Mortgage Trends in the Wake of Rising Interest Rates with Eric Stewart

Hold on a minute. Let me get this zoom up. I guess I should restart though. Good morning, everybody. Welcome to Syndication Attorneys Free monthly podcast where we talk about topics of interest to real estate syndicators with the opportunity for live questions and answers at the end of the call. I am attorney Kim Lisa Taylor. Before we get started, please note that all of our podcasts will be recorded and may be used for future promotion posted on our website or broadcast in a podcast available to the public. If you don't wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. If you want to ask questions during the live call, you can raise your hand. And we will let you ask your question live, or you can type a question in the Q&A, and then we'll just give your first name when we, when we read it out. Information discussed during this free podcast is of a general educational nature and should not be construed as legal advice. Today our topic is— okay, what is our topic today? It's mortgage trends in the wake of rising interest rates. So here we are in 2023, and we've seen a whole flurry of activity by the Feds. So we decided we would bring on an expert. Eric Stewart is the expert that we selected. We love Eric. We've known Eric, I don't know, probably 10 years, maybe, maybe longer.

Yeah.

For a very long time. Eric is like a magician when it comes to mortgages. And I just tell you this story firsthand, is that my husband and I syndicated a property one time, and it took us 2 years to get it refinanced. And Eric stuck with us for the whole entire time, and it was just a crazy story. And he finally found somebody who would finance it for us, right? Like when we were down to the wire, you know, like stressing out about it because we had a private loan on it, and we got it done. So as far as I'm concerned, he's a magician. He helped us get it done. I don't think anybody else would have stuck with us that long. So, you know, he's our go-to guy on mortgages, and he's been around the real estate investment circuit for a long time. Very, very much in tune with the kind of things that our clients are trying to do. So, Eric, tell us about yourself. You've heard my intro.

Yeah, thanks for the intro, Kim. I really appreciate that. Definitely. Thanks for having me on and letting me talk to your listeners. My name's Eric Stewart. My company is Atlantic Investment Capital. And, you know, I'm a mortgage broker, so I don't actually write the checks, but I've got a stable of lenders that do write the checks. And that allows me to serve, you know, individual investors that are looking for short-term debt, long-term debt, small loans, large balance loans, all different types of industries. It just gives me a lot more options than kind of being a one-trick pony with, you know, one bank, one credit union, or even one agency lender that may have one or 2 products. So it's been wonderful to connect with folks like you that also share and serve that same client base. And we've got that You know, back and forth, those open lines of communication where we're all here to help these clients succeed. You know, and that's been wonderful. I mean, I think you and I met, it had to have been around '08, maybe '09 even, something like that. So it's been a long time, a lot of deals funded, and it seems like no matter what the time was, what year it was, there was always something exciting to talk about. There was always some uniqueness to what's going on with interest rates, what's going on with property values. You can't find a deal, you can find a deal, what's hot, what's not. And that's always been what's created the opportunities, are the folks that, that had clarity for what they wanted and had clarity on how to get it, aligned their interest with the right industry professionals, and they were able to take advantage of the opportunities. And, and I don't think that's going to change going forward, especially not between now and the next couple of years. I don't think you're going to see it settle down.

Well, I know that we had a very slow kind of end of the year. December, things kind of cooled way down. January was a little bit light for us. I think everybody was kind of just reeling about like, what's going to happen? But now this month, you know, we're going gangbusters again. So people are finding deals again. People are, you know, managing to find deals that make sense. So maybe the sellers have started to kind of adjust their prices, or, you know, maybe other people have exited the marketplace. You know, competitors have exited the marketplace because they think it's a bad time or whatever. But our clients are finding deals and, and they're coming back into the game. So what do you see happening in the commercial marketplace in the wake of these rising interest rates?

Well, you know, there's— it's— funds are still available, right? Rates have increased. And we all know that prices have increased, cap rates have compressed, and a lot of borrowers look at the end result or the net loan amount as an indication that lenders don't want to lend, or they're interpreting that as something negative from the lender's side where they're not looking to get involved or there's a major concern with the market. The reality is lenders want to lend. You know, that they're, they're, they're using the same underwriting metrics that they always have. The difference is that it's with a higher interest rate. It's with right now, lately, much higher expenses, especially on insurance. And that same loan amount is, is, is, is in conjunction with a higher purchase price. So it results in lower leverage. So it's not as though lenders are saying, hey, we're not going to do more than 60% leverage. It just means the property won't cash flow for more than 60% leverage. So that standard underwriting that they're doing, they really haven't changed. It's just producing a lower loan amount. So what we've seen happen since then, to your point, is cap rates have risen. We have seen prices pull back a little bit and that we started to see that kind of the Middle to Q3 of last year. If if if we did, we did see a dip actually, which you were you were talking about. Say Q4 of last year, we did see rates pull back a little bit, and in you know the true spirit of volatility here, they have recently jumped back up. Right? We've got the 10-year Treasury that's now above 4%. We've got you know SOFR in the or we got a 2-year Treasury in the high fours. We've got SOFR that's running higher than high as it has been in the high 4s, and most impactful to our multifamily rates and the long-term perm debt, that 10-year Treasury note, when it, it broke that 4% barrier again. So we're sitting at like just over 4%, and that is what in the short term is going to create some turmoil. You know, folks that have already been under app, and they're moving through their loan process. They haven't locked their interest rate and they're going to have to deal with those changes during the process. And I know you see a lot of that because that's when you get involved, right? So that's right now. That's what we're working through, are, you know, giving yourself enough— when you structure these loans, you give yourself enough of a buffer in the interest rate. You don't underwrite the current market rates. you bump that up a little bit so that you have some flexibility as you go through processing.

