Commercial Loan Defaults: How to Handle Lenders and Avoid Triggering Bad Boy Carve-Outs

Hello and welcome to the Raise Capital Legally podcast and YouTube channel, your go-to source for insights on raising capital the right way. We dive into topics that matter most to real estate syndicators and fund managers with live Q&A opportunities before we wrap up. I'm Krisha Young, your co-host, business development director, and client success coach at Syndication Attorneys. And joining me, of course, is Kim— attorney Kim Lisa Taylor, founder of Syndication Attorneys. Now, before we get started, please note that audio and video from this event will be posted on our podcast platform, YouTube channel, website, and social media, and will be made available to the public. You can go ahead and ask questions at the end of this broadcast by raising your hand or typing it in the Q&A. Please note that information discussed during this event is of a general educational nature and should not be construed as legal advice. So today's topic is commercial loan defaults, how to handle lenders and avoid triggering bad boy carve-outs. When a syndicated property goes back to the bank, it can feel like the end of the road, but it doesn't have to be. In this episode, commercial mortgage expert Eric Stewart joins us to unpack what truly happens when a syndicator loses a property to foreclosure, how lenders evaluate your future loan applications after loss, and what you can do to rebuild your reputation and credit. We also dive into the darker side of non-recourse loans, those comforting words that sometimes come with hidden teeth. Eric explains how certain borrower actions, even accidental dental ones can trigger bad boy carve-outs, turning a non-recourse loan into a personal liability nightmare. Whether you're navigating a distressed asset or just trying to stay out of hot water, this conversation will arm you with practical strategies to mitigate risk, negotiate smarter, and recover stronger. Hello. Hey, good morning.

Thanks for coming. Well, boy, Erik and I have known each other for many, many years. I'm not going to say how long. We don't talk about those things. So, but Erik is truly an expert in the mortgage brokerage space. He helped us on a syndicated deal pull a loan out of a hat, and it took like 2 years, and he stuck with us, and he didn't tell us to go pound sand. I know he spent a whole lot of time with us. So, you know, Erik really cares about making sure that you get what you need. And so we love to have him as a guest and help kind of pick his brain on what's going on in the current markets. For some reason, Krisha, I am having a little technical difficulty here getting to the questions. Could you email them to me?

Sure, I can. While I'm doing that, why don't we start with the first one? Go ahead. Which is basically, Eric, tell us about your background and how you got into commercial mortgage brokerage.

Yeah, yeah, I absolutely— I'll be brief on that one because it's a longer story. But the big picture is that I was in the leasing industry, the equipment leasing, and I did a lot with hotels and a lot of reservation systems and so forth. And when you build relationships in that industry, you kind of get a lot of referrals and you really look at the overall financial structure for your clients and They started asking me about mortgages. So it came to this fork in the road where you're going to do a $30,000 lease or you're going to do a $3 million refinance or acquisition. And so I really chose that route of, of commercial mortgages and serving clients that way. And that was back in the early 2000s, late '90s. And then in 2004, I did a couple loans for some folks that were just moving into the multifamily space. They were educating themselves, they were learning about the industry. And then actually, it's some really good friends of both Kim and myself, and they introduced me to some really solid educators. David Lindahl actually introduced me to Dave. And, you know, he was kind enough to give me a few minutes to talk to folks about loans. And it really, it really started to take off where, where, you know, leaning into folks that want to come into the industry, being there when they have questions, helping prepare them for what they're going to see down the road— that became my, that became my marketing strategy. That became what I was offering in the beginning instead of, you know, bringing donuts to a broker and hope that he sends me deals and, and that type of thing. So You know, I look up 20-something years later and still doing it, still leaning into that same client that wants to move into the multifamily space or some type, whatever type of commercial real estate space they're looking to get into. I try and add value and get ahead of that learning curve. And it seems to be working so far. We got 20 years down, so we'll I love—

yeah, I'm into business.

We've seen some big changes happening later, uh, lately in the industry, and some of them, of course, you know, everybody's heard about. There's distressed deals going on. Um, you know, um, what, what's your sense of what's going on in the industry right now as far as loans in distress and, uh, people with distressed properties? What do you think?

You know, there's, there's always the macro and the micro. So, you know, on a macro level, when you look at decade over decade, we're coming off of a period of time where interest rates, which really drive liquidity in the marketplace, which subsequently drives valuations, that was artificially low. We were running, we were running on these, running these properties or buying these properties with artificially low interest rates, and subsequently The valuations are artificially high. So we come off of that, we come out of that, that phase, and we, we're now in a time where rates are settling back into the, the, you know, decades of normalcy. And they're settling higher than they were back in, in, in 5, 7 years ago. And that's going to result in lower valuations. It's just, you can't help it. That's just That's just the math of it. And then so that, that requires sellers, which are, you know, oftentimes in our business syndicators, to come to terms with the fact that their projections from 5 years ago or 3 years ago may not hit. And that's a tough, that's a tough pill to swallow. And so they hang on as long as they can. Um, the bridge debt component is there where, you know, syndicators and lenders alike plan on this stabilized valuation. And if you're too aggressive with that, that's where you— that's where you see some of the trouble, and that's where you see those layers chip off, which we'll talk about in a little while, I'm sure. But, you know, you've got layers of severity where, hey, I didn't hit— I didn't hit my projections, but I can still hit my pref. Hey, I didn't hit my pref, but I didn't lose money. Well, Hey, I lost money, but I didn't lose all the money, you know, and there's just varying degrees of severity for people or for deals. And that's, that's what we're seeing unfold now.

Well, what I'm seeing is that somebody said my volume is low. Is that better? Can you guys hear me better?

I thought you were fine.

Okay.

Yeah.

