple items - 

* This is not big box or large tenant retail. Largest tenant is 3,200 SF but average tenant size is 800 SF. I would have a hard time thinking this takes that long to relet. If the space is in good condition, I would guess 2 months, 3 tops. If it needs a remodel, that's obviously different. But I could still relet it at lower rents than market for remodeled space, which is what I'm using in my underwriting. 

* Our tenants in MT industrial also routinely go bust. I think of this product type as the multifamily of commercial. The idea is lots of tenants with quick time to relet so diversified risk. I agree with you that LARGE units take much longer, which is why we don't invest in those anymore. 

* The BIG question. Is the juice worth the squeeze? I'm sure your clients have been asking you this question. Say hypothetically you're going to have a $400k tax bill. But your deal is only 5% cash on cash return. Math time: how much does the cash on cash return for a deal in 2024 need to be to justify losing the $400k to the tax man in 2023? Follow up question: now factor in 80% to 60% bonus depreciation. Please everyone - do not say that we shouldn't do a deal for taxes - that is obviously obvious. We do deals to make money. It's a question of which one makes more money in the long run, and taxes in this case are simply a figure to factor into that calculation. 

Yeah, I agree. But what is the point of the LOI then. Have you seen it actually happen where a buyer gets rejected for another offer after an LOI is already signed? That's got to be bad real estate karma...

Quote from @Dave Foster:

@Jonathan R McLaughlin, LOL - Shane!!!   @Kim Hopkins it is possible to do a 1031 exchange with owner financing.  But they have to keep the two reinvestment requirements in mind.  In order to defer all tax they must purchase at least as much as their net sale.  And they must use all of the proceeds in their purchases.  Any amount they purchase less than they sell.  Or any amount of proceeds they take personally will be treated as profit and taxable.

the cash down payment is one proceed.  the note/mortgage they are carrying is another proceed.  Both of those must go into the exchange account if they want to avoid all tax.  While the note is in the exchange account and before they have to purchase their replacement property they can swap the note with cash from any source.  This leave them with only cash in the exchange account and they can finish their exchange.

The note is now outside the exchange account an it is non-taxable except for the interest portion of the payments. 

Not everyone has access to that kind of cash.  But it can work beautifully.  I have a colleague request out to you if you'd like to discuss offline.

 Thank you! Calling you now!