So what kind of interest rates is this translating into for our clients?

Well, great question, and it's a moving target. I— but I like to, I like to focus on that foundation. I mentioned it earlier. The 10-year Treasury yield is a really, really solid gauge to keep, to keep an eye on, because as that increases, that is what your interest rate is based on. Now, again, I'm using, I'm using an agency permanent loan, let's say a 10-year loan or a 12-year loan, something like that as an industry standard because there's so many different loan types, so many different lenders that we can, we could talk about that in a whole nother podcast. But for just to standardize the 10-year Treasury yield, which is right around 4% right now, is a good industry standard base. I like to plan on 2% above that.

2%?

Yeah, 200 basis points above that. Now, that's very general. There are certain loan terms and certain loan characteristics that could put you at 215 basis points or 2.15% over. There's also some scenarios that can put you at 1.75% over. So There is a range there, but focusing on the one in the middle and just kind of standardizing it, I like to say 2% over the 10-year Treasury.

So if I'm understanding this correctly, then it sounds like if the 10-year Treasury is at 4%, then we're looking at interest rates of 6% for these commercial loans. Okay, so that's not so bad. I mean, you know, I think that people were imagining that it's like 7% to 9% or something like that, but it sounds like that's not the case.

Not right now. And if you're looking at today's rates, again, that's what we have to give ourselves a little bit of a buffer. So if you're underwriting your deal and you're planning on closing in 60 days, which is a standard timeline, then I would really ask you to dial in 6.25%, 6.35%, something like that, because we're going to see some more economic— we're going to see another Fed meeting here mid-month. Realistically, market sentiment comes out based on the Fed's minutes more so than what they do because they've already priced in the 2 more quarter-point increases and they're looking at what they're going to say, or the market looks at more they're going to say. more about what they say than what they actually do. But I think it would be wise to plan on higher rates at least through mid of this— middle of this year.

Okay. Well, and, and, but that's still reasonable. You know, I think that those deals are still doable for— so for the listeners, if you're underwriting your deal, then you want to put in, you know, maybe that 6.25% just to be conservative. As far as what your interest rate is going to be on that deal. Now, are we still seeing the same terms? Like, you know, are we seeing, you know, options for 5, 7, 10-year maturity rates on these loans?

You know, it's a great question. And those, those terms are available. They haven't, they haven't restricted the availability of them. But what I'm seeing most clients do is modify their, modify their loans Based on current market conditions, and to your point on that five-year deal, some clients are taking the the they're taking the strategy of doing a five-year term and then refinancing once that term once that loan matures, thinking there's going to be a lower interest rate. Right? I would what I would ask them to do is look at the the premium that they're going to pay because right now. we have what's called an inverted yield curve, meaning the yield on the 10-year Treasury is lower than the yield on the 2-year Treasury or even the 5-year. So you're going to pay a higher interest rate for that 5-year fixed period than you are for a 10-year fixed period. I saw one the other day. It was almost 7% for a 5-year deal where You know, you could save 100 basis points to take a 10-year term and fix it for 10 years. But it's—

But with those 10-year terms, there could be a prepayment penalty, right?

You're absolutely right. And that's, that's the, that's the nuance. You look at the, you look at the prepayment penalty and we have the ability to, to pay a little bit higher interest rate but get a softer prepayment penalty. So we're going to, we're going to compare the difference between just doing a 5-year term and paying a premium for that relative to a 10-year term and pay a premium for a softer prepayment penalty and see which one benefits us the most.

Well, and then are there 7-year terms available?

There are, yes. Right. That may be a pop somewhere in the middle.

Right. So maybe you paid less for 7 than 5 and Right. And it's also a trade-off of, you know, you're gambling that in 5 years there's going to be better interest rates, which may or may not be the case. You know, what if they're worse? You know, then you're forced to refinance in the shorter term.

You're exactly right. There is a— it's an educated guess. I try to keep my opinions out of it, and I try to follow the money. And I look in the industry about who is betting the most on future interest rates. And there's 2 players in the industry that have the most to lose based on short-term future interest rates, and that's bridge lenders and rate cap providers. Rate cap providers, they price their cost of their caps Based on where they feel rates are going. And they look at the forward curve charts. Bridge lenders, they have maturities that are coming up in 2 to 3 years. I mean, that's a short fuse on those firecrackers, right?

Right.

So I look at where they underwrite their exits, which is historically it's been around 5.5 to 5.75. I can almost assure you they're going to bump those up now based on the last couple, well, 2 weeks that we've had rate increases. But looking at what those— the rate cap providers are doing, I really— those guys, they price based on future rates. And so rather than try and reinvent the wheel, I go in and look at what they do. So.

Okay. So are people still looking at— okay, so the rates we're talking about, these are Fannie, Freddie, CMBS, or is it across the board kind of the same?

