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Get ready to find your recipe for a successful real estate lifestyle from America's top experts here at Greenlight REI with your host, Lance Edwards. Well, everyone, hi, this is Lance Edwards. Welcome to this edition of Greenlight REI where we teach about the successful real estate lifestyle. And I've got a Special guest today, Mr. Aaron Abelson, who's executive director of PGIM Real Estate and someone who I've conducted business with. So I can vouch for him. He's been a great assistance to me, great help to me. And it's in the area of commercial lending, which is a very, very popular topic. And so I've invited Aaron, he's been gracious enough to join us today and, and talk to us about, you know, some of the fundamentals of commercial loans for multifamily but also get down a little bit of what's going on in the market these days. And I'm going to ask him to pull out his crystal ball and predict some things maybe here a little, little bit along the way. But anyway, Aaron, it's absolute pleasure, thank you for joining me today, Lance.

I really appreciate the time and look forward to the opportunity to chat with you and your audience and lend any kind of value I possibly can.

Super, super. So I'm going to, I'm going to start off a little bit, maybe I start off here. So I talk about commercial loans. There's a, that covers quite a bit of territory. Maybe Aaron, introduce what type of loan products do you typically cover? What, what do you, what's your range?

Sure, sure Lance. So just, you know, sort of a quick, quick abridged version. I have been in the commercial real estate lending business for the better part of two decades. I have focused almost exclusively on providing non recourse fixed rate debt financing vis a vis Fannie Mae, Freddie Mac, hud. We also touch on other non recourse type of lenders, whether they be institutional life insurance companies and, and debt funds. So the definition of, of commercial real estate and commercial real estate lending is fairly diverse. But I think really what, what, what where I can add some value today is to really focus in on the non recourse element of it. The agencies which are Fannie, Freddie and HUD and kind of how they're viewing transactions today in this market on a non recourse basis.

Okay, perfect. Well let me, let me drill down into that because for some people, so they've got the agency loans which are the Freddy's and the Fannies, which is more of the long term financing, but you also provide financing to get people in shorter term financing to get them into these projects. So can you kind of.

Sure, absolutely. That's, that's a great point, Lynn. So there is a distinction. There are obviously multiple different options related to capital for financing multifamily real estate. The distinction that you just laid out is very clear when you're talking about agency financing. Longer term fixed rate non recourse debt that's generally more long term, I. E. 5 years on the short end and 10 years on the long end and even, even longer, quite frankly, 12 or 15. There's also the op. There's also opportunities to finance acquisitions where perhaps there's some value add component to it or there's a lack of stabilization component to it, if you will. And those are considered more temporary in nature. We can't, we, we generally talk about those as bridge loans, if you will. Acquisition bridge loans. Those two in many instances are also non recourse. So there is non recourse debt available for transitional assets that may not be stabilized and ready for your quote unquote, permanent debt financing.

Okay, so there's for, for label purposes. Tell me this is reasonable. We got shorter term bridge financing, shorter term non recourse, which is a bridge to get you into the longer term stable property financing.

That is correct. That, that's a fair statement. And, and, and within the bridge space, if you will, there are most of the debt capital that's available for bridge financing is generally going to be on a, on a more. On a floating rate basis. Right. Because with the longer term fixed rate debt, there are generally prepayment penalties that are associated with that. So when you're doing this bridge or this interim financing to get you to that next level, Tom, you're generally going to be doing some sort of floating rate instrument or there is, there, there is more limited capital out there that's available to do fixed rate bridge financing. It's, it's not as plentiful, there's not as, as much of it out there. But there are certain sources of capital that can provide fixed rate bridge financing as well.

Excellent. Kind of even more important in the current economy, I would say being able to.

Yeah, that, that, that's, that, that's true. I mean, I think, you know, where we're at right now, we're in a sort of a unique environment. Again, having been in this business for, you know, 20 plus years, I've certain seen, I've certainly seen different cycles and this cycle is, is not necessarily unlike others that we've seen. You know, we are In a, you know, inflationary environment, we're seeing short term interest rates trending up. We continue to hear noise around the Federal Reserve and their desire to temper inflation and the mechanism that they, the mechanism mechanism they use to do that is to hike the short term interest rates. So with that as the Fed continues to raise their short term rates so to go floating rate debt. So to go. So to goes fixed rate debt. So we are continuing to see interest rates increase.

Okay, so let me. You mentioned non recourse, which is always a very popular topic. Obviously not no personal guarantee.

Correct.

