All Forum Posts by: Serge S.

@Kyle Varga the net worth requirement is generally applicable on GSE (Fannie, Freddie, etc). The way around that in a bigger deal is finding a partner that has that balance sheet and offering that person a piece of the deal in exchange for renting his balance sheet.

This deal is most likely too small for a Freddie loan although it can be done I would say that the prepayments and fees are not worth it for what you are doing.

Best bet is to find a local community or regional bank. They will not hold the net worth requirement over your head and should be competitive on rates. You will have little to no prepay and they will be there for you on your next deal. Only downside is recourse but that probably is not an issue for you at the moment.

@Ivan Barratt I do not see any scenario where we are in the bear trap stage. I believe we are clearly in between denial and bull trap. We certainly have had our new paradigm peak which would be defined by bridge debt purchases that relied on year 3 NOI just to reach a 1.2 DSCR AND millions and years in CAPEX to get there. Everything had to stay perfect for that investment to make any sense but alas we saw people underwriting to a "new paradigm" where perpetual population and rent growth was the new normal.

I am seeing so much denial right now in this market. Brokers telling me with a straight face that there are a ton of buyers out there. The stock market off only 2% from year end 2019 (nobody can convince me that makes any sense). I am seeing syndicators  that are now stuck in 2019 purchases continue with outlandish renovations like nothing has happened thinking that 9 months reserves will carry them through. 

There is a light on the other end and I do agree that multifamily will show its strength through this pandemic. The assets that will thrive are the ones that have the ability to compete in a submarket at the highest end of the value proposition (meaning best unit for the price). When people downgrade they move from the shiniest new countertops to a classic unit priced $100s less. Those are the units that will have the most demand.

Its a bit premature to write the obituary for Cardone's syndication business. He has a lot of haters but don't forget that Grant has been in the game since the early 2000s. He has bought and sold into this market and had his share of capital gains. He has done significant deals for the last 5+ years as the primary sponsor and purchasing with other people's money. Now I have no clue regarding the reserves, cap rates, and quality of his deals but what I do know is that he has made his in fees and is now staring at potentially 3 years of a buyers market. So save the sorrow, guys like Uncle G. do just fine in times like these. The guys that do not do fine are the posers that set up shop one maybe 2 years ago who instantly became "market experts" and are now in the wrong market and sitting on outrageously overvalued basis and have no strategy but hold and prey. 

Anyone paying attention noticed a pretty significant perk for RE investors. The current bonus depreciation rules mean large year 1-5 depreciation and many investors stack large NOL carryforwards. Some are advising that this carryforward can now be applied to 5 years of prior period taxes paid and refunded for those amounts AND the taxpayer would get a check for amount of the carryforward if there was no prior period liability. Sounds too good to be true that would mean a windfall for those purchasing apartments over the last 2-3 years and present.

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Multifamily owners using a PM how do you interpret your eligibility if your PM pays payroll? I have been advised that if your holding co LLC EIN is NOT the one making the payroll then it does not count towards the loan calculation. It would technically be the PMs employee even though its your property, expense and liability. If this is the case then the PM would be eligible for the forgivable loan up to $10M. Think about that one for a second. A professional PM with 10,000 units would be the one getting the check and not the owner. I find this hard to believe. Maybe @Brandon Hall has an idea and can chime in, I'm not sure what to make of this. A 100 unit apartment complex typically can have $15k in average monthly payroll meaning it would be a $45k check for every property and it would be the PM and not the owner that would be eligible. 

@Evan Polaski its a roll of the dice right now and your mileage may vary based on asset class and location. I personally could not underwrite less than a total 20% economic which is most likely conservative. Its back the days of rebuild cost and intrinsic value.  Who knows when bad debt and vacancy stabilize. This makes for a very interesting resale market. Brokers are still listing deals based on 2019 results and trying to justify this a bump in the road. Feels like the pandemic risk is just the first domino to fall followed by turbulence in credit markets, inflation and regulation. This is just the beginning.

Interest article. $30B in CMBS maturities coming due:

By Craig M. Douglas and Corina Vanek – Phoenix Business Journal8 hours ago

The last time the U.S. economy was in crisis, terms such as “jingle mail” and “extend and pretend” became commonspeak among the thousands of men and women earning their keep in the commercial real estate sector. What’s unfolding today in the age of the coronavirus undoubtedly will add to that insider vocabulary, and then some.

A Business Journals analysis of the commercial real estate market identified 4,600 properties nationwide securing $30 billion in commercial mortgage-backed securities, or CMBS, debt coming due in the next six months. With the global economy in a tailspin and nary a sign of it stabilizing, the likelihood those loans will be paid in full — whether through refinancing or property sales that can satisfy lenders — is slim.