For— if we're focused on the multifamily industry, then Fannie Mae and Freddie Mac are really the— they're the go-to lenders. You know, they're the ones that are going to get— they're going to offer you the lowest rates, the best certainty of execution. And if once we get into self-storage and some of the other commercial components, that's where CMBS really comes in and You know, they're the ones that can make it happen. The rates that I've been talking about are Fannie Mae and Freddie Mac. That's— if when we get into the CMBS market, you're going to see a little bit higher rate. They're probably in the mid to high 6s and they're looking at 10-year terms.

Can you explain to us what a rate cap provider is?

Oh, absolutely. Yeah. You're most likely going to see these rate caps and rate deal with rate cap providers on your bridge debt. And it's a— when you are taking out, let's say, a 3-year bridge loan, a lot of times that lender only, only offers variable interest rates. Well, if you get into a scenario where that rate can— has no cap on it, you could get into a situation where you can't make your mortgage payment. The cash flow from the asset doesn't service the debt anymore. So what they do and what you can do is buy a rate cap. It's almost like an insurance policy, and it says that if your interest rate goes up above a certain point, then this company will reimburse you for any amount, any mortgage payment above that rate. And it's really a nice tool to have, and it was reasonably priced as of 2 years ago. But once the expectation of rate increases started to kick in, then those rate caps started to— they got really, really expensive. And they actually pulled back Q4 of last year. Rate caps were pulling back because they the expectation of rate increases wasn't as great. And I have a feeling over the last 2 weeks they're starting to price back up again.

Okay. So, yeah, it's always a trade-off, right? What do we want to pay upfront for this insurance policy versus do we want to take the risk and not get that insurance?

You know, Kim, I have to say, it's really an insightful thing that you bring up there. Um, because I, I've looked at that scenario and I've been in that scenario with clients where we're just comparing, comparing notes on it. And almost, almost always, 9 times out of 10, my recommendation is to pay a slight premium for a fixed rate loan rather than come out of pocket for a couple hundred grand at closing and then hope— I mean, you just bet $200,000 that your rate's going to go Right. So why not just pay a little bit more in the interest rate, sleep at night, you know where your rate's going to be, it's not going to change, and then you don't have to buy the rate cap. I really feel like that's a more conservative play and you offer your investors a much more conservative structure.

Yeah, I like that. I mean, certainly that's a tool that's sometimes used. Um, but, uh, yeah, if the fixed rates are available for a comparable premium, then yeah, you have to look at that, I would, I would imagine. Okay, so, um, so I guess you have a lot of clients that are thinking buy now, refinance later?

Yes, that's, that was the thought. I mean, it was, it's a common, it's, it's, I don't necessarily agree with the structure, but it is common. I talk to a lot of folks that consider just doing shorter-term loans now so that they can refinance later. What I ask them to consider though is the premium they're going to pay for that rate. When they do that 5-year term, they're going to pay a premium for it. They're going to pay higher interest rates. So they have to look at the overall yield for their investment. And then something that's not really quantifiable is the interest rate risk or the refinance risk that they're subject to. So anybody that plans on a short-term maturity and then a refinance, I ask them to really look at that specific deal. Look at the merits of your rent lift, how you're going to force appreciation, make sure you protect your exit, obviously by not overleveraging, but also not putting together a business plan that's this artistic operational lift rather than just market rents. You know, like on my bridge loans, I say throw money at the problem, keep it simple. If you— when you get into, well, rates have been rising, rents have been rising by X, and this company's coming in and job growth is great, so I'm really comfortable we're going to be able to refi out, I get concerned about that. If you come in and say, I'm going to improve units, I got $500,000 in the bank, That makes me more comfortable.

So just in case anybody's just new, you know, really new to this and you don't understand what a maturity date is, can you explain that, Eric?

Yeah, absolutely. When we talk about a loan term, the loan term is the length of time that that loan is outstanding. Well, at the end of the term, that loan matures. That means it needs to be paid off. And sometimes if you— if it's— if the loan is amortized, meaning the payments are spread out over the full term, they call it fully amortized. So like on your home mortgage, you usually have a 30-year term and a 30-year amortization. Well, on these commercial deals, the term is usually shorter than the amortization. So we're going to— we're going to spread the payments out over 30 years. To give you a lower payment, but it's probably going to be due and have to get paid off or mature in 10 years, 5 years, 15 years, something like that. So that's where that term balloon comes in. It's a lump sum payment that needs to be paid off.

Yeah. And I'd just like to point out that when I started as a securities attorney in 2008, you know, the financial crisis was shortly thereafter and there were a lot of people that had really short short-term maturity dates on their debt at that point that got left holding the bag when all of a sudden the values dropped, right? The value of their property dropped. So they were at a point where they couldn't refinance because their property wasn't worth the loan amount that they had on it. And so those were the people that ended up losing their commercial properties to foreclosure or short sale. Am I correct on that, Eric? Is that an apt description?

It is. It is. And it was a different lending environment. It was a lot more aggressive, um, sometimes irresponsible, uh, short, short-sighted. There, because of that and that debacle, regulations have been put in place to help prevent that. And, you know, one of the biggest things is the level of recourse that these lenders have on the notes they originate now. You know, that wasn't in place. The accountability wasn't there way back then.

Or yeah, somebody who got a bridge loan 2 or 3 years ago that's now coming due could actually be in that situation now, right?

It is possible.

Well, I guess, I guess they don't necessarily— it's not that the property value has dropped, but now they have to actually refinance at an interest rate that's higher than maybe the bridge debt was, or that maybe was available to them. Previously.