So, yeah. Hey, Don, thanks for pointing that out to us. What I'm seeing is people are caught in bridge debt and they're at the end of their maturity period and they can't refinance because the loans, you know, the values are lower. But I'm also hearing some reports that even in certain areas rents are dropping. And so that too is resulting in a lower— and there's a lot more concessions being offered, things like that. And From some other people, I heard that the quality of the tenants that they've been able to get— and again, this is probably very geography-specific, but in certain geographies, the quality of the tenants that they're getting, it's like, you know, we could, we could, you know, help somebody move along, shall we say nicely, evict them for nonpayment. And then the next person we get in, you give them concessions, and then when it comes time for them to pay, they don't pay either. And so that's, you know, certainly a disturbing trend if it's happening on a large scale. Let's hope it's just very geography-specific, but also because people were enticed into these mortgages. So if my recollection of the last recession were people had short-term maturities, so 3 to 5 years, they got caught in a downturn, they couldn't refinance for the value of the loan. And so then they ended up having to walk away from the property. And then at that time also, there were a lot of people with 1st and 2nd position loans, and the 2nd position loans, they'd stop paying those first, and those would foreclose, become the borrower. And the 1st position lenders were then in kind of a tenuous position because they couldn't really, you know, they didn't have as much enforcement authority against that, that new owner as they did against the original borrower. And, you know, I'd love to hear your Take on that. But then fast forward, you know, Dodd-Frank and, you know, lender rules came out and said, we're not doing seconds anymore. Nobody can do second position loans. But then they kind of, you know, devised a new way to entice people into it with the adjustable rate mortgages. And everybody said, oh, okay, now we can afford to do these loans with adjustable rate mortgages. But then, you know, the rates actually adjusted and they thought they'd be able to get their repairs done and get everything. you know, up and working so that they could get out before the rates adjusted. That didn't happen. Now they're stuck with these adjustable rate mortgages at higher interest rates. They're putting all their cash flow or maybe even deficient in what they can afford to pay to stay up with the loan payments. You know, what's your take on all that stuff?

Well, you know, you cover a lot of ground there and, you know, you started with talking about some of the regional components of, Rental increases, and you know flat rents are are almost take flat rents on a stabilized occupant, a stabilized property, right? It's there. That's the micro of what we were talking about earlier. You know the macro component of decades of interest rate levels and things like that. But getting into specifics of a market, asset quality. Borrower or operator decisions on staffing, you know, how well you manage your maintenance calls, how, how well you, you address your tenant concerns, the security of the property. Um, let's, let's take San Antonio, right? San Antonio rents on C-class assets are very challenged, right? That's a market that everybody loves. I mean, how often do we talk about, um, Austin getting yielded out? Well, let's just move south and we'll hit New Braunfels, we'll hit You know, Abu Dhabi Kyle and go down to New Braunfels, and you end up in San Antonio where everything's great. Well, the reality is rents are flat there or declining. Oversupply. There's an oversupply. And lately what we're hearing a lot of are ice raids. I had a I had one of my PMs shoot me a text and say this just happened on this just happened. Just north of the highway of one of our properties, and it was 140 people got arrested. And, you know, people freak out, right? If 140 people get arrested, what's the ripple effect of that? Um, and I don't know if it's, it's an exaggeration. It really is happening. I've heard this here this morning about Charlotte. Um, I heard about somewhere else where there's some big raids.

Let's not go too far down that road. I really want to keep us focused on what's going on in the lending industry right now.

Sure, sure.

And that, that can have an effect. I mean, you know, kind of another ancillary effect of, you know, administrative policies is some people with student loan or student housing are having trouble because there's not such an influx of the foreign students that there were before that used to occupy a lot of that student housing. So, you know, definitely whatever administration is in place, whether, you know, it causes the interest rates to go up, or, you know, whether it causes some other ripple effects in these other areas, it definitely has an impact on what's going on with the, you know, the market, specifically the multifamily market. There's certainly other asset classes out there, and that's what I'm kind of encouraging my clients is, you know, hey, if you're in the multifamily space, it's just a little bit difficult right now, and it may be a while before that recovers. But in the meantime, you know, look at some other asset classes, gain some other skills, figure out how to buy other things, because we've got a lot of clients that are still buying other things and they're still doing well. You know, you don't have to just be stuck in one market or one asset class. But I've got another sense of what's going on right now, and I want to hear your take on this. So my thought is that, you know, from what I'm hearing from multiple clients is there's a backlog of these distressed properties and the lenders aren't, you know, they're trying to do workouts when they can. And if they can't do the workouts, then, you know, eventually they might have to either, you know, the syndicator or operator will walk away and hand over the keys, or they might, you know, get foreclosed on. But my kind of sense of it is that there's not going to be a lot of that happening before the end of the year, that the lenders are going to kind of hold off and start trying to, you know, work through those distressed properties in the beginning of the year. And then, you know, the other report I'm hearing from, like, one of our staff, Mola Bosland, used to work in the Foreclosure industry, and she said once they get the property back, there's a whole, you know, legal framework of things that takes time that they have to do to go through the REO process before those, those properties can get back out on the market. What's your sense of that? Do you think we're going to see kind of a wave of foreclosures and takebacks in, you know, next year and then maybe start Seeing some of those properties come back and resurface in maybe summer or early fall next year? What's your thoughts on that?

Well, to your point, between now and the end of the year, yeah, I don't see any major acceleration happening between now and the end of the year. But again, you know, 30 days, 45 days in our business is the blink of an eye. So things that are already in process, they may want to wrap up. If it's hitting now, sure. But I don't expect a huge acceleration.

