All Forum Posts by: Stuart Udis

A good sponsor should be able to articulate to LP's their competitive edge. Why are they better than other sponsors and what advantage do you bring to the table? It's also good to know if they are the true GP or have a silent GP partner whose balance sheet is leaned on for the bank guarantee and the sponsor liquidity/equity contribution. A sponsor who is personally invested and personally signs onto the debt has more to lose. Besides this, track record is important. Every experienced sponsor finds themselves in difficult deals that don't go as planned. Learning how the sponsor navigated challenging deals and situations speaks more to their capabilities than the success stories. If the sponsor claims to hit nothing but homeruns, that's a red flag.

@Dwayne Byrd You mention nothing about the actual investment or the GC credentials. Those are far more important to the success of the new build. Also, who will be the guarantor for the debt? As someone from the outside looking in, I see a scenario where an affiliate service provider is set to make fees on title (which it sounds like you are adding to your repertoire), brokerage and loan originations regardless of how the underlying real estate performs. There's nothing in the post about how you add value to the actual development phase of the transaction. On a side note, there seems to be a conflict if you as the property developer are able to place the title insurance, broker the sale and originate the loan for the buyer. 

Based on what you shared, it sounds like you built out a really nice platform of affiliate services. Perhaps a better approach is to focus on networking with developers and builders and use your brokerage to source the land deals for them. You will ultimately get the affiliated service revenues you mentioned in your post. Maybe even invest in the deals. I know this is inverse of what you were contemplating but seems to better align interests and will avoid conflicts.

The budget that's submitted to the lender should have a contingency line item. You can usually shift cost figures around if the scope was completed for less than the initial budget indicated. By way of example if your budget included $20,000 for framing and you only spent $15,000, the lender should allow for the $5,000 that was not spent to be shifted elsewhere in the budget. As a general rule of thumb, its best to overstate your contingencies in your construction budget. This is particularly the case when the contingency is baked into the loan. A lot of borrowers are too focused on their out of pocket cash at time of the acquisition or loan funding and opt to keep their budgets lean for the sake of reducing their cash requirement on day 1. This is because most construction lenders will look at the total project cost and require 20%-25% to be funded by the borrower. Therefore, the bigger the budget, the more cash needed up front. I am a strong proponent for understanding the max LTV and funding parameters of the lenders and as long as the LTV falls within the lender guidelines, add as much contingency funds (and interest reserve) as you are able. Usually an additional $5,000 of cash up front translates to an additional $15,000 in contingent funds. There's nothing worse than being involved in a project that is incorrectly funded. Shortfalls in funding kill deals, even if purchased correctly. Being properly funded goes along way towards ensuring your projects smoothly get to the finish line.

Settlement periods are always negotiable. You tend to see shorter settlement periods in residential transactions and the longest in land transactions where entitlements contingencies are customarily found.  The particular circumstances will dictate what is appropriate and acceptable. 

I am a strong advocate for asset protection and utilizing a deed holder entity is recommended. However, most fail to operate the entity properly and that's where issues generally arise. It's also good to loop in your accountant before the formation is completed. Depending on where you live, there may be certain tax benefits to owning real estate as a Limited Partnership as opposed to an LLC or even how you are admitted as a member of the entity. This generally has more to do with local taxes but good to spend some time up front to make sure you are addressing both asset protection and tax planning properly.

@Max McQueen  If you are looking to grow a portfolio you will need to build relationships with numerous lenders. First of all, banks will have legal lending limits which dictates how much the bank can lend to each particular borrower. Unless you have a tremendous track record and strong balance sheet, banks will be reluctant to lend up to their legal lending limit. Secondly, some banks will be more active and offer better terms in the construction and bridge debt space whereas others will consider take out financing and debt for stabilized properties a core competency. You will want to determine which lenders are best suited for different loan requests.  Once you understand which banks offer the loan products that align with your borrowing needs you can spread your loan requests around. 