You're exactly right. And, and that comes— it's— there's a lot of components that go into that. Um, number one, and it all starts with their— and you're very familiar with this— the projections, right? When they dial in these short-term notes, you know, there, there's, there's folks that, that may have pitched a value-add deal as though it is a, a stabilized momentum play and just a cash-flowing deal, right? When in fact this short-term note means you've got to have a distinct value-add plan. You've got to throw money at the asset. You've got to make sure that when you assess your exit, you use a higher interest rate than where rates were at the time. And that has a lot to do with being able to refi out, is projecting your terms. as much as the value, because the lender's going to protect them. The lender's going to do a 2-valuation approach. They're going to look at as-is value, and then they're going to look at as-stabilized value or as-completed. And a common metric from bridge lenders is that not only are they going to base your loan amount on your total cost, meaning purchase price plus improvements, but in the fine print on your term sheet, They're going to say proceeds not to exceed 65%, 70%, maybe 75% of stabilized valuation. So they're going to protect themselves on a leverage— by a leverage-based approach, saying no more than 70% of stabilized value. They're also going to run exit tests and look at the NOI, projected NOI in year 2 or year 3. And bump that rate up and make sure you can cash flow that deal.

So I know I'm running, like, completely deviating from the prepared list of questions that we have. I'm just kind of chasing these rabbit holes because I think these are things that people want to know. I guess people want to do these bridge debt Because— or we have to do bridge debt sometimes because they don't have the right occupancy rate. Is that kind of the driving factor? You know, you're trying to get into a deal that doesn't have 85% occupancy, or is there more to it than that?

There's— that's, that's a huge component. That is a primary driver of why you do bridge loans, just because it won't, won't qualify for permanent debt right now. Another, another reason is That a bridge loan will include, and they'll lend on renovations. We've got some lenders that'll do 80% of your purchase price and then 100% of your renovation cost.

Nice.

It really is. But again, we've got to look at that exit value because now we're levering up based on improvements and we don't want to over-leverage going in and not be able to refi on the way out or not be able to refi the whole unpaid balance on the way out. So, so you're, you're right, occupancy is a big one. Cash flow is another one because there's— coming off of the, the, the pandemic issues, we've been dealing with squatters and all these tenants where you've got your physical occupancy, but your collection loss is through the roof. So there's, there's also, you know, there's also those issues because the, the relief programs have worn— most of them have worn off now. And we're trying to wean these tenants back on supporting themselves. So there's a few other concerns in addition to occupancy, but you're right, that's a, that's a huge one.

Well, and I've had some clients that, you know, are just very sensitive about what states they'll actually invest in because of, you know, whether or not those states are landlord-friendly or tenant-friendly, you know, what, you know, whether or not they're going to be able to sustain their occupancy, their collected Occupancy, right?

Yeah, you're right.

Okay, so, so bridge debt. What kind of terms do we see on bridge debt? Is it, you know, just 2 or 3 years and that's it? Or are there like 3 years with, you know, 1 or 2-year extensions? What's, what's available?

That— and I'm glad you mentioned that here. And here's, here's why. Well, first, let me answer your question. The answer to your question is yes. Bridge loans are usually anywhere from 1 year to 3 years. Once you get above that 3-year mark, you're kind of mini perm to perm, 3 to 5 years and greater. So 1 to 3 years, that's your, that's your core term. That's when you're expected to, to make your improvements, stabilize the asset, and then refinance out. If that doesn't happen, let's say something crazy would happen in the world like a pandemic or something ridiculous like that, and you're not able to refinance out of that deal, then they're off. Then they offer you extension periods. There's usually a 1% extension fee or maybe a half a percent extension fee, and usually they're a year. So it's like 1% for 12 months, and then it's kind of like the doctor— if you can't pay your bill, they'll give you another 6 months. Well, um, there's usually 2 extensions, so they refer to that as a 3-1-1.

Okay.

And what I've seen, what I've seen investors do is consider that a 5-year term and they plan on going into those extension periods. And I caution against that because those extension periods are not part of the initial term. They're not part of the initial plan. Those extension periods are just there in case you need them. And what happens is lenders will incentivize you To refinance, meaning those, those extension periods may not be the same interest rate as your 1 to 3 year term, or they may start to amortize the loan because those bridge loans are one— they're 1 to 3 years interest only. They're only collecting interest. They want you to increase the value of the property, force the appreciation to protect your exit and increase the income. to protect your exit rather than pay the loan down to protect your exit. But if you're in a scenario where, hey, we weren't able to hit in 3 years, we need to use this extension, the lender's most likely going to say, we'll give you the extension, but we got to start paying this loan balance down because we're getting nervous about this now. So those extensions are not as attractive as your initial 1 to 3 years.

Well, and, and some of them, don't they also make you start providing you know, some metrics on your property, and if it doesn't meet the metrics, they can refuse the extension?

Absolutely. They absolutely can.

They're looking at debt service coverage ratio. Well, I mean, what kind of metrics are they looking at?

DSCR is real standard. They do want to see that. They also want to see a debt yield, which is comparing your NOI directly to your loan amount. They're also going to look at how much money you have spent, and they're going to, they're going to watch your CapEx schedule, if you are over budget on a number of items, some lenders go back in and ask you to rebalance that CapEx budget and put more money in. Real standard.

Hmm.