From a—

just, just from a credit facility standpoint, you know, that, that, that outside credit facility structure of, we'll call it 5 years, right? The typical bridge loan that, that, that was been— that's been originated over the last few years has been a 36-month standard loan. That's your typical loan. And then you get 2 1-year extensions. Those all have caveats with them. Under— you have to be underwritten for it. They want to review it. You may or may not get it. Your rate's going to change, which is a big thing of what you're talking about. So we are now at the end of that, that 5-year credit facility where lenders are going to have to get more strict. And it also depends on the type of lender. So if you're working with a depository lender, that's one thing, right? They're, they're making their decisions in-house. If you're working with a debt fund, you know, that is a security that you're working with. Everything is much more heavily regulated. And, you know, you go over 30, you go over 30 days late. On your payment with a depository lender, there's a human being making a decision on how to handle that. Whereas when you're with a debt fund and your loan has been securitized and sold off, when you're over 30 days, you're going to a different bucket and there's somebody else that's handling it.

Yeah.

So that's a different procedure.

Yeah. And, you know, so what happens when syndicated property goes back to the bank? You know, what happens as far as the sponsor is concerned? What are the, you know, the impacts on them and their ability to get financing in the future?

Lots to unpack. There's a ton of answers inside that one question. First and foremost, there's a— it's not just instantaneous where they take it back, it's done, you never see it again, right? In some states, that property does not go into receivership, and that— we'll call it the previous owner or the borrower— continues to operate the property. I'm actually doing a refinance for one of those right now where they foreclosed in February of '24, and it's not going to auction until January of '26, and just now came to me for a, uh, for a refinance. So You know, they've been running the property the whole time. So it's not necessarily, you know, a swift execution where the property is gone, you never see it again, and all of a sudden you just lose everything. Um, it's a, it's a process. To Mola's credit, she's absolutely right. It's a process. It's exhausting. It's long. Um, and, and everything comes down to the deficiency judgment. What the loss is once that property is actually sold. So so you've kind of got to you you run through it, and if it is like we'll talk a little bit about recourse versus non at some point I'm sure. You know from a from a recourse standpoint, that deficiency judgment is the the problem that you have to deal with. That's once they figure out what the loss is, that's what you have to deal with.

There's not so much the fact that you have the foreclosure, it's whether or not they get a deficiency judgment against the guarantors. And, uh, and that's what's going to follow them. Is, is my interpreting that correctly?

To some extent, yes, there, there is truth to that. To, to say that it's the foreclosure didn't— isn't a big deal, or it's not going to impact your borrowing capabilities going forward, it absolutely will. We're going to have to talk through your letter of explanation and really get granular on what happened, how you conducted yourself, and then in the end, what the loss was. If it's a scenario where you just buried your head in the sand, didn't communicate, you kind of went dark on them and just didn't say a word. Lender took a huge hit, lost a couple of millions, a couple million dollars. That is materially different than the borrower that rolled their sleeves up, communicated day one, stayed in there fighting, actually put their own money to try and save the deal. Now we're writing a different narrative to future lenders. I will say that if, if you— if a property went back to, say, Fannie Mae, you're probably not going to go back to Fannie Mae and get another loan. If forever?

Forever, or is that going to be kind of expire in some period of time?

That's where we're going to get into the detail. Not the first few years, without question. First few years is we're going to come up with a different strategy for you to buy property. But we can, and that's the beauty of the LLC and all that good stuff. But, but without, without a doubt, the first few years you're not a Fannie borrower if that property went back to Fannie Mae. But there's other alternatives for you. There's other lenders that are more focused on the asset and will listen to the story. And that's where we're going to peel back the layers and talk to them about what happened.

One of the things you said, though, you said, you know, hey, if the sponsor puts some money back in the deal, I think you've got to be cautious about that because I've seen sponsors that have done that and they start feeding deals, but they don't communicate that to your investors. Make sure that you are communicating that to your investors as soon as it starts happening. Because, you know, the alternative is you go to them for a capital call, so they put up the money, or you can loan some money. But then if you have, you know, the way that most operating agreements are written is that whoever loans money gets paid first when the property actually, you know, sells. So if there is some equity, you could be putting yourself in a position ahead of your investors, and they might not like that, but they may willingly go along with it if you talk to them about it in advance. So just, you know, make sure you're always communicating with investors. But I think you mentioned, you know, like how quickly— so if— let me kind of reframe this. What are the first steps from a lender standpoint that a sponsor or guarantor should do once they realize that a property is headed towards a default?

One of the first things you need to understand is getting clarity on where the deal is and what happened. What's actually going on in this scenario? Because any communication that you have with your lender is going to require a clear picture on timing and what the ask is. When you, you know, I think we're all in agreement and everybody kind of, everybody realizes That you shouldn't just run from the lender and not communicate. They want to communicate. That's I think that's a general consensus, and everybody accepts that. But the reality is you have to do that successfully. You have to let them know here's where we are, here's what happened, and here's the plan forward and why. You know, if not, you're just standing there exposing yourself as not going, not knowing what's going on, and possibly not putting any effort into fixing it. So. Not that, not that anybody would do that, but you don't want to even give that optic. You want to be able to have— present a clear understanding of what your operations are, where the money's going, why it's losing money, what you're doing to save it, and what the ask of that lender is. I've had, I've had a lot of conversations with it where, where the borrowers are having issues operationally in their property because obviously there's kind of a There's there's signs that show what's going on, and you can kind of get a handle on where it is. It's like a big jar of water, right? And you just see it. You see those funds moving downward like we talked about earlier. You you might miss your projections. Well, then you start missing your preferred. Then it just keeps going down from there. Maybe you're not you're not making your your certain bills, and they get behind, and then you're not making your mortgage payment, and that's when it starts to hit. So. Understanding that is definitely step one. That way you can communicate effectively with the lender and build a path forward.

So, and I would argue that you have to do the same thing with your investors, and it's really largely the same presentation. You know, think of it like, you know, when you put together your first property package or investment summary to get investors to invest in that deal, you really kind of have to redo it. And talk about it from a here's where we're at standpoint. Here's what we projected. Here's, here's what happened. Here's where we're at. Here's our path forward, if there is one. So that goes back to one of the— you said, you know, what's your ask? Well, what is it? What's reasonable to ask a lender to do?