Now for the more nuance part of the process. Currently banks are looking for borrowers to keep cash on deposit. This can make it difficult if you are working with numerous banks. Therefore you should determine whether this is a requirement and/or try to negotiate this out of any term sheet outside of perhaps keeping an operating account open. Also, depending on how active you intend on being, you will find the banks who offer the better construction financing terms tend to be the smaller banks with smaller legal lending limits. This means you will likely need to spend more effort finding more banks that can fill that void whereas you will want to find banks with higher legal lending limits for the take out and stabilized financing. The underwriting tends to be more similar deal to deal once you reach this point and once you are familiar with a particular banks procedures and underwriting policies it will streamline the process, especially if you find a bank who can take on numerous stabilized loans.

You will also find the banks you work (particularly the banks who offer the aggressive construction lending terms) will frequently be acquired or participate in mergers. It's the nature of the banking business, particularly now. Typically when this occurs "the gold standard" aggressive lender lending policies change overnight & the loan officers leave. You will build rapport with the loan officers more so than the bank and this will open up new banking relationships. Paying close attention to where loan officers are moving is an excellent way to determine which banks to work with. If you see a press report about a CRE team moving from one bank to another, it typically means the onboarding bank is aggressive with their lending. Meanwhile you probably want to shy away from the bank where loan officers leave.

While not a primary emphasis of your post, it was mentioned by others in their responses and wanted to suggest not to purchase real estate in your name solely because the loan terms are better. Owning real estate where the deed holder is an LLC (if done correctly) is a powerful asset protection tool. You will also find your CRE loan terms will improve as does your track record and balance sheet.

@Lauren Coles  Thanks for shedding additional light on why you are looking outside of your own market. However, I still believe you are missing the main point I was trying to get across which was where to prioritize your time and effort. You still seem to be focused on a service provider that is truly inconsequential if all of the steps that come beforehand are not executed well. Your priority should be locating a target market that has the fundamentals you are looking for and then assembling the professionals who will assist with sourcing the best investment opportunity. The PM comes secondary. In all honesty, a good PM can be found in any market. It's not a role that attracts the best human capital as its widely regarded as a loss leader in the real estate industry.  I don't believe the PM should be a driving force in where you choose to invest. 

As someone interested in purchasing your first property you should not be looking at investment opportunities all over the country & are too scattered with your approach. I've always believed it's best to acquire your first property in your own market but if you happen to be in a market where that's not possible, select a market that has strong fundamentals, arrive at an investment thesis and focus there. Once you narrow in on a market, your focus should be on the real estate. I don't care how proficient the property manager is, if the underlying real estate is not purchased correctly it will be a bad investment. Before you worry about a PM, focus on the professionals that will help secure & finance the correct property (Brokers, Contractors, if you are seeking value-add opportunities, attorneys, lenders).

Prioritize asset protection over interest rates. You will also find as your track record and balance sheet continues to improve, so will the financing terms you receive from CRE lenders. Consequently, the future version of yourself might receive banking terms where there is less of a spread between interest rates. Also, the shorter loan periods requiring refinances every 5-10 years and pre-payment penalties are the attributes that makes CRE loans more costly than the actual interest rate spreads. Try networking with CRE lenders who will offer longer terms and/or lower or no pre-payment penalties. Credit Unions tend to be more willing to offer these terms.

I don't personally own any properties leased to housing choice voucher recipients but heard from others who are having trouble leasing their properties. They are citing a lot of inventory competing for the same tenants. This will likely differ depending on the market. However, I have also personally seen a big push towards investing in affordable housing. A lot of money has been raised in recent years to invest in this thesis. Section 8 rentals are frequently located in extremely low barrier of entry markets, especially the single-family homes and small multi-family properties which I assume has also led to an influx of inventory. In Philadelphia, which is where I am located there was a recent re-set on rents that are significantly higher and suspect the increased rents will cause more investors to turn to the program which may cause more lease-up issues. This is merely what I am hearing along with some suspicions. Others who are active within the program may have other intel to share.