It's something that we negotiate in the beginning of the term is, let's say you send your CapEx schedule in and the lender has a team that reviews that and they say, look, you know, we want to set— based on this structure, we want to set a rebalance point at 12 months. And that means they're going to go in, look at what you planned on spending, what you actually spent. And if you need to bring in more money, you sign that you will. And that's usually included in the carve-outs.

Mm-hmm.

And then what we'll say is, look, that doesn't really align with our plan because of the seasonality of it. You know, we bought this property in Wisconsin, can't do a roof in February, so we'll have to push this out. Let's make that rebalance point 18 months, you know, something like that. So those are the types of things that we negotiate upfront so it aligns with the plan.

So I think that the audience is starting to see why it's so important to work with a mortgage broker like yourself that's going to help them understand all of this. And because there's so many variables here that they have to consider that, you know, unless they've done this a zillion times before, they're not going to know or understand that. Let's spend just a minute talking about A mortgage broker versus going directly to a lender? You know, what, what are the advantages of going to a mortgage broker? I mean, other, other than knowledge, which we're seeing here.

You know, it's, it's a great point and it has a lot to do with relationships, right? If, if you haven't dealt with a lender before, there's— each one has their own proprietary methodology, their own proprietary guidelines that they underwrite to, even though they may all sell their loans to Fannie Mae. They each have their own methods and some are more conservative than others. Some want their deals presented a certain way and some will give you certain concessions, but that's lender-specific. So that existing relationship is priceless. You know, to have somebody that you can go to that knows what that lender's looking for, knows who to talk to, I mean, it makes all the difference in the world.

So, well, and I liken it to, you know, you can go to a store online and buy something directly from that store, or you can go to some aggregator like Amazon and you can compare 5 different sellers of that product. You know, with a mortgage broker, you're getting their expertise, listening to what you're saying about what your needs are for the project. And then they're, you know, in their mind going, okay, that would work good for this lender or this lender or this lender. Or maybe you need to consider bridge debt. Maybe you need to consider, you know, this before we get to agency. You know, Eric's gonna be thinking about all that stuff as he tries to direct you to the appropriate lender, which may not be your local credit union or bank. You know, I can tell you that I've had clients come to me before that are like, oh, well, we talked to this lender and these are the terms they gave us. And, you know, I always encourage them, talk to a mortgage broker so you can get kind of their wealth of knowledge of, you know, other options are available out there.

It's kind of like a tailor because it's not just about the deal. It's also about your investment strategies and your individual, your individual plan for this asset. So, you know, you go to a tailor and they're going to say, well, if they're talking to me, they're going to say, look, you're really short, so you need to do this, this, and this, right? So the deal's no different. We're going to discuss it. And the first thing I like to do is just listen. Right? Have you tell me your plan for the asset, how you're going to raise the capital, what the overall structure is going to look like from a hold period standpoint. Tell me about the market, what your connection is there, and then we can walk through the best debt structure for you. But it's got to start from the borrower's plan, and then we find the right loan to fit in from there.

Yeah. I think that's really wise. So how about qualifying for loans? You know what? You know, people— well, let's talk about this first and then let's talk about qualifications. Recourse versus non-recourse. Can you explain that?

Yeah, absolutely. It's, it's, it's one of the big drivers for a lot of my clients that are converting from single-family into multifamily. Everybody wants to do non-recourse debt, and the, the neon sign for non-recourse debt would be no personal guarantee. That's what everybody likes and hangs on to. Some of the real fundamental benefits of it is that you're unlimited on the number of loans that you can do because the guarantee and the borrower is with the property itself. Number one, that it's not hitting your personal credit. Number two, that loan is getting sold off to investors. So when you are dealing with, let's say, a depository lender, a bank, they hold that loan on their books. Doesn't get sold off. And the more debt you do, the more loans you do with that lender, the higher that exposure is to you. So a lot of times they'll say, hey, no more than $7 million. no more than $12 million, and then they cap it. Well, when you work with a securitized lender, a lender that sells that loan off in a group, they pool it with a bunch of other loans and they sell it off. Well, now it is an investment on its own. Your second loan that comes in, your third or fourth or fifth is a separate securitization. So it's not a total exposure thing. Each loan is securitized in its own package. And so it allows you to keep borrowing. I've done— I've sponsored deals and had this more than one loan, more than one loan request going on my own at the same time, and they didn't overlap as far as my net worth, liquidity, and all of our requirements. You're able to do that because they're separate buckets, they're separate securitizations.

So it's not like it's cumulative. They're saying, oh, well, your net worth is this, you can only guarantee up to X amount of dollars worth of loans and then you're done. It's more like you could borrow against that same net worth again and again and again, right?

Exactly. You're exactly right. So that's one of the benefits. And I, you know, I say that I use that, that example to the non-recourse question because most of your securitized lenders are non-recourse. So I try to— I mean, I have to compartmentalize that. When you— when I say recourse lenders, I'm usually thinking depository lenders like banks and credit unions. A lot of your, a lot of your alternative lenders in that 1 to 4 space, they're usually recourse.

And you mean 1 to 4 unit space?

Yeah. Yeah. I'm sorry.

Talking 1 to 4 units. Yeah.

Yeah.

Okay. So, so small properties, the smaller the property, the more likely you are to get into recourse debt. Is that an apt statement?