There's a lot of perceptions, misperceptions around non recourse loans. So I'm going to just talk about borrower qualifications because there are some qualifications around non recourse loans. So can you, can you speak to that?

Absolutely. And and one, one thing I want to sort of touch on and you know, maybe maybe flesh out a little further. You mentioned, you know, non recourse financing and one sort the what really what I want to also make sure that your, your viewers are aware of is when, when we talk about non recourse the, the loans are, you know, are, are there's no personal liability for, for that debt. Right. However, there's one distinction or one classification that I do want to make sure your viewers understand is that these are loans that are non recourse but for right. There are certain provisions in the loan documents that would potentially trigger what they call the non recourse carve outs which effectively and I don't want to get into the weeds, but effectively it means that in the event a borrower commits fraud, that loan potentially can become a recourse loan. So I just want to make sure that your viewers understand that distinction. Getting back to your next point about borrow credit quality, etc. There generally is a standard that we as the lending community look to as it relates to borrower requirements. Right. And when we talk about borrower, really what I'm talking about is the, the key principles to the transaction, those parties who are viewed as a key principle which generally are defined as a manager of that borrowing entity. So if you have control of that borrower, you are considered a key principal. Okay. And also generally speaking, although the requirements are maybe a little more loose here, if you maintain ownership in the borrower, the high level borrower greater than 25% generally speaking, you would also be considered a key principle related to the transaction. To your question and point around sort of what we look for and generally we want to look for key principals who have some Level of ownership experience, who have owned apartments in the past. And also we generally would want to see certain net worth and liquidity hurdles. Okay. And again, these are loose but fairly consistent. We typically want to see a net worth equal to the loan amount, generally speaking. So if it's a, for example, a $10 million loan, we want to make sure that the E principles to the transaction, okay, have an aggregate net worth equal to that sort of $10 million level. So that means if there are two key principles, they can aggregate to get to that level. If there are three, four, et cetera. And then as far as liquidity is concerned, we like to see a liquidity sort of covenant, if you will, equal to, generally it's 10% of that loan amount. Okay? So if it's a $10 million loan, we want to see roughly a million dollars of liquidity again on an aggregate basis among the key principles to the transaction.

All right, got it. Now I could hear the air running out, rushing out of the balloon of some people that were just now listening to this. So, but all's not lost. So for someone, when you're working with someone who's got a, you know, got a solid project and perhaps they don't have the experience or they don't have the net worth or the liquidity threshold, how, what can they do to fill the gaps in those guidelines, in those criteria?

Yeah, no, that's, that's a really good question. I mean we do get that question often. A lot of times when we're dealing with borrowers who are perhaps newer into the investment business, who are not necessarily as familiar with some of the covenants around these non recourse loans, there are, there are ways to, to sort of work with that. So a lot of times if, for example, you have a, a borrower, a key principal, a, a group who are new at this, we generally, we generally want to make, we want to see, as perhaps a mitigant to maybe limited experience, we want to make sure that they're, they're utilizing local, experienced third party property management. It's, it's really not, not just as a crit, is it critical quite frankly to, to, to that borrower, but it's, but it's really critical to the success of the deal. Right? Because at the end of the day you want to have, you want to have a, a property management company who understands the local markets, who understands what it takes to drive the business plan. You want to, you want to make sure that they're able to effectuate the business plan and they're really handling the day to day operations of the, of the asset. So that's a way that we can kind of work around some of the experience elements of it as it relates to covenants on net worth and liquidity. A lot of times we tend to see groups that may not have a lot of experience or maybe a little light on the network and liquidity, perhaps bringing in other partners. Right. Bringing in other partners who have done this before and sort of using their experience and mentorship to really bring them along in the transition.

That's great. And, and I want you to make it clear maybe you can reinforce this. It's not, that's not something that's looked down upon from the standpoint, correct?

No, no, absolutely not. It's not looked down upon at all. I mean, it's really, it's something, you know, again, I think that it's a really good way for investors who want to be involved in the multifamily business to get guidance and as I said, mentorship from other, other borrowers and, and, and, and investors who have done it before who have successfully effectuated a business plan. And, and it's, it's just kind of a, A, a good tool to bring yourself, the borrower, as a new borrower, up to speed and get to a point where, you know, you're able to, you know, you're, you're able to then kind of pay it forward and perhaps become a mentor to somebody else.

That's excellent. That's excellent. That's really good, Aaron. All right, so I want to shift gears a little bit. So you're seeing how many transactions you've worked through over couple of decades. But through that, through that history are there, let's speak to the first timer, let's look into, you know, go through their first loan application process, non recourse loan application process. Are there specific things you would recommend to them to be prepared for? And maybe a corollary, are there certain mistakes you want to certainly warn them against that you've seen maybe over and over people tend to make.