It depends on what the path forward is going to be. If you're in a, if you're in a temporary dip, a temporary cash flow dip, maybe like you just mentioned, rents, maybe there's some major CapEx that hits you, maybe you are— you need additional time to be able to refinance out, or you're under contract and your buyers— there's so many scenarios that decides what the ask is. So if it's an extension of an interest-only period, Hey, we got 36 months of interest only, and the way the cash flow is in the property right now, if we start to amortize this loan down, it's going to crush us. Well, can we have an extension for our interest-only period? And then from there, maybe we, you know, you come up, come up with another way to protect your exit. Because if you're not amortizing the loan and you're really, really close to your maturity, your lender's concerned about how you're going to pay that off. So maybe there's a one-time reserve that you put up for, to protect your exit or something like that. But understanding what the problem is and how you got there, that's gonna decide what the ask is. Maybe it's more time, maybe it's additional IO, maybe it's a moratorium on payments, which is not that common, but, you know, you move payments to the back end. All those types of things.

Okay. Yeah, because I think that's a big thing is that, you know, of course, we're— whenever we're in trouble, we all want to stick our head in the sand, not deal with it until it becomes a big, you know, forced issue. But, you know, you're— I think both of us are saying from an investor standpoint, from a lender standpoint, don't do that. You know, pull up your, you know, big boy pants and say, take a big gulp and go, okay, got some bad news. Let's talk about this. What, you know, here's what we think we can do. Let's, let's try to, to move forward here and see how we can keep this going. That's a win-win for you and for us.

Great point.

It's— sorry.

I think you mentioned something earlier, and I kind of caught out of the— and I want to make sure that we expand on it. I think you said that sometimes the lender will even leave the asset manager in place rather than them trying to put in their own people after the first Foreclosure. Did I hear that correctly, or what have you seen?

Yes, it depends on the state. Sometimes the lenders— sometimes a lender is not going to bring in a receiver and take over operations. That's the case in New York. You know, the borrower, they filed foreclosure in February of '24 and they've been running the property ever since.

Now, they may— they may be very strict about what you can earn to do that. You might be working for free, right?

Or Well, yeah, yeah. I mean, there's this— there's no— there's not a real pretty, attractive, profitable scenario right here, but it's more survival. And, and, you know, allowing a receiver to come in and run that property is— that, that puts you in a much worse position because you don't know what they're going to do with it. They're going to sell it for whatever they can, and now you've got a larger deficiency judgment to deal with. relative to you being in there trying to make the most out of that net operating income and get as much as you can for the property or potentially refi and, you know, cure the default that way.

Yeah. At that point, you're really trying to save your investors if it's even possible and to save your reputation with the lender. I mean, I'm— so I think we talked about this a little bit in the pre-interview that if, if somebody is in trouble on a loan and they're super cooperative with the lender, then that's going to be viewed a lot differently. Uh, by future lenders, uh, than somebody who's just, you know, not dealing with it, letting the bank go through the whole legal process, fighting along the way and not, uh, not cooperating. Uh, is that, is that your sense?

You are, you are 100% correct. And, and it has, it also has a lot to do with the human component of your attorneys, the type of lender you deal with. I mean, everybody's that Everybody has their own personal spin on how they conduct their business, you know, and, and some counsel, they, they want to open up and they want to talk and they want to work through things. Other counsels like to use force and go in really strong. And I'm sure you've dealt with other attorneys that just are very, very challenging to work with. And it's, it's their way or the highway. And they almost take things personally. You know, that, that can just make matters worse at times. So, so there's, there's that component is, is building your team of like-minded individuals and understanding what the win looks like, winning the war, not the battle, you know, getting out and surviving.

Yeah, there are definitely different types of attorneys that you may need at certain, you know, in certain types of disputes. I mean, there are times when you want the hammer, right? And you want the big guy to come in and the, you know, you want to know the baddest attorney then in the area that nobody wants to work with. So they just want to get rid of the case and go away or Drop the case, right? But there's other times when you need those people that are really more mediation-focused and trying to come up with a resolution. Just, you know, on the side, I used to do homeowner association litigation, and we, we had a saying that if everybody walks away from a mediation equally pissed off, it was successful.

There you go. There you go. As long as nobody's happy.

Yeah, so nobody's happy, but that's probably the just result. That's funny. I heard somebody else say something the other day and I thought it really resonated well with me. And they said, you know, if you want to build trust with your investors, deliver bad news, but deliver it early, you know, because I've seen other people that, you know, do stick their head in the sand and they don't deliver the news until a year after it started happening. And it's like, well, why didn't you tell your investors about that now? Now it's critical mass. They're about to lose money. And if they'd known that a year ago, they would have seen all the things you did to fight and to, to help. And now you're telling them after the fact, and they're, they're just mad that you didn't tell them earlier. So, uh, you know, don't, don't let these things fester, because that, that's the stuff that breeds, um, investor distrust and probably lender distrust too, and also potentially leads to a worse outcome for the operator because, you know, you got lenders, you got investors that are pissed off, they're going to sue. Um, you know, you got a lender that's going to take the heavy hand because you didn't keep them involved in the loop and you didn't give them an opportunity to, you know, maybe work it out because they don't want to take these properties back, right? I mean, that isn't a giant hassle for them.