That's, that's exactly right. And if, if you had to put an industry standard on it, if your loan request is below $1 million, it's probably going to put you in a bucket where you're doing a recourse loan. Now, there's some alternative to banks. You know, we've got, we've got no-doc loan, no-doc or low-doc programs where you, you pay for a little more privacy and things like that. So they are available where they're not looking at your tax returns and doing this global debt-to-income ratio like a bank is. But they're, they're— that $1 million is the threshold for, say, Fannie Mae's small balance program and Freddie Mac's small balance program.

And then that's been true for a long time, but there have been times in the past where they've actually had some smaller balances that they'd offer. Is that not available now?

You're right. They used to, they used to do— they used to go down to $750,000 based on a relationship. But they really drew a hard line over the last 4 or 5 years. They drew a hard line in that million-dollar loan amount. They'll actually price you up. Fannie Mae will price you up roughly 80 basis points or 0.8% if you're below $2 million. They may have waived that actually now that they're starting to warm up to smaller deals now, or at least been very open to exceptions on that. I The latter part of last year, I did a— it was about a $1.4 million loan and they waived it. So sometimes we can get that, you know, we get a pricing waiver, but they do price them up.

Okay. So guarantors, loan guarantors, let's talk about what that means. So in a recourse scenario or even in a non-recourse scenario, you have to provide a guarantor, right? Yes. Or one or more guarantors. What does that mean?

Okay. So first there's a guarantor and then there's a borrower. Right. And as, as, as you know, and if somebody doesn't understand this, that's, that's the Kim Lisa Taylor questions right there is who's the borrower? Well, you're going to form— Kim's going to form an LLC for you that will be the actual borrower. The guarantor is the warm body that controls or makes decisions for that borrower, for that LLC. And most of the— most lenders have a typical— they have 2 triggers that they focus on to decide who's making those decisions. One is a percentage ownership threshold. So an industry standard would be 25% ownership or more of that borrower, that borrowing LLC. That's one. The second one would be managerial control that, that through your title. So if it's a manager-managed LLC, again, another Kim question. If it's a manager-managed LLC, then, and you are named as the manager, you're probably going to have to sign on the loan. Now, this isn't— this isn't etched in stone. I've done deals where, you know, we've had borrowers that we've had, investors that own 65% of the deal. They didn't sign on the loan because they didn't have any control. They weren't managers in the deal, but they did have to get underwritten. They pulled credit. They made sure they didn't check any boxes on blacklists for investors and things like that. So that's kind of the hybrid is where you have a major investor that's over 25%. They're probably going to get their credit pulled. But if they don't have any control of the deal, they're not running the day-to-day operations, they're probably not going to have to sign. So those are the 2 things.

Okay. So that's kind of underwriting versus guaranteeing, right? They have to be underwritten because they need— and that's because of the Banking Secrecy Act, where the lender is required to investigate who they're loaning money to and to make sure that they're not bad people, right? So they need to look at them to make sure that they're creditworthy and that they're not money launderers or someone that they're you're not allowed to do business with. So let me just talk a little bit about structuring because we do a lot of structuring around this very issue, right? So when we create a syndicate, we typically create a manager-managed LLC that's going to hold title to the property, become the borrower on the bank loan. The manager is another LLC, and that includes the members of your management Team. Okay. If only some of— well, if all of those members are going to be signing on this loan and going to be guaranteeing this loan, meaning that they're putting up their liquid net worth to support the loan amount, right? Then we're going to make this a member-managed LLC. If you make it a member-managed LLC and only some of those members, the manager, are going to be signing on the loan, then the lender's going to start looking at the percentage ownership interest of each of those members. You can correct me anytime I misstate here, Eric.

You're spot on.

But one of the things we regularly do is let's say you only have 2 people that are going to be putting up their net worth to guarantee the loan, but there's 5 people involved in management. Then we would also create that management entity as a manager-managed LLC, and we would identify the 2 people signing the loan and guaranteeing the loan as the managers of that manager LLC, and then all of the 5 of them, including the 2 that are, that are guaranteeing, are the members of the manager LLC. So I know that's a little bit more of an advanced concept. Some of you guys obviously have done this before. Some of our listeners have done it before. They, they get what I'm saying. Some of you, it might be a little bit more convoluted to think about, but it's just a matter of the lender. And the way I explain it to clients is that the lender wants the people in ultimate control to be the people that are the loan guarantors, so that if something happens and that property starts to fail, or their loan is in jeopardy, that they know that they're dealing with the people that have the most at stake.

Okay.

So, so one last thing about recourse versus non-recourse. Even in non-recourse loans, there's a whole bunch of carve-outs. That say, if you do something illegal, if you violate some law, and you know that, or if some, you know, certain thing happens at the property, we're not going— we could hold you personally responsible for that loan. Am I correctly stating that, Eric, what those carve-outs mean?

You are. That's accurate.

And have you seen these carve-outs kind of grow? Over the years? Well, like more and more things can be added.

You know, they— it's, it's, uh, the attorneys stay busy, right? They constantly— they're constantly reviewing the lender's docs. Um, and one thing to note too, and Kim, I'm sure you see this all the time, when, when a borrower reads their loan docs, they were— they're usually freaked out. So just for— to put it in the most realistic terms, they are built By lender's counsel for the lender. The lender spends a lot of money to make sure that all those documents are weighted in their favor. They're never gonna say, we wanna make this more, more, uh, we wanna make this easier on the borrower in case there's a dispute. They just don't do that.

Right.