So yeah, I mean, those are, again, those are all really good questions. You know, my, you know, some of the things that I've seen in the past, you know, related to, you know, I, I think it's really important when you're analyzing a transaction to really, you know, hone in on some of the assumptions that you're making. You know, you really want to understand, you know, the market. You really want to understand what's driving rents realistically, where rents are at in relation, at that specific asset, in relation to where the market is, you want to make sure that you're, you're, you're really getting a good handle on the expenses at the asset. And again, that really speaks to bringing in, you know, a third party property management company that has experience in the market that can really guide the business plan to make sure that you're not underestimating your expenses, that you're not overestimating your rent levels, because those are some of the pitfalls that we see. Just being able to not really fully underwrite and analyze the transaction and then obviously not being able to then effectuate your business plan. So, you know, I, I try to caution, it's a cautionary tale, but, you know, try to be as prudent and diligent as you can when you're, you know, analyzing, analyzing the opportunity.

Yeah, I would add to that if I might. You know, one of the biggest mistakes I make. You know, anybody can make a deal work on paper, but at some point you got to live with it. So you better make sure you're pretty conservative or reasonable going into it. I mean, that you say the same thing.

Yeah, no, I, absolutely, I mean you're, you're 100. Correct. I mean, you can, you, you can, you can look at a spreadsheet and look at an underwriting and make certain assumptions and make your, you know, make your metrics look better or worse based on the assumptions. But really, you know, really honing in on the assumptions and whether they're reasonable and whether you can actually effectuate and, and, and get that business plan completed is, you know, the difference between a successful project and a project that's not going to be successful.

All right, so kind of a corollary to that is so the recommended, you know, as the sponsor, as the buyer going in, got these reasonable assumptions, conservative assumptions, get it validated with people that know the market, have great solid business plan.

Correct.

When it goes, when it goes to underwriting with the lender. Aaron, now what, what, what kind of eye do they cast towards it? Is it, how are they doing a different type of underwriting or what kind of assumptions might they be making?

Yeah, so, so that, those are, those are very good questions. I think that when the lender looks at a transaction where lenders will generally apply the same methodology, right. They will certainly look at the, the revenue, for example, at the property where the actual leases are written at. And those, and those are really the, the assumptions on the revenue side are really going to be made. It's very Especially when you're dealing with non recourse financing, the assumptions on the revenue side are pretty consistent. You're, you're underwriting to the actual revenue at the property that's in place. Okay, that's fairly consistent throughout the non recourse world. And when you're looking at the expenses on the lender, they will also view kind of the expenses based on historically where the property is operated. But it's, it's more important or just as important that the borrower provide a really good detailed budget to show where those expenses they feel based on their underwriting and their diligence, where they feel that those expenses are going to be supported by the market. And then as the lender, we're going to sort of trust but verify, right? We're going to trust what the borrower's performance says, but verify vis a vis our own, you know, our own market intelligence, you know, our portfolio, the deals we've done in the market, etc. But also rely fairly heavily on what the appraiser comes back to us with to again verify that those assumptions are in fact correct. So it, look, it's, it's really not rocket science and, and there's no, you know, there's no real trick to it. It's math and it's trust and verify the mathematical assumptions based on the income and the expenses. There, there are certain ways that we, we look at the deals and we do, we do. You know, lenders do look, it's not necessarily all black and white. I mean there is some subjectivity to it. We will look at, for example, if, if lease tradeouts for example, are, are trending higher than where perhaps the current rents are in place, we can maybe look a little forward and see, okay, well, if we're going to close the deal in 60 or 90 days and we have, you know, 20% of the leases are trading out that, you know, a certain percentage higher, we can maybe look to making some of those assumptions again with the support that we get to verify that those rents are in fact being collected. So there's some of that that we look at as well. But you know, it's, it's, it's, it's, it's very similar to how a, a borrower would view an underwriting of a transaction. That's how we typically look at it.

All right, so I've got a few more questions, but I want to give an opportunity, Go ahead and we'll do this again at the end of the interview. Go ahead, let people know how they can Get a hold of you, Aaron, to work with.

You know, that's, that's great. Thanks, Lance. I appreciate it. So absolutely would love to, you know, put myself out there. Happy to answer any questions, follow up, you know, anything that, that might be of any question that you have, please reach out to me. You can email me. My email address is, is Aaron double a r o n.abelson a b e l s o n at p jump p as in Paul, G as in goat, I as in Igloo. Amazon, mary.com. that's my email. Or you can always feel free to pick up the phone and call 312-636-6187 anytime.

