All Forum Posts by: Kyle A.

I typically work in the commercial multifamily space using the LTR approach, but currently broadening scope into smaller multis, potentially using the STR approach. Those of you that have experience modeling out pro formas for STR's, what's the best way to project occupancy and rate variability throughout the year? I'm looking in areas that experience all the seasons, so I need to take into account the drastic income fluctuations throughout the year.

I've checked out tools like AirDNA, but not sure how accurate that is, and also looking into contacting super hosts or someone who specializes in STR acquisitions. Please let me know if you fit into one of those categories or if you have any other feedback regarding this, I'd love to chat.

Quote from @Svetlana Kazantseva:

I'm an out of state aspiring investor (living in CA, looking to invest in more affordable and cash flowing locations) looking to by my first investment property and wondering whether purchasing a new construction SFH is actually a bad idea? The concerns are obviously not being able to find a great undervalued property deal. However since I'll be owning a rental property very far from where I live and don't have a local network of contractors, property managers etc. yet – does it make sense to consider a new construction as a safe low maintenance option? Would love to hear the thoughts of more experienced investors.

Prices are still pretty inflated for new construction in most markets. There's not a lot of houses being listed for sale because people are hanging on to their low interest rates, causing the inventory/competition to be lower than usual, in turn driving prices upwards. You'd have to put a pretty substantial amount of $ down to be able to get something you can actually make income or break even on with new construction. 

Wherever you're looking, just do some research to find out how much SFHs are renting for in the area and see what kind of payment you'd need to have to compete. I know with new construction in my local market, you'd have to put down 30-35% just to break even with PITI, and would not want to do out of state management.

Quote from @Justin Moy:

Interesting how the article cited a few others that have some of the most debt coming due, specifically rise48. 

Some people were able to capitalize on the timing of the market and hit 40+ IRRs but those days are way over.

 Not sure if you saw, but Zach actually made a rebuttal video to the article.

There are many CRE syndications that will be facing Cash Calls in the coming months/years, and many have already started this process. Just wanted to start a thread on some things to consider if you're an LP facing a Cash Call and don't know if you should contribute or not.

Firstly, if you’re a passive investor on a deal and a cash call comes as a surprise to you, that might be a red flag that the deal sponsor has not been overly communicative about the state of the investment. At this point, we are over a year into the feds start to raising interest rates, which should have sparked sponsors to adjust business plans months ago, or at least notify investors of challenges to come. Any performance based challenges should also be regularly communicated to LPs, along with an outlined course of action to overcome them.

Regardless of how thorough the sponsors have been up until this time, you need to know where the project is at now. Are interest rates the only problem or are there other things that haven't gone according to plan? Poor management, unrealistically high asking rents, and mismanagement of Cap Ex budget are typical performance-based errors GPs can make. How does the NOI look now based on initial proforma when you invested? If it's lower than expected what are the reasons for this? Make sure to evaluate these things, because injecting more equity will not help with poor management or unrealistic asking rent issues.

Know your loan terms. If the property is underwater, loan covenants may become more stringent, potentially triggering default provisions or additional penalties. Understanding the loan terms and their implications can help you assess the urgency and necessity of contributing to the cash call. Additionally, if the property is highly leveraged with floating rate bridge debt (not the best place to be), make sure you know how much capital would actually be needed to do a cash-in refi to qualify for a lower LTV loan.

After you fully assess the situation and know the current loan terms and options, review the GPs recovery plan in detail. Make sure there is a clear path to fixing any performance issues and overcoming rising interest rates. Do the math and see if their current cash call is enough to survive 2-3 more interest rate hikes if a refi is not possible within a short time span. Sponsor should have laid out a new proforma with updated performance metrics and exit strategies. It’s also worth reviewing if the GP team is contributing additional equity alongside LPs, as well as if they are adjusting asset management fees and GP/LP equity split.

If contributing to a cash call does not make sense and you see a low likelihood of getting your principal back, make sure to speak with a qualified CPA about the possible loss. Offsetting capital gains from other investments in current or future years can potentially reduce tax liability. If the cash call is not successful and the team is forced to sell at a loss, selling underperforming investments to realize losses can allow investors to readjust their asset allocation and potentially reinvest in more promising opportunities. This rebalancing can align the portfolio with investment goals and risk tolerance (and I'm sure most peoples goals and risk tolerance have already adjusted). If the losses exceed the amount that can be used to offset current year gains and other income, the excess losses can be carried forward to future years. This can provide tax advantages and potentially increase the investor's after-tax returns in the long run.

If anyone has anything else to contribute to this please add!

Quote from @Justin Moy:

Interesting how the article cited a few others that have some of the most debt coming due, specifically rise48. 

Some people were able to capitalize on the timing of the market and hit 40+ IRRs but those days are way over.

Ya I've even seen full cycle 100%+ IRR's, and more power to them for making that happen at the right time. It'll definitely be some time before those types of numbers will be achievable again. I must have read a different article because I didn't see Rise48 mentioned. However I spoke to Zach earlier this year and was really impressed by their standards and the way they structure deals. They don't over leverage, purchase rate caps on everything, heavily invest in their team to ensure product quality, and are vertically integrated to have full control on costs and timelines (Just to name a few things). Where did you see the article that mentioned them?

Quote from @Frank Teshima:

Awesome post dude! Great, great info! 

 Thanks Karl!