So you're gonna, when you, let's say for example, you start reading Freddie Mac small balance docs and you're like, Kim, this, this is a recourse loan. This is crazy. Why are they doing this? And then you're going to explain, well, here's the difference between the borrower and the guarantor. You are the guarantor. The borrower, the company, is obligated to all of these things, but you're the guarantor signing on this non-recourse guarantee. So that's— this is the long way to get to your answer. Those carve-outs can house all the exceptions to where the lender can come back to you, come back on you personally if you do things or don't do things within these, within this list. They, one of the, one of the most recent ones, I won't say recent, but one of the most prominent ones that they're using are completion guarantees. So they've, they've been doing it for a long time. It's not new, but let's say you're doing a renovation deal, you've got a bridge loan and you've got a $500,000 renovation budget and you blow your money, you don't— you spend it all on something else and you don't complete the repairs and the deal falls apart because you didn't complete the repairs. They include something in those carve-outs called a completion guarantee where you're personally guaranteeing, saying you are going to complete this project. You're going to do the improvements, not necessarily spend all the money, but you're going to do the improvements that you say you're going to do. Another one in there that catches folks is Voluntary bankruptcy. So if there's trouble with the property and you just, you run and file bankruptcy just to protect yourself, and so that lender can't take any action against you, that triggers a recourse guarantee. So certain things like that, you definitely want to walk through with your counsel and understand what your real exposure is.

Well, and I'll tell you where the first thing that you talked about happens, okay, where you can't make the— you can't guarantee the completion, and that's because you didn't raise enough money up front. You got in— so when we do an offering, we'll do a minimum offering and a maximum offering. We'll say you have to raise at least this much in order to acquire the property, but you can continue to raise after closing. In order to raise your capital improvement budget, etc. And then we give you a cushion that says, and if you get into the property and you figure out that there's some other thing, or, you know, something goes over budget and you need to raise more money, you can go up to this maximum dollar amount. So your ideal target is somewhere in the middle of that minimum and that maximum amount. But if you only raise the minimum and you get in there and you close the property and you never raise the money for that capital improvement, that's where you get into that trouble where you could experience some liability for that personal guarantee for not being able to complete the repairs. And I have actually had some clients that did that in the past and ended up losing the property because, you know, it's easy once you're running full steam ahead to get to the closing table. And then the second you get the deal closed, you've got a million other things to do to get the property going. But you take your foot off the gas from raising money and you stop raising money. And that is a huge mistake. You never stop raising until you hit your target. Okay? And then you leave the rest in there as a cushion. If you— not that you're raising the money, you're just leaving yourself a cushion in your offering documents that you don't have to go do a whole new offering. You can just reopen this offering if you need more money within the first year. And you're usually going to be able to figure that out within the first year. So, all right. Well, Eric, this has been phenomenal. Like I said, we completely deviated from the list of questions. I apologize for that, but I think we covered some really great stuff. I do want to talk a little bit about your book, which I happen to have a copy of right here. Tell us about your book.

You know, it's quick. First of all, I try to refer to it as more— exactly. It's, it's, it's a— it would be more of like a plane ride kind of read or more of a discussion. And I left out all of the— I left out all of the, the, the here's what I did when I was a kid and all that kind of stuff. It really just gets right into what you need to know. And it's, it's really born from, from questions that I've got over the last 20 years because they're all so similar. Um, that's, that's my entire educational platform is built off of the questions that I get from clients because of the repetitious nature of it. This discussion is there to prepare you and help you figure out what questions to ask, help you figure out what rabbit holes to go down to that are going to be the most valuable for you specifically in your investment. I don't talk about mindset. I don't talk about your why. I help you start to peel back the how so you can make that why happen.

And so just for the people who are listening Audible only, the name of the book is Borrow Smart. And how can people get a copy of it?

It's on Amazon. I don't know if I can— I don't know how to post the link right now. I can— I don't know if I screen share and do a QR code or how I should do that, but it's available on Amazon. Borrow Smart: The Not-So-Secret Weapons of Successful Commercial Real Estate Investors.

And Eric Stewart, if you want to look him up by author, it's S-T-E-U-A-R-T.

S-T-E-U-A-R-T. It's right there at the bottom. So, um, yep.

So just there if you could, if you didn't see that. Okay, great. And, um, let's see, what's your website? How can people reach you?

Oh, okay, great. Any, any— the easiest way for you is the way I want you to get in touch with me. So I will give you my email address. Which is E R I C S Eric S at Atlantic I C dot com. So that would be the Atlantic and then the last two letters. Yes, I see, I see.

So you kind of broke up there a little bit while you're saying it. So it's it's the name of the company is Atlantic Investment Capital, and so the domain is Atlantic I C. Correct.

That's exactly right.

That's exactly right.

Do you allow me to share the screen share? Yep.

Yeah, that's great. Perfect.

Yeah, I can just pop that right up.

All right. So we've got a couple of questions here. Let's see. An anonymous attendee says, which Southeast regional states are landlord-friendly? And they're asking specifically North Carolina, Georgia, and Florida.

You know, we've had— I'd have to go back and kind of update on all the landlord laws because it's not something that, um, it's not something I target and keep track of each state. But I have not had, uh, I have not had huge issues with the assets that we've owned in Georgia. Everything I've owned in Georgia, I've been a passive investor in. So I really— I haven't been involved in the evictions, but I know the properties have done well. I've never heard any pushback on that. Florida, I do not see that as, as a, as a tenant-friendly state. So that's one that I think you would consider, you would consider landlord-friendly. And then I think North Carolina is, is the other one that you'd mentioned.