All right. And we'll put that on the show. Notes, everyone.

Great.

You know, and I can. And we'll do it again here at the end. But I can, I've worked with Aaron directly, personally. Reason I invited him back. He took such good, great care of me. So he'll take great care of you. And just as you can tell already he's very generous with the information and, and guiding, you know, guiding anyone through the process. So I'm just, it's really just a great resource to have in your, in your Rolodex for those of you who are old enough to know what Rolodex is.

So.

All right. But okay, just a few more questions here. I want to. You kind of. Great segue. So you're talking about the time to close. How much, how much time should someone kind of budget for this process? The time they come to you to being able to close. So they're managing their transaction.

Yeah, no, that's, that's a great question. I get that. I get certainly that. That's always a question that comes up when I'm talking to borrowers. Hey, you know, what's the time to, you know, how quickly can you get an application? What's the time from the application to the commitment? What's the time from the commitment to the closing? So, you know, no two transactions are alike. But I will tell you that generally speaking, the time, the time from. Call it the executed application to close is generally between 45 and 60 days. It could be as long as 90 in some instances. We do extended forwards as well. But in terms of getting to that quote unquote application that, that firm sort of paper application, you know, what generally happens is, you know, somebody will contact myself or another, you know, a lender like me, you know, they'll submit the deal. We have an om. We're looking to buy this property. We have, you know, the financials, and by financials I mean actual, you know, detailed break broken out at least T12. So on a monthly basis, looking back 12 months, we always want to see a rent roll with, you know, with, with leases and actual vacant units and market rents. We love to see as much market intel as we can. And that's why generally the OEM is pretty full of information. But once we, once we have that, we can pretty quickly turn around a, you know, various loan quotes, whether it be 5 year deals, 7 year deals, 10 year deals. It generally takes us anywhere from 48 to 72 hours once we have all the diligence that we need to kind of turn around a quote and you know, and then we kind of, we go from there. But I would say from start to finish, you're probably talking 45 to 60 days in general.

All right, so 45 to 60 days is, is, you know, until you, until you otherwise hear from Aaron, everyone. So you're, and your role in the process, Price said this early on, you're managing, you're managing the process for them. You're, you're first of all sourcing the source or giving them options on the loan product, recommending the loan product source, managing the application process, seeing it through. Talk about, you know, that role that.

Yeah, yeah, yeah, yeah. So that's exactly right, Lance. I mean really, my, my, what I, what I do, the service that I provide to my clients is trying to provide them with as much market intel as I possibly can and trying to provide them with as many, as many options as I possibly can to really make that market, to show the client what options are available, what may fit for each specific transaction, and as you said, guiding them through the entire process. On any deal that I work on, I'm involved from start to finish. Obviously, it's not just me. I have a team behind me. You know, we all have teams behind us that, that you know, help and support us throughout the entire process. But you know, the way that I personally approach my business is, you know, I'm very much hands on and, and I'm involved in the transaction from the very beginning till the, till the time the deal closes. And quite frankly, I'm involved even after the deal closes. If for, you know, there are servicing issues, things come up. I, you know, although we have service, a servicing department, and there's always a asset manager, you know, involved in a handoff. You know, nine times out of 10, just because of the relationship, I'll get a phone call. Hey Aaron, I got a Problem with my tax escrow or Aaron, I got a problem with my insurance escrow. You know, can we talk about it? And so know that's just me personally and just my approach to the business.

No, I can, I can validate, verify all that. That's exactly how well my relationship I enjoyed with Aaron. And so, so to carry that one step forward, let's say come to you and I've got a, I've got a project, Aaron. It's 75% occupied, got all this potential and I want to put a bridge loan in place to acquire it and stabilize it with the intent to go into an agency long term loan. You can take me through that full, you take that person through that full life cycle, correct?

Absolutely, absolutely. That's what we do. I mean we, we have, we have internal prod, we have internal product that can take you from effectively a CFO if you're buying a property at CMO all the way, you know, getting that deal closed on a bridge. Once that deal stabilizes, we then will take that bridge out with a long term agency solution. So we're soup to knots, start to finish, whatever execution makes sense for that deal and that business plan. We get you all the way from start to finish.

All right, final question. So I held off, I held this one off to the end. Aaron, this is your, this is your crystal ball. You gotta you know, shine it up to what is, what's, what's, what are you guys saying about the future with regards to rates and what's going to happen with the economy?