Yes, that is not their goal. I mean, there are predatory lenders out there. There's There's, you know, the whole lend-to-own component that is a concern, but I don't know, that's not the norm. Yeah, they are out there. And, and I think getting back to that, that level of transparency, folks that stick their head in the sand or don't want to communicate, I don't necessarily automatically default to them being bad people or bad operators. A lot of times they don't know a path out. They don't have the path out. So at a minimum, saying we are addressing it, we're working on it, we're going to figure this out, we've got 3 options, and this is what we're contemplating right now— that would be better than going silent. Best case scenario is you talk to them, you say, this is the problem, this is a solution, we got this. Um, that's not always available. So—

Well, and this is why I always say talk to your investors early, because a lot of your investors are Smart business people. I mean, that's how they got the money they could invest with you in the first place. And they may have some ideas. They may have been in certain, you know, similar situations in the past, and they may think of something that you haven't considered or, or maybe have some solution that you haven't considered. And you've gotta give them a voice. You don't necessarily have to let them dictate what you do, but you do want to hear what they have to say and any suggestions they might have. And just feeling heard. Along the way can go a long way to breeding more trust with you and, and, you know, their confidence that you actually are fighting for them and you're doing everything you can to protect their investment. There's, you know, at some point there was nothing that you could be— that you could do.

That's golden. That's a— that's— that piece of advice right there is a game changer.

Yeah. Yep, keep, keep your investors informed. Um, all right, so, you know, we talked about kind of writing in a letter of, you know, hey, here's, here's the story of what happened. This is very much the same way that when somebody comes to us and says, hey, I had this thing in my past, should I be, um, you know, disclosing this to investors? And of course, usually the answer is yes, because if it's something they could find out about you or your past, for instance, You've had a foreclosure in your past, you need to tell your new investors about that. Or if you now are raising capital and you've got other properties that are in jeopardy, you really need to inform the investors about that. Because if they find out about it later and they feel like you concealed it, then they're going to accuse you of fraud and they're going to lose all their trust. But if you tell them about it now and they say, okay, I get it, you know, I understand that, that set of circumstances, I've seen other people in that position. But this, you know, I see where you've learned and you're, you're moving forward. They, you know, they may still make the decision, okay, I'll go ahead and invest, and then they do it knowingly with all the material facts. There's no securities violation. So we do the same thing. We say, write a letter of explanation. What happened? What did you learn from it? What, you know, what did you do to try to stop it? And, you know, what ultimately ended up happening? And let the investors read it for themselves and they decide, you know, do I want to take a risk with this person or is this just something I don't want to deal with?

That makes sense. It's, it's, again, it goes back to your investors and your lender. They're, they're both in, they're both investors in the deal. They just have different risk tolerances, different risk positions, and different return expectations. But they're both investors. So you're right, the explanations are very similar. And it seems like, you know, good people can do bad deals. And it— in today's social media world, everybody gets villainized if a deal goes south. The reality is that there are some bad actors with, with bad intent, obviously, but there are good people that did bad deals in a declining market that was not projected. So You know, there's, there's that component there.

Yeah.

And, and, you know, we've heard some of the news stories and, you know, recently where some really big players, you know, millions, hundreds of millions of dollars have defaulted on loans. And, you know, they were, you know, good players, probably all were good deals and good times. And then times went bad and the deals turned bad. You know, certainly they didn't plan for that or weren't I wasn't counting on it when they were doing those deals.

Right.

Yeah, it's, it's tough. Um, all right, so what is the— so, so, well, let me, let me kind of go one more place. I, I imagine that there's some people listening to this call right now that are saying, well, you know, I just want to— I don't want to take the risk with lenders. I just want to do all cash deals, and that way we never have that risk. You know what my response to them is usually that you can't, you need the leverage. Your lender is your cheapest investor. And so, yes, you want to get some money from a lender, but they can mitigate risk by keeping their loan-to-value ratios at, you know, 65%, 70%, right?

That 65% is a benchmark. I mean, most of your institutions They moderate their risk at that 65% level as well. So that 65/35 is a real conservative sweet spot to keep things, to keep things in line. You know, it varies depending on the type of deal you're doing. But if you're buying stabilized assets, that 65% is a real benchmark. Yes.

Yeah. And what that allows is that you can have a 35% dip in prices and you could still refinance out of that loan if you had to. Potentially, you know, maybe you have to bring a little bit more money to the deal, but you're not underwater. And, you know, how do you— you can't get out of the underwater situation sometimes if it's too far, too far underwater, but you might be able to, uh, you know, put $1 million or something, you know, some more money to the deal and still get a refi if you need to.

Yeah, your initial analysis is usually going to include a break-even analysis, sensitivity report of, hey, if my rents are here and occupancy drops to this, we can still make our mortgage payment or we still make our preferred return if we see an occupancy like— and you run those sensitivity analysis so you can kind of see the what-ifs, the good, the bad, and the ugly going forward.

Yeah, I think this is all really sage advice. All right. So let's talk a little bit about the carve-outs because when People are in these distressed loans, it's easy to think you're making the right decision, but maybe doing something that all of a sudden makes— activates these bad boy carve-outs. So let's preface that by when you sign a loan agreement on a commercial loan, there's going to be several pages, and it seems like an ever-increasing list of things that could happen that would all of a sudden make a non-recourse loan where, you know, somebody's not personally on the hook for any deficiencies, uh, turn into a recourse loan. Those are called bad boy carve-outs. Um, let's talk about some of those things and, um, you know, what that means from your perspective.

