Matching Borrowers to the Right Lenders

I would say as you're either starting the business, or you're already in the business and you want to understand different capital types that you can use for your property, you may want to talk to someone, to understand the capital that's available today. Just as an example, Freddie Mac is pretty much out of the business today for commercial and multi-family properties. You may want to talk to someone at a company, let's just say to say, “Hey, is Fannie Mae lending today?” If it's not Fannie Mae, who is it? There are aspects to who's lending today and who's hot in which markets. Freddie was saying, “Let's underwrite the deal to 70% loan to value and only a 1,35 DSCR.” Whereas, Fannie was willing to go up to 80% per cent and a 1,25 DSCR, which was able to improve of course on the loan amount. Separately, besides for Fannie and Freddie, there are many other lenders out there. There's life companies, there are banks, and we want to understand are you syndicator? Are you investing your own family capital? Are you willing to sign recourse? How long of a term do you want? Then aside from called permanent loans, there's a whole another side to the business of bridge loans, where you may want to buy property and it's a value-add deal and you want to get a bridge loan. On the bridge loan side, it's always a question of do you want to sign recourse? Are you looking for the highest loan possible for your deal? Then of course our job would say, “If you're looking for the highest loan possible, we want to match you up with the best rate as well.”

A bridge loan in many cases will not give a strong return to investors, because you're borrowing 85% of cost, but you're throwing into there a big portion of capital expenditure. Were you going to renovate the property? In addition, sometimes you're buying to deal where there's only a IO cover, or even a negative debt service coverage ratio, at which point we’ll put up an interest reserve and we'll have money there, but investors are in there for the long run. They want to be in there for two or three years and try to really add value to the property, so they can pull out some equity on the refinance. As far as stabilized loans where someone just wants to beat the S&P and get a 7% to 10% return on this money where it's more of a permanent loan, then you'd want to say what type of permanent loan are you looking for? Some folks are – especially family offices where they're not so focused on the returns, but they're more focused on building equity, building a financial statement. In such a case, they have no problem with amortization of 25 years, 20-year, will do self-amortizing in loans. Whereas most syndicators, their focus is returning capital to their investors. In such a case, we definitely want to push out to 30-year amortization, in addition to that, we want to push for IO, which means you will not be paying any principal payments during the first couple of years as long as we – I just closed on a loan in Brick, New Jersey where we got four years of IO, so he has four years of no principal payments, which he happens to have no investors in the deal, but he still gets a nice strong cash flow for the next four years.

Do I underwrite two years, or four years? It really makes a big difference during two years or one year of IO would make a big difference to what investors will get back. Now of course, it's all on the front-end, because anything – when you're paying full principal payments, that's really cash that you should be getting, but instead, it's going back to pay off the principal balance of the loan. Most investors when they put money in the deal, they want to see a return. Every year of IO makes a huge difference. Every dollar we can get, our clients makes a huge difference. In many cases, a client will go out to his banks and say, “Jacob, my bank has given me 17 million. What can you do?” We did a deal where we got him 21 million after he came to us at the 17-million-dollar loan. In some cases, we can't do better and we'll say, “You know what? You have a great deal from your bank.” Most of those cases are for construction loans though, I would say.

If you're risk-averse and you're worried about the market – where rates are and where rates may be in three years, you may want to really push for 10, or even 12-year loan to try to keep – rates today are phenomenal, so you want to lock it in and get long-term debt, even though maybe you're going to lose out in five years of doing another cash out refinance, but you'd rather have long-term conservative debt. Some folks are more focused on just refinancing as often as they can, because every refinance is a return of capital, that's tax-free, it's super helpful. I guess, they'll depend on your personal feelings with the market and your investors and what they're interested in this market. Do they want to park the capital long-term, or do they want to cycle this into many deals over the next couple years?

Listen to full episode: https://lifebridgecapital.com/2019/10/ws352-matching-borrowers-to-the-right-lenders-with-jacob-cohen/