All Forum Posts by: Sean Kelly-Rand

@Chris Seveney - I am more referring to transactions. There the immediate impact to real estate is immense. I am in a chat room with 50 developers and another with 50+  national lenders and it was going haywire over the weekend with the impacts to transactions funding this week. For example: An investor wired over $500k to an escrow account on Friday only to figure out that lawyer used Boston Private (SVB) for all his accounts. Other investors called me as they have significant escrows with First Republic. 

And I believe Signature Bank also provided funding to private lenders so if you have a closing this week and your lender uses Signature as a funding source it's unlikely to occur. 

It seems depositors at SVB will be fine however there are real issues out there and developers need to be aware and check the risks. For example take an additional moment to check the health ratios of the receiving bank before sending off a wire.

@Scott Trench might want to do an announcement for the group to be a little extra cautious the next few weeks. 

Hey BiggerPockets Crew! It's been a heluva week in the capital markets! And a crazy Friday for those in real estate on the east and west coast tech heavy markets with the collapse of SVB. 

Initial impacts coming out of the FDIC take over are:

- Several closing attorneys used Boston Private / SVB for their escrow accounts so transactions that were closing on Friday/Monday in Boston or San Fran could have issues. I already know that one investor funded to an escrow account on Friday and has no idea where the funds are.

- Many firms used SVB/Boston Private for their business banking - I have already received one notification from a NYC based real estate private equity fund to all of their investors that their firm had significant investor accounts with SVB/Boston Private. 

- The follow-on is creating a hectic weekend for financial professionals figuring out exposures (it could be within your investments or clients)  or tenants or suppliers/vendors.

- Going forward: If SVB could collapse so suddenly who else could be next? There is talk of First Republic (and have heard from a few people I spoke with that they moved money on Friday) but overall they are seen to be a very well run bank. I predict that we'll know by end of the week.

- Issues plaguing SVB aren't entirely unique: banks have low returns on long-duration assets which have fallen in value while their cost of capital (deposits and short-term borrowings) have increased dramatically. 

Advice to investors is to check on accounts and make sure you don't have a number of single bank concentrations and holdings per LLC and per individual are below the FDIC limits. Study the limits today.

It's going to be a crazy week in the capital markets as we all figure out what the FDIC is willing to backstop on SVB and then the follow-on. If the FDIC doesn't guarantee all deposits then there is likely to be some contagion as investors/business yank deposits from the weaker regional banks.

Expect delayed closings - maybe wait a week before funding large escrow amounts. 

I was with Lehman real estate in '08 so have been through this before and am watching the situation closely. 

Feel free to contact me with any insights. I would love to hear what impacts you've seen and how its affecting your home market. We're all in this together now!

Good summary @Jonathan Bombaci! 

We are financing a good bit of multifamily now (seems to be a higher proportion than before). I can't tell if investors are getting better deals on value-add multi's and need us to finance them or if before they just went through the banks. I don't finance the vanilla stuff only heavy rehabs that the banks don't want (which we love - great value add deal is perfect).

Advice to investors today is that it might be worthwhile to look at the unpolished gems as they seem to be trading at a steeper discount to market value (i.e. home owners are leaving the investment only product alone). 

Are you seeing the same trend?

If anyone in the Boston area needs financing on value-add/opportunistic please feel free to reach out to me. We'd love to take a look.

@Robert Brunson - Two years from now we'll want to have a stack of cash, access to credit, and a line of sight into a few opportunities anything that helps you get there in the meantime is useful. Loads of networking in your home market start a savings plan, get to know the financing options (they will change vastly in the next 2yrs). 

I'm focused on private credit now (capital preservation and yield). 

Also as @Gino Barbaro mentions you don't have to stop looking. If a great deal falls in your lap today by all means swing for it. 

@Herndon Davis - Good post. The biggest part is adding a private lender or two to your tool kit of resources before you need them. That will allow plenty of time before closing to vet the lender and their processes. In Boston we are relatively well known (I find many people know me because either my transactions pop up on Traded or they have heard of us because friends used us or lawyers have dealt with us, it's a tight market), most business is referral based.

I would add a couple of questions to your vetting:

1) What is the source of funds of your lender's capital? - Are they a fund (raised capital already) or do they need to table fund the transaction with other lenders One is not better than the other it's different capabilities / risks.  We're a fund so have committed capital - that's different than dealing with an individual/firm that is arranging on behalf of another firm.