Yeah, yeah, absolutely. Um, so I mean, obviously everybody loves the non-recourse component on a surface level. No personal guarantee. I don't even exist. I can just, I can just buy whatever I want to, and if I don't make the payment, they take the property back, but I'm going to keep all the money, and this is is the best thing ever. Well, the reality is that there is a level of obligation, um, that these— the guarantors— because that's something too, and I, I can— I know this is your arena, but everybody needs to really understand the difference between a borrower and a guarantor and a managing member versus a member of this Borrower and that type of thing. That's everything when it comes into these these documents because you're going to read language about borrower guarantors. I mean, borrower recourse, but then you have to define guarantor recourse, and that's really what we're drilling down to here is the actual guarantor that's signing on the loan—not the borrower, not the company you formed to own it—but you as a guarantor, and. Essentially, these lenders want to protect themselves and they pay attorneys a lot of money to make sure that they are— the documents are weighted in their favor to say, if you, if you conduct yourself inappropriately by embezzling money, by dumping toxic waste in your retention pond, you know, somebody slipped you $50 grand because they didn't know what to do with this stuff. And then you have 3-eyed fish. You know, there is an issue there. They're going to— they can come after you personally for that. That's one layer of these carve-outs or these exclusions to the non-recourse guarantee. There's another layer that's operational that is, you know, you may not even know it's happening. It can be part of— if you're not running the accounting or watching, managing the accounting, And you miss it, you miss a payment on your insurance and it lapses, or you don't renew it and you're a month behind, that can trigger a carve-out. If you didn't keep up with— I sound like Jeff Foxworthy, right? You might have a recourse loan if, if you don't monitor your registered agent and your property taxes get sent to an old address. And they don't get paid, you might have a recourse loan, right? We just did a whole new segment. This is great. We have to do this. But those types of operational things are things that you really have a responsibility to monitor because you can't— if you can't file bankruptcy just to protect yourself against the lender, right? Voluntary bankruptcy without lender approval, which is kind of comical, but That's going to trigger a recourse guarantee in most cases.

Bankruptcy of the company, so a bankruptcy of the borrower.

Right, right. So you just do it to halt proceedings. You know, and I've seen it happen. I've done refis for clients that they, they, they knew that they knew the risks. They had to do it because they were within hours of getting this foreclosure filed. They filed it and then that then, then the lender started working with them and we ended up refinancing out. But But being aware of those things is, is really, really important because there is a scenario where they can come after you personally. There are scenarios where that can happen. And another area where that's forgotten, I think, is when you are looking for someone to come in and sign on your loan and add strength to the team. Because when you're doing these negotiations, it's in the beginning of the deal. You haven't bought it yet. All you've done is put projections together, and everybody loves everybody. Everybody's so excited. You're on social media saying congratulations, you got a PSA accepted. PSA accepted is just that's like pregame stuff. Congratulations, you just closed on your deal. Day one, right? It's pregame stuff. So this is where it matters. This is like the prenup of the the the. Of the deal. And so planning for this just-in-case scenario, you think it doesn't matter. Oh, I'll never do that. But, but, you know, somebody like yourself that would come in and negotiate these terms, you're going to focus on taking a note of something like, like they're going to have language in their documents that say any breach of contract or any breach of covenants. And you might come in and say, well, let's call that an intentional breach of covenants rather than any breach.

Well, let's, let's talk about, you know, contractor liens, right? If you're not paying attention to getting lien releases every time you make a payment to a contractor so that they're, you know, paying their people and you're not on the hook for that, you, you could trigger it that way. You know, or if your property manager steals money from you and doesn't send you the Payments, you let them be in control of collecting the payments and they divert the funds. You're on the hook for that. You're supposed to supervise. You have an obligation to supervise, and you know, so you really, you know, you're not just taking on risks to your investors. You're also taking on risks to the lender into making sure that the project is competently run. You're not letting people on your team, whether it's property manager or even the people in charge of your investor bank account, who are. you know, embezzling funds, you know, any illegal act. And that's true also of, you know, liability protection. You know, the entities that we use to create this layer of protection between your personal assets and this particular deal, there is no limited liability for any illegal act. So anyone inside your asset management team does something illegal or grossly negligent, your entire asset management team is going to be held personally You know, jointly and severally liable, when that means that whoever has the money pays, you know, and it could be, you know, one person with all the money, and that could be the loan guarantor, and they end up paying for the whole group. So it means any one of you could be liable for the entire loss, you know, and if everybody coughs up their share, then sure, it's joint liability, but that's not usually what happens. So you've got to be careful if, you know, you are in a guarantor position, make sure you understand the team, but make sure you also stay involved. Because I do know that there are some guarantors out there that will put their resume and sign on the loan docs, and then they're out of the picture, you know, and they're not staying engaged. They're not helping make sure that their assets are protected, and they could be putting themselves at risk by taking on that more passive role as well.

It's easy to do. It's easy to do, especially when you get a number of properties and they're— especially when they're going well. You know, you're looking at these things like, hey, this is great. It's easy to slip up. And I mean, a quarter in our business, 3 months in our business is just a blip on the radar. But a deal can fall dramatically in 3 months, but it takes a lot longer to get it back and right the ship. It's, it's, it's something you can't— you really have to monitor it, no doubt.

Yeah. And you can turn, you know, these, these bad luck stories into hero stories. You know, there's people that do it, you know, by trying to make it right with, with certainly with investors. You know, you can give them participation in future deals, some of your share of participation. You know, there's people, you know, maybe it takes you 10 years to make it right with your investors, but eventually, if you at least get their Money back, then they're gonna be pretty forgiving. But if you make no effort or you just walk away, sorry, we can't do anything, you know, they may look at that differently. But sometimes that's all you can do, and there is nothing else that can be done. So, all right, let's talk about how people can get a hold of us, how people can get a hold of you, Eric. And then we've got a— I think we may have a couple of questions. Yeah, Eric, how can people reach you? You got a book out there. Where can they get that?

Yeah, the book is on Amazon. It's called Borrow Smart. It's, it's a very, very quick read. I mean, it's under 100 pages. It's a plane ride home from wherever you're going. I'm sure we can put up the link, which I can email to you guys if you want to pop that in there. The, the, you know, all your social channels on Facebook, we can put the link there. LinkedIn is another great one. And then, you know, this thing is one of my favorites, an actual text or a phone call. I love that stuff where we can actually call and talk through things like normal people do. So I'm happy to, if you guys want to put that up after we get everything wrapped up, that's certainly great too.

Is it, is socials Eric Stewart or is it under a different company or like what would people be searching up?

It's actually both. They can, they can find me under Atlantic Business Capital on Facebook. Eric Stewart is there as well. Most of my activity is done on my personal page, and that's where, you know, the branding is and all that. So it's, it's Eric Stewart. LinkedIn is Eric Stewart as well.