The shrapnel from this ticking time bomb will be absorbed in virtually every major metropolitan area in the country. In Washington, D.C., some $1.8 billion in CMBS debt secured by 67 properties is coming due by Sept. 30. In Los Angeles and Boston, the totals are $1.46 billion and $1.31 billion, respectively, and the combined number of affected properties is 240.

In New York City, home to the largest concentration of CMBS debt, some $3.96 billion in loans backed by 181 commercial real estate properties is slated to mature within the next 180 days. According to Bloomberg data, the most prominent Big Apple properties scheduled to mature include 280 Park Avenue ($1.08 billion loan due Sept. 16), which is owned in partnership by S.L Green Associates and Vornado Realty Trust (NYSE: VNO), and 731 Lexington Avenue, another Vornado property with a $500 million loan coming due in June.

What CMBS loans look like in Arizona

In Arizona, there are 278 properties that back CMBS loans that are scheduled to mature in the next six months. In the Phoenix metropolitan statistical area, there a 247 such properties, with a combined loan balance of $957.3 million.

The majority of the properties are hotels, particularly Motel 6 and La Quinta Inns.

Many of the largest loans coming due locally involve an entire portfolio of properties.

For example, 455 Motel 6 properties across the country, including 29 in Arizona, have a loan due in the amount of $1.36 billion, plus another $147.5 million in mezzanine debt that will mature Aug. 10 – though it is not clear how many of these properties are owned by G6 Hospitality. G6, which operates and franchises more than 1,400 Motel 6 and Studio 6 Extended Stay properties, did not respond to requests for comment from the Dallas Business Journal.

There are several other Arizona properties with loans maturing in the next six months, and some already are prepared with a plan for when the loan matures.

The Arizona Biltmore Resort backs a $281 million loan, which is scheduled to mature May 1. However, the resort’s owner, Blackstone Group Inc., has five, one-year extensions available beyond initial maturity.

The Tucson Mall also backs a $205 million loan scheduled to mature June 1. Brookfield Properties Retail Group, the owner of the mall, did not return a request for comment.

With hospitality and retail taking some of the hardest hits in the wake of coronavirus, it is unlikely hotels and retail properties will be able to make the balloon payment expected of them at the end of the lease terms, Phoenix commercial real estate experts agree. However, they also do not expect lenders to immediately foreclose on the properties either.

“It’s unlikely these properties will be refinanceable at maturity because of how hard they’ve been hit,” said John Smeck, senior vice president of capital markets for Colliers International in Phoenix. “But lenders don’t want these properties back.”

Smeck said lenders will likely look at a property’s performance before the coronavirus hit.

“If performance of the asset was acceptable prior to the event, they probably will extend the maturity date,” he said. With an agreement to extend the term, lenders will also likely tighten the requirements of the loan, possibly by requiring more frequent financial reports or other additions.

Moratorium on foreclosure?

Smeck said there have been discussions at the federal level of a moratorium on foreclosure, but so far nothing has been implemented. However, even if it is not required, most lenders will probably choose not to enter foreclosure.

“Lenders will likely give the borrower every opportunity to get to the performance level before this unprecedented event,” he said.

Jim Pierson, managing director of Walker & Dunlop in Phoenix said he would hope lenders are willing to extend these loans, and other options could include deferred payment or discounts that were available in the last cycle.

"CMBS is not set up to take these properties," Pierson said. "The borrower will be able to work with the servicer."

The sudden downturn came at a time when hotels were doing well with a bustling economy, Pierson said.

“The economic impacts will last for the balance of this year,” Pierson said.

For hotel or other property owners facing loan maturity or even payments that cannot be made, Pierson said he advises talking to the lender immediately.

“Many of our clients jumped on this last week and contacted servicers, quickly getting forbearance agreements in place,” he said. “I wouldn’t advise anyone to just not pay, they need to speak with their servicer.”

Are banks on the coronavirus hook?

Banks hold the majority of the nation's commercial mortgage debt, with small banks in particular accounting for approximately two-thirds of those loans. Federal loan data indicate there was approximately $1.5 trillion in commercial real estate debt on the books of U.S. banks at the close of 2019, with Wells Fargo & Co. (NYSE: WFC), Bank of America Corp. (NYSE: BAC) and JPMorgan Chase & Co. (NYSE: JPM) accounting for about 13% of that total. CMBS loans account for about 50% of the U.S. commercial real estate loan market.

Real estate experts interviewed for this story cautioned it is too early to tell whether banks ultimately will absorb whatever fallout is to come from the coronavirus crisis, or whether landlords will break with tradition and negotiate down lease contracts to accommodate struggling tenants. They also agreed lenders have no desire to take ownership of properties if it can be avoided.