- That goes for banks as well - where are your banks funds coming from (image you were closing on Monday with SVB as your lender... )

2) I believe its prudent to collect a small deposit from a client before starting work - we typically close $5M-$15M a month in transactions we need to know the client is committed before we start incurring DD and more importantly legal costs (loan docs) our average loan is close to $1m to give context. I 100% agree don't pay origination fees upfront and if there are large upfront prior to closing fees than I would be wary, a small deposit to cover legal and dd seems reasonable.

3) As a lender I want to run all my DD myself and order our own appraisals etc background checks credit - we're set-up to do it and it ensures that none of the documents were doctored. If you were and investor with me you would want it that way as well. 

4) We use our closing attorney for the closing - Imaging you're a client and you want to close in 5 days and I've never heard of your attorney and you're asking me to wire $500,000 to his account... (god forbid his escrow was with SVB)... plus as a client you want me to move with speed. That means I have to have a solid process and team set-up. Don't insert a new quarterback into the line-up the day of the superbowl...

Individual private lenders/HML have different rules but I find that in general the more reputable lenders have pretty strict rules around closing and DD (that's how they stay in business).

RD Advisors can be found on LinkedIn, IG, Google search, and of course by calling any active investor in the Boston market. 

 

@Linda Weygant - to be 100% clear, I am not, and will not offer tax advice. I am simply sharing my personal experience part of which is too obtain proper tax advice as its complicated and there are many nuances (which is what I was pointing out).  The one bit that was not obvious (and I didn't bother to ask for tax advice, is that if you convert a long-term hold to condos before sale you don't automatically get the long-term capital gains treatment - that was surprise to me and I thought worthwhile sharing with others before they made the same mistake).

You should absolutely share your experiences in terms of flips, hard money, rentals, that' what this forum is all about. Peer to peer sharing of stories from individuals some of which have more expertise than others in a certain topic but all of which have something valuable to share. 

Fair point @Linda Weygant - It was my recollection that it was a much higher tax rate than the long-term capital gains. Also if I am not mistaken exactly how it's classified depends on your occupation and how you've held/classified the property. 

@John McKee and @Steve Vaughan - nice posts. I am focusing on the debt side as well.  Less on the CD's (I need at least an 8% return) more real estate loans and setting cash aside for opportunities. 

I have been reinvesting into a private credit (hard money lending) fund I run in Boston. We're able to lend today at 11%-12%+ (c. $500K to $5M loans) at 65% ARVs and there seems to be more and more demand as banks and national lenders drop out. I am naturally a real estate investor (own multifamily) however haven't really liked the yield dynamic over the past few years so moved on to the debt side. Eventually I'll buy and develop again but for the next few years I prefer the capital preservation and yield. 

You are welcome to invest alongside us if you're accredited investors. 

@Will Lenz and @Kyle Spearin - I learned the hard way about tax implications of flips: To be clear this is just my experience I'm not a tax pro.

1. It's short-term capital gains - so in high tax states like MA and CA it could be 40%+ depending on your income bracket (or its ordinary income, depending on your classification).

2. To make it worse, if it's a condo conversion you could hold it for a decade and then decide to do a condo conversion... it's short-term capital gains as you only owned the condos for under a year...that hit me hard...

3. Current strategy is if we have a condo conversion, we convert, rent for a year, and then sell later... doesn't always work with market timing (i.e. may be better to take the hit) however in a high tax state its very worthwhile to run the numbers.

For larger projects there are more sophisticated strategies and its worthwhile to get a specialist accountant involved (basically possible to sell the land into the new development and higher basis).

Lending relationships are critical. At the very least have a relationship (deposits) with one or two banks. And everyone speaks about 'banks' as if they are all the same one very important differentiator is what happens to your mortgage after you close and what is that bank's source of funds. I.e. do they sell or hold your mortgage and do they have deposits to fund loans or mainly through sales. Construction loans are hard to sell so mainly need a depositary bank. 

We're hard money lenders - not for every loan - I see us just as one more tool in the toolkit - and when you need to close in 10 days or there is an issue with the property that prevents conventional financing we are there to help. 

So make sure you have a local private lender / hard money lender in mind as well just incase.