And it's E-R-I-C for anybody listening.

Yes. And then Stewart, S-T-E-W-A-R-T.

Yeah, that is correct. Something else that I do too when I do these, you know, when I do the, the video calls is I put my QR code there that if somebody does want to scan it, you know, they can either pause the screen or take a second and scan that, and all my contact information is right there. So that tends to make it easy for folks as well.

Anybody on live or on the replay video, There's a QR code up right now. You guys can grab that.

Oh, I don't see it.

Oh, it's in place of Eric's screen.

Oh, it's probably the view I have. All right, that's fine. All right. So, and then if you want to reach out to us, reach out to us at syndicationattorneys.com. While you're there, if you'd like to have a call with Krisha, she's amazing. She's our business development director. She's also a mindset coach. So if you're having trouble, you know, just getting your mind wrapped around something that you need to do, she might be able to help you work through that, whether it's, you know, I don't want to pick up the phone and talk to prospective investors, or hey, I gotta have, you know, some courage here to go talk to the bank and my investors about what's going on. I've seen her do some amazing work in that respect, but she's also our business development director, so she can tell you what products We offer that might be able to help you. We're happy to talk to you about potential workout situations. Eric, is that something that you can also talk to people about, or do you have someone that you could direct them to?

Absolutely. I'd love to connect with them on it and get into some detail on on what happened, why you are where you are, maybe some options on how to dig out of that. I mean, I also own property, so if I can share some tales from the road and. And a lot of times just being a sounding board for somebody, understanding where they are, where they can hear themselves tell you what's going on, they're going to come up with ideas as well. I mean, they've— or they've got an idea and they want it verified to know it's a good one or a bad one. Love that. Love having those conversations. That's full circle to our initial conversation about getting into the business, you know, and talking to folks. So.

Yeah. And then Eric also does some— he's a loan guarantor on certain projects. Of course, he's going to be vetting deals well. Here's something I'm seeing a big trend in, and it's very, very concerning to me. I'm seeing that there are not as many great deals out there, but there's a whole lot of people that are trying to raise capital that don't understand underwriting. And they don't understand either how to underwrite their own deals, or they don't understand they're doing a fund of funds. They're trying to invest in other people's deals, and they're not looking at those deals and doing the underwriting to make sure that those are really good deals. So my advice to our mastermind clients, we have a weekly mastermind. If anybody's interested in joining that, please schedule a call with Krisha at syndicationattorneys.com, K-R-I-S-H-A, or go to our website and schedule a free discovery call. She can tell you about that. But on our weekly masterminds, I've been advising people, if there's one skill set you need that will last you your entire career and you'll never regret getting it, it is learning how to underwrite deals. If you want to be in the capital raising business, you need to understand whether the deal is viable, whether it's a good deal, if all the information is there, you know, and whether or not just with the underwriting, you'll be able to tell whether the people you're thinking about investing with know what they're doing, or if they're omitting key facts that are going to come back and bite everybody in the end, including the investors you bring to their deals. So, you know, when you're doing a fund of funds, You're putting your reputation on the line because your investors are coming to you if the deal goes bad. And if you didn't do your underwriting, you were actually negligent. You could be on the hook for that. So make sure you learn those skills. We've got some great resources for that on our website at syndicationattorneys.com/trusted-vendors. Look for the trusted vendors page of our website. And it's broken down by categories. Look under the underwriting. There's Bob Bowman who has Commercial Underwriter. That's a subscription-based underwriting software program. And then there's Despard Analytics who is a done-for-you analyst company. So they'll go in and look at the deal. If you're thinking about passively investing or you're thinking about actively investing and you're, you know, you just want a second look at your underwriting or you want them to do it for you, Despard would be a really good choice for you. Not overly expensive. They've worked with some of our clients. I thought their rates were very reasonable for the amount of money that you're putting at stake. So do we have any questions, Krisha?

Yeah, we do. Excuse me. Sorry. So Cleve Clark actually has quite a few questions here. Excuse me. There's some questions here. Eric, are you able to see the Q&A? Um, there's 4 questions about Treasury. There's a question here about do they have to pay taxes on phantom income from a deficiency judgment, how to communicate with your investors.

Yeah, I think, um, let's, uh, Cleve, I would ask you to talk to Eric directly about your questions about the Treasury. I think that's a little bit, uh, you know, beyond what we have time to cover in the next 4 minutes, but what about this? Does somebody have to pay tax or phantom income from a deficiency judgment, Erik?

I guess the biggest question is, where's the income coming from if you get slapped with a deficiency judgment?

That's true. Well, or sometimes, yeah, I guess that's right. If the bank is— if you take cash for keys or something, then maybe you would. You would have to pay taxes on that for sure.

Yeah, it's going to— I mean, that would follow a similar, a similar path of credit card forgiveness or something like that. I mean, it's got the word tax in it. So my answer is going to have the word accountant in it and CPA in it.

Yeah, exactly.

Yeah.

Ask your CPA. That's a good question for them. If you're missing your projections because of an economic factor like job losses constricting income, That's outside of your control, what could be your plan for moving forward? Right.

A lot of times, just, that's more, that's more of an operational question, but I can, I'm happy to, you know, talk it through. Anytime there's economic or market conditions that you're seeing on the horizon, you may have to dial back your distributions and build up your capital reserves. In order to deal with that, in order to address those concerns if something happens. And then once that storm passes, you can always distribute later. But that's going to be the first line of defense is keep your coffers full. Don't be too aggressive to distribute capital just to get it out there and say you're distributing capital and then run your reserves so thin because you're just going to have to ask for it back. Or it's going to come out of your pocket, to Kim's point earlier. That's going to be one of the biggest things is stay well capitalized.