Yeah Lance, you know, again it's a question that I'm asked all the time and my answer is always the same. If I was a prognosticator of interest rates, I would be on a retired, on a beach somewhere. But having said all that, look again, you know, my view of the market is we are, we are absolutely in a, you know, we, we're as, as I started the conversation off, we are in an inflationary environment and the Federal Reserve is acting extremely aggressively related to trying to temper the, the environment, the inflationary environment we're in. As a result, we are now seeing long term interest rates at you know, decade historic levels. Okay. I think the 10 year treasury probably it closed. I, I, we've been on, you know, we've been talking here. You know, I think last time I checked it was slightly over 4%. The five year treasury I believe is somewhere in the four and a quarter percent range. What that means for rates today. You know, we're, we're seeing you know, we're seeing long term rates kind of in the high fives to low sixes today. Historically it's not super high, but when you look at what, what we've seen over the last, call it three or four years or five years, we've seen essentially zero percent interest rates over the last four or five years. So where I think we go from here, I think, I think 23 is going to still be a little challenging and I think we're still going to have to work through some of, some of what's going on with the Fed and trying to get things in control. I think once, and these are just, you know, caveat here. This is Aaron Abelson speaking. I'm not speaking for anybody else, not speaking for pjum, I'm speaking specifically for, for myself and where I think the market's going to go. But you know, my sense is, is that, you know, once the Fed gets to a place where they feel that they've hiked rates high enough, I think once we get a little more stability, because there's just a lot of instability in the market today, I think we're going to start to see things relax a little. And Tom, and my view is, I think whether it's Q4, it's Q1 of 24, we'll probably start to see rates settle back down. I don't think we're gonna, I don't know that we're gonna see, you know, the days where we saw, you know, a 290, 10 year or a 3%, 10 year, but I think more historic norms, you know, maybe settling somewhere in the, you know, low to mid 4% range. So what that means today we're seeing a lot of, a lot of borrowers who are transacting, are looking for that kind of shorter, shorter term solution. They're looking for five, excuse me, three or five year fix with some flexibility so that they know if we do start to see rates come back down in the Next, call it 24, 36 months, they can take advantage of the opportunities for lower interest rates. So it's, it's really five and three and five year fixed with flexibility so that, you know, when things do settle back down, you know, they have the ability to then take advantage of a lower interest rate environment.

All right, well I've, I've carved that in granite and with your name affects to it and the date, Aaron. So we can, we can, a year from now we can look back but not appreciate that. And I haven't agree with you, by the way. I agree with everything you're saying. So Aaron, this has been excellent. So well he done. And then before we give out your contact information one more time, is there anything, anything I should have asked you that I didn't ask you or anything else you wanted to add or say in this, in this context?

No, Lance, listen, that I appreciate the opportunity. This was great. I think you hit all the high water marks and, and, and kind of, We, I think we covered a lot of, a lot of ground in, in a short period of time. And, and as I said, I certainly would be more than open to any conversations with any of the, any of your, your audience. They, they can certainly reach out to me. I'm happy to talk about transactions, specifically the market in general and how we can, you know, how we can collaborate going forward.

Well, super. Well give them that, give them your email again.

Well, yeah, absolutely. So, so again, yeah, sorry. So, so yeah, if, if you need to reach out to me, please feel free. It's Aaron. Double a r o n. Abelson a b e l s o n@pjim pgim.com and you can always reach out to me by, by cell phone if it's old school. But you know, I'm still a fan of the phone. 312-636-6187.

All right, and we'll put that on the show notes everyone, so that you can get a hold of Aaron. By all means, speak to this man. He's like I say, very knowledgeable.

And.

Will help guide you. He just did a tremendous, tremendous job for me. So, and you can tell from listening to him obviously overflowing in knowledge of background experience with the industry. So he's, he's one of your go to guys. All right, so again, Aaron, thank you so much for your generosity of your time and your and your knowledge and for everyone, this is a wrap on Greenlight REI. We'll have the show notes you can find at greenlight reinvesting.com greenlight reinvesting.com along with post contact information for Aaron. Until next time, make it a successful real estate lifestyle. Take care everyone. You've been listening to interview with the experts with, with Lance Edwards. Let us now blatantly and shamelessly bribe you toward creating your own real estate lifestyle by offering you a whole bunch of free stuff. Go to greenlightreinvesting.com and get you some free stuff. And this session's show notes, that's greenlightreinvesting.com.