Bloomberg's Langbaum said he takes some comfort in knowing lenders and landlords alike are far better capitalized vs. 2008, when it was commonplace to see loan terms for overdue mortgages extended indefinitely — a practice known as “extend and pretend” — or for property owners to simply turn in keys — “jingle mail” — and walk away from properties.

What also was different then, he said, was the economic fallout was far more gradual than what’s unfolding today.

“There are so many balls in the air right now it’s impossible to see where the pain points will emerge,” Langbaum said.

Costar sees signs of multifamily trouble: Multifamily cap rates rising

Looks like investors finally starting to demand real cap rates and multifamily will begin trading on present performance and not future rents. 

Here in PHX, I am getting calls from many brokers. Most are recommending clients postpone sales and some will not consider listings. One broker is pulling forward listings and throwing up everything they can hoping and preying that someone steps in.  They are looking for someone to backstop deals that are falling apart. The official communist party line is "don't expect distressed deals, prices are fine". But talk to these guys on a friendly man to man basis and they will tell you there is already distress. Class A already offering concessions and price cuts. Anyone underwriting a new deal must consider rent growth dead for 2020 and probably 2021. I am underwriting a 20% economic vacancy to account for an increase of bad debt to 7% and concessions to 3%. This may not be conservative enough. 

@LaVonne Eaton could you elaborate on your specific issue other than not returning calls? It is a turbulent time for some syndicators so you might want to allow some time for them to respond. The guys that syndicated in value cash flow markets earlier than 2019 (think Atlanta, NC, FL, Midwest) should be just fine. Maybe the ambitious 3 year hold turns into 5-7.  The first time syndicators purchasing in PHX circa 2018-2019 are in the witness protection program and I wouldn't expect a call back anytime soon.

I'm sorry to be the bearer of bad news but if you invested in a PHX multifamily purchased in 2018-2019 then you are probably in for long and bumpy ride. The most respected syndicators I know were not able to deploy in PHX during this time and for good reason. Hopefully your operator/sponsor had experience in the PHX market before the run up and has been around long enough to have managed through a recession. 

Many "assets"  in this time frame were purchased by very inexperienced operators using inappropriate comp rents to justify an enormous rent bump post renovation. Today this strategy has no viability as there is absolutely no assurance of any rent bump post capex. Nor do you want to be the top of the market in rent price. This was a slow motion train wreck which has turned real time very quickly. 

There were some operators bragging on BP about buying at 3.5% pro forma cap rates in 2019, same guys who said RE was overpriced in 2011. It was easy pickings for the local brokers, a running joke that everyone knew who to turn to to offload that ridiculously priced deal. I'm seeing a run for the exits now as they try to list their half completed "value add" hoping to snag the last of the idiot 1031 money that may not think this recession is that bad. Problem is nobody is interested so now the investors have to sit through 5-10 years of unwinding this mess. But, on the flip side, said operator now is sitting on $750k in investor purchase fees and can maybe finally buy some RE of his own. Better save that cash in reserve for litigation.

I sincerely hope the optimists are right and this is all but a short term bump in the road. At this point though I'm not sure there is an easy way back. If we get anywhere near the predictions of 20% unemployment and 20-35% Q3 GDP drop then there simply is no quick return to "normal." This isn't really a recession its more of an Ice Age and the big question mark is how long it lasts. 

@Joel Owens its been a while. Yes I am a value investor indeed:) Agreed that it will be mom and pops retail feeling most of the pain but I wonder how shopping changes in the near term and how many of the chains can wait it out. The government can't bail out everyone and my guess is retail is pretty far back in the line waiting for bailouts. I think that the fast growing population growth cities that were already a good 20% overvalued will be in trouble. I don't see how Vegas goes back to normal.

The problem we are in will surely be solved and hopefully sooner than many expect. The issue I see is not the current problem but the effects that we will now be dealing with in the long term. You can go from 3.5% unemployment to 20% in 60 days but how long does it take to go from 20% to 5%? What happens to population growth when LA  becomes affordable and Phoenix/Vegas has no jobs? Does population continue to grow unabated in the Southwest and Sunbelt? You don't add $3T in government debt without consequences. 

I have spoken to many a savvy investor and many are well capitalized and ready. I have been a seller for the last two years and sold a number of multifamily assets and nearly all SFR assets in 2018-2019. Multifamily valuations became so out of line with reality, you literally had to underwrite a perfect economy to make these pigs look tempting to under educated investors. Fees and promises have been the name of the game. Post correction there simply is no viable strategy if you were purchasing peak priced assets valued on tomorrows rent. Lawyer up and join the witness protection program.

If you have been around the block you know that RE valuations do not adjust overnight hence take the anecdotes from your brokers and realtors that its business as usual with a grain of salt. The biggest difference I see right now is that lenders are willing to work with owners day 1 as compared to last time it took years and the government is more proactive. This will just delay the inevitable.