Yeah. Well, and that's true. If you— so when we write offerings, we write a minimum maximum deal. So the minimum is, this is the, you know, if I just raised this amount of money, I could close on the deal, probably leaving more of my own money in than I wanted to, not taking an acquisition fee, not getting reimbursed for the pre-closing expenses that the asset management team had to put up to get the deal closed. You know, those are all asset management team expenses, not investor expenses. The investors don't— their money doesn't come into play until you close on the deal. If you don't close, you have to give their money back without deduction. I don't think a lot of people— there's some people I don't think realize that that is, you know, you don't use investor money until you close. So, I think you've got to make sure that you hit those targets. So, you're going to have a minimum. If you close with the minimum, then you don't probably have enough to do your capital improvements, and those are going to stall until you raise enough money. So you're going to have some kind of a target, and then we are always going to give you a cushion beyond the target in case things cost more than you expect, or you discover new things you didn't know about once you get into the property. But it's always, always harder to raise the money once you close on the property, because now you know things about the property you have to disclose to all your new investors. And they might not be good things. So, you know, if you don't raise all the money to hit your target before you close, you're going to end up with the same property you just bought from the seller, and you can't do any better than they can on the performance. And if you let that persist or you take your foot off the gas and stop raising money, then you're going to— that deal is going to suffer all the way through. So ample reserves, to Eric's point, and then making sure that as soon as you realize that, hey, our target was low, We've got to raise more money. Get out there, get that money raised. You know, when we write the offerings, we give you up to a year to raise the money. So you've got to figure out, you know, within that year, okay, we closed on the property, we did these repairs. Hey, we need to raise another $200,000. Just reopen your offering, get it done, get it done. One question Cleve asked, and Cleve, thank you for your questions. These are great questions. Do you deliver bad news one-on-one with your investors? Or in more of a town hall community Zoom meeting, I would do a Zoom webinar like this where you get to control who speaks and you might turn off your chat so that you, you don't get a lot of chatter from investors going back and forth. And then you invite them afterwards to call you to have a more in-depth discussion one-on-one. So yes, it could become, you know, a real— You know, cluster if you try to open up forum for all of your investors to complain, because there could be some people that are trying to mutiny against you or just really angry, and you don't want them to flavor your message where you want to keep people kind of focused on track and helping look forward to a potential solution or to prepare for a potential loss. So that's, that's my advice. Anything else you want to say, Eric? We're like a minute over, but—

Well, just to the last 2 questions, you know, those reserves that we talked about, they were— they're largely defined by 2 things: the vintage of the asset, right? If you're buying a '70s asset, you really want to focus on that 5-year cycle because you raise a bunch of capital in the beginning, you improve the property, it Looks great, runs great, and then five years later it's ready to do again. Most of the time you're either going to refinance or sell at that point. So if you don't have, you've depleted all of those capex reserves. Now you've got an asset that needs help again, needs to be renovated, and it's going to come out of operations. So you're that's part of that plan. The second component is location because if you're in a coastal region or something like that, your insurance like in the last few years we've seen insurance. triple. Who's going to plan for that, right? Who's going to plan for insurance tripling?

Right.

You know, it— that's just going to eat into your operations. So it's, it's that, that really has to come into play and be considered. And then as far as communicating with investors, you're 100% correct. I love that town hall component. But remember, you brought them in in a one-on-one conversation, so you want to make yourself available. And, and, you know, if they call, don't avoid it. Talk to them directly and, and, and make sure that you are communicative. The same way that relationship started is what you want to maintain for bad news.

That's what I expect.

Absolutely. Yeah. Um, and, and you can also send something out in writing. You know, we help clients write letters to their investors explaining what the situation is, what, you know, what they're planning to do to remedy it. Uh, you know, when, when you— if you have to do a capital call, you got to tell a story. And you got to tell, you know, you've got to re-pitch the deal to these same investors. Why should you invest more money? Why it's not just good money going after bad. And, you know, what's our plan and how are we going to get through this? So, Eric, this is super informative. I'm glad we were able to slot you in.

Thank you.

Cleve asked one more question. Is there an asset manager playbook that you can proactively hedge against the possibility of a bad actor intentionally defrauding your company. Well, all of our clients are required to go through a bad actor and a background check. Anybody who wants to be named in the asset management team, we require it as a policy of our firm. And we're doing it for not just our protection, we're doing it for your protection. Because what we've learned is that since we started this policy, people will bow out than have problems. If they have pending litigation they didn't tell you about, or they've got some other bad in their past that would preclude them from being in the management, they're just going to say, oh yeah, I can't do this deal. I got something else going on. And they'll just bow out on their own. Those that are, you know, don't feel like they have anything in that background, they'll do the bad actor in the background check. And then you have that also for credibility you can use with your investors. Hey, we couldn't even do this deal until all of us went through this check. You're, you know, free to share those reports with them if you'd like. So, you know, there's ways ahead. Khalif says the 3 of you are terrific. Yay! We'll take a win for that. And thanks so much. We think you guys are pretty terrific too. Eric would love to hear from as many of you as, you know, have something relevant you want to talk to him about, and so would we. So thanks so much for coming and taking time out of your day.

Thank you.

And we hope you all have the best deals possible. Learn your underwriting, and that's going to keep you out of a lot of bad deals. And don't be afraid to say no, or not right now, you know, but also explore other asset classes. There's a whole other world of real estate investing out there besides multifamily. So we had an event called Go Beyond Multifamily. The website is still live, gobeyondmultifamily.org. If you want to, you know, in 2 days, a virtual event with over 50 speakers, and the— you can still buy all of those recordings and see it. It's all still relevant. $97, you know, so you should really consider doing that. gobeyondmultifamily.com. And we'll look forward to seeing you all on a future podcast. Right.

Thank you so much. Thanks, Kim. Thanks, Eric.

Thanks for having me.

Bye, Eric.

Bye. Bye.