Yes.

Is that okay? I, once again, I have not heard any issues with, with North Carolina being With North Carolina being tenant-friendly. So I think all those 3, I would consider them to be landlord-friendly states.

Yeah. And I've had— I mean, not to be political here at all, but I have had some clients say we only invest in, uh, in red states, um, because it's the, the blue states that tend to be more landlord, uh, you know, friendly, or actually more, uh, anti-landlord. I would say more than, more than tenant-friendly, they're anti-landlord, right? Um, you know, and, and There's certainly a big push across the country to start instituting rent controls in certain areas and things like that. So you've always got to be cognizant of that because that's going to affect your exit strategy and, you know, your ability to sell the property to a new buyer later on, and the actual property value itself, because you're not going to be able to, you know, to maybe achieve the same rent increases that you were hoping to achieve, and it could depress your exit value. Value. Um, let's see, somebody—

one quick note on that too, has a lot to do with the asset class that you're buying. If you're buying a high B asset, you may not have to deal with those eviction issues, right? So it centers— it has a lot to do with your target tenant base too. You know, a lower C, probably going to have some eviction issues. So something—

So I just put the link to Amazon, uh, to your book in the chat. Um, Eric, just in case people were not watching the video, they were just listening audibly, what is your phone number?

The phone number is 800-916-9005.

Okay, great. And let's see if we have any other questions. And just so you know, you know, if you want to know information about us, please go to syndicationattorneys.com. There are multiple options for you to schedule an appointment with one of our staff or with me. If you just click the schedule consultation button, you'll get a dropdown that'll give you some options there. We are always happy to talk to you. I have very skilled staff that can usually answer most of your questions. If you want to schedule a paid consult with me, you can as well. Some of you may be pre-syndication clients of the firm. If you're not, that's another option for you to be able to get direct access to me and Mola Bosland, our other securities attorney. We do hold weekly masterminds for clients only. So if you want to become part of that, those are really valuable, especially for people that are just starting out. But we also get seasoned syndicators that show up on those masterminds and add value to those calls. So that's something you can do with our pre-syndication retainer, which is just a nominal amount to get a couple of hours of access to us, plus access to our masterminds, and then also discounts off your future syndicate deals. So I think somebody said— Kelsey said, I just ordered the book. Thanks, Kim and Erik, for the great information today. You know, Irma says, hi, Erik and Kim. Thanks, Irma. You know, so this has been super valuable, Erik. You know, it's way over time that we had you on our— as a guest on our call. We need to do this annually. You've got a huge amount of information to share with everyone. Highly recommend everybody, you know, read Erik's book. It's only going to take you a few hours. It's skinny. And, but, you know, there's my information in there. I don't know if you felt the same way I did when you did your book though. When I, once I did my book, I felt like, oh my gosh, all my, that's my entire brain on 168 pages. I'm depressed about that.

Yeah. Yeah. There was, there was a lot of information.

Somebody else, somebody else tried to make me—

That's why it's so thin, right?

Yeah. That's why they tried to make me feel better by saying, no, no, you're just good at being concise.

I guess it's what—

is your glass half full or is it half empty, right?

That's right.

And I think there are people that are watching this on video are just dying to know, is that an actual motorcycle behind you?

It is. It's an actual motorcycle. That is a— that's a 1971 FX Super Glide. It's the first year Harley-Davidson combined the 2 editions. And that is the, that is the, uh, uh, what started that whole cruiser line. And I figured I love looking at motorcycles as much as I do riding them. So that one, that one got put into the office because just makes me feel better to have a motorcycle in here.

You need to elevate it up on a little platform so it's like it's your backdrop, right? It is, it is totally cool. It is an amazing—

When I do the podcast, I'll do that when I do the podcast. I'm I'm getting a lot of good advice from you, Kim. I appreciate it.

Happy to have a consultation with you about that anytime. All right, so Delroy says, great job, guys. Hey, Eric, Delroy here. Robin says, thank you both very much. What is the book called and accessible from? Again, that's— oh, my book. My book is called How to Legally Raise Private Money. It's on the sign behind me and it's available on Amazon. You can get a free digital copy at our website at syndicationattorneys.com. If you want to read it on computer, or if you want to buy the book, you can buy it on Amazon. I am furiously working on an updated version of that that's going to be coming out soon, and then we'll be sending out physical copies. But if you get this one first, go ahead and read it. We'll have some updated content in the new one, and then, then we'll be sending you physical copies as well. Once you get into our database, you'll learn about that. So thank you so much, everybody, for showing up today. Really appreciate it, and we look forward to talking to you again, Eric, in the future. And we'll see everybody else at our new podcast. By the way, we are now doing 2 podcasts a month. We've just had a tremendous growth of our podcast. If you're not a podcast subscriber, please do. And if you want to hear some of our old episodes, you can hear them at our website. If you go into our library, there's a section called Our Podcasts. You can look at them all there. But, and there's a ton of educational information for you there. There's a lot of little 2-page articles, 1-2 page articles that you can read if you don't want to read the whole book. But the book kind of just puts it all together. So thanks again, everybody. Have a really great week, and we look forward to seeing you all again soon.

Thanks for having me, Kim.