Quote from @Trevone Williams:

Small multi family as in 2-4 units.  That is what I was looking for.  Thanks for the info.  

Ok gotcha. If you continue using Zillow or Realtor try and identify the brokers who list the most multi-family building in your area. They could potentially have other properties not listed on those sites, and you can request they notify you when something comes online that fits what you're looking for. 

If you don't have access to a good data company, you can reach out to PM teams or even brokers to find vacancy rates. 

Small multi-family as in 2-3 units? Zillow and Realtor are more SFH based but if you want something a little bigger you could start on Loopnet, Crexi, Catalyst, RealNex etc. Those are not only good places to find properties, but also good places to connect with brokers who specialize in multifamily.

I'm sure you all saw in the news last week another heavily Texas based investment team (Tides Equities) is facing loan maturities amounting to $1.5 Billion (with a B) backed by poorly performing properties, that will require massive cash calls or rescue capital to avoid foreclosure. Unfortunately it's likely they will join Applesway as the next big failure in the commercial multifamily space. 

As we come closer to the end of this year and into the next couple, these will not be unique situations. According to Fitch Ratings, 23% of CMBS debt alone will be maturing by the end of this year are too highly distressed to have a chance at refinancing. Yardi Matrix shared data of 2500+ underperforming commercial multifamily properties yielding <1 DSCR, that happen to be on floating bridge debt expiring this year. The fed has stated the likelihood of at least 2 more additional hikes this year, which will push these properties even deeper underwater.

Here are some potential options operators can take if they are facing loan maturities with struggling properties:

1. Cut Costs - Obviously the first course of action. Cut costs wherever possible in order to boost profits. Note that if documented proof of effort to boost NOI is not shown, many banks reserve the right to convert non-recourse debt into recourse, leaving personal assets outside of LLC at risk.
2. Notify Limited Partners That More Equity Is Needed – Whether looking to raise more capital outside of the current partnership, or within, fill in all investors with what’s going on. Depending on how recently the property was acquired, there might be an addendum that needs to be signed in agreement by all investors allowing the ability to raise more outside capital to be raised. This can take time so better to do it sooner than later.
3. Loan Personal Capital – If operators have the ability, they should loan their own personal capital to keep the project afloat. They can also collect interest on this loan, so it is not only a show of good faith in their abilities, but also goes back to putting in good faith effort in boosting NOI. If they have the ability and do not do so, this will not go over well with banks or investors, and can result in lawsuits.
4. Sell More Equity – This is a tough sell since you're essentially trying to bring in more investors to a bleeding property, but it is more favorable than doing a cash call with limited partners already invested into the deal. This is easier to do if everything has been going according to plan and NOI is close to, or exceeding projections.
5. Reallocate Cap Ex Budget to Reserves – If there’s money left that hasn’t been used, it’s possible the bank will allow you to move the remainder into operating reserves to stem the bleeding. This isn’t initially favorable to banks, so you must provide a great argument for this.
6. Borrow Money Against LP Shares – Using limited partners invested equity as collateral is an option, and if they’ve gotten to this point, the LP shares are already at risk so operators might as well put them at stake to try and save the property.
7. Borrow Money Against GP Shares – This is even less favorable and more difficult to do than borrowing against LP shares, which is why it comes after.
8. Cash Call – Ask for more equity contributions from limited partners currently invested in the property. They should be fully informed of the state of their investment at this point, and should not necessarily come as a surprise. Most will not want to invest additional funds if it looks like a sinking ship, but if there has been thorough communicating, property has been going according to plan, and is only at risk because of interest rates, maybe some will be on board.
9. Rescue Capital – This can come from boutique lenders or other investors/operators. There’s multiple ways to structure this, and of course every project and situation will have different terms. There’s a version where rescue capital is brought in to essentially refinance the property into fixed debt, but will also take control of the asset as well as take pref equity from investors. There’s another version where rescue capital comes in to cash flow the property to keep it afloat while remaining on the existing debt. This could be a better option if a refinance isn’t feasible and the bleed of the property isn’t too substantial. With the second version it’s typically a note that converts into equity once property is stabilized.
10. Sell Property At A Loss – As stated above, the fed already announced there will likely be more rate hikes this year. If there is not a conceivable course of action and none of the above steps are successful, this is the next best option. Allowing a property to fall even further victim to rising interest rates and decompressing cap rates is extremely irresponsible and waiting will cause even further losses or foreclosure.
11. Foreclosure - No banks yet have allowed principal deferment, payment deferment, or temporary rate adjustments yet and are not afraid to seize properties. They will take back control and easily sell it for sub-maximal price as long as owed loan amount is covered. If banks are threatened by delinquencies, they see risk of losing money, and lack of effort by operators to restore profitability, they would rather take back property and sell it themselves instead of watch the value sink even more. They will not help investors get their principal back, whereas rescue capital can. Going into default and bank seizure is worst case scenario and the laziest option for operators and investors.

So what are the takeaways for buyers not in these situations? No matter how competitive a market is, always stick to the fundamentals to mitigate as much risk as possible to avoid serious loss. Know your risk tolerance, and every corner you cut to make a deal pencil out (when it really shouldn't have) leads further and further away from risk mitigation. This should be most pertinent with syndicators or operators taking on investor capital in any form. I don't see a problem with gambling your own money, but taking huge risks with other peoples money is irresponsible and reckless. What's going to happen in the coming years is really unfortunate for our industry, but hopefully we are able to learn and come out better on the other side.