All Forum Posts by: Conor Freeman

I'm a big fan of Pipedrive - very intuitive set up if you're working on multiple deals, clients, leads etc.

Hi Paul, welcome! With your background in land development, you should check out the San Diego Chapter of the Urban Land Institute. We have monthly breakfast meetings at the University Club downtown - lots of good connections.

https://sandiego-tijuana.uli.org/

 The short answer is yes, but it depends on a number of factors:

• Credit-tenant vs. a mom & pop tenant
• How long they've occupied the space
• Single-tenant asset vs. multi-tenant asset
• Specialty asset vs. One that can be leased easily
• Leverage
• The market, location, etc. 
• Sponsor experience

Originally posted by @Peter A.:

@Joel Owens Will the bank loan on a 10 year term on a property with a tenant that has less than 10 years left on their lease?

Hi @Daniel Spaizman,

Your best bet is to read up on the possible structures and consult with a real estate attorney on how to structure a borrowing entity (LLC), as @Michael Seeker mentioned. This is a recent article from an attorney on how they're structured in the Joint Venture world where a sponsor teams up with a capital source, in this case private equity funds,  to form a borrowing entity. Much of it is applicable to you and your friends forming a venture.

You wouldn't be sharing the mortgage per se, the lender would fund to one borrowing entity made up of multiple members or partners. In the Fannie/Freddie world, anyone who is a >20% owner of the LLC will be looked at by a lender as a general partner, and be required to provide financials, sign the non-recourse carveouts etc, and anyone <20% ownership would be considered a limited partner and not face as much scrutiny.

You would not be able to have a loan in one person's name and other folks be private lenders. While some lenders allow subordinate liens, having multiple lien holders who are essentially investors is not an option. Hope this helped a bit,  best of luck!

https://www.lexisnexis.com/lexis-practice-advisor/...

Piggybacking off of @Joel Owens. Here are some additional modifications:

Both the Senate and House versions of the bill include matters important to our industry, including:

• Maintaining Section 1031 like-kind exchanges for real estate.
• Maintaining the deductibility of interest on debt for those involved in real property trades or businesses, including CRE development.
• Preserving capital gains tax treatment of carried interest for real estate practitioners, but requiring that assets be held for three years or more. Senate amendments that would have eliminated capital gains treatment for carried interests completely were defeated.
• Reducing corporate tax rates to 20 percent from the current 35 percent, not taking effect until 2019 in the Senate proposal.
• Doubling the estate and gift tax exemption levels (with inflation adjustments) from the current $5.49 million for individuals or $10.98 million for married couples. The Senate version would not completely repeal the estate tax; the House version phases it out entirely by 2024.

While the Senate amended its original version to bring it more in line with provisions included in the House bill, several important differences remain, including:

• Taxation of pass-through entities: While the House bill establishes a new pass-through rate of 25 percent, the Senate bill establishes a 23 percent deduction for most pass-through income (increased from 17.4 percent in the original bill). Unfortunately, the Senate bill limits the total deduction to half of the W-2 wages paid by the business. The House version is preferable, as the economic activity of many real estate businesses involve using contractors and outside services rather than direct employees.
• Historic Preservation Tax Credit: The House would completely eliminate the credit. In contrast, the Senate bill maintains the 20 percent tax credit for rehabilitation expenditures of certified structures but spreads it out over five years. The current 10 percent credit for non-certified structures would be eliminated. We support maintaining current law on the rehabilitation tax credit.

@Carol Bloom Yes, yes, and yes. The rule of thumb when qualifying for a Freddie or Fannie loan is having a 1:1 net worth to loan request and 10% of the loan balance in post close liquidity. As long as you have that, some experience in real estate, and no BKs or foreclosures, you'll likely qualify as a borrower. The rest is determined by the property, which needs to have above 90% occupancy and cover to at least a 1.25x DSCR.

@Andrew Beauchemin is correct. Any Freddie or Fannie multifamily program, including the Freddie SBL, will NOT issue blanket pre-approval letters to borrowers, like one would see in residential. The programs are more focused on the real estate rather than the financials of the sponsor, therefore you'd receive a term sheet from the lender. The term sheets are thoroughly vetted by the lender and if there are any concerns, reviewed by Freddie, so receiving a term sheet would be the commercial equivalent to a pre-approval.  

Andrew, just an FYI: Freddie tells lenders to put their pencils down if they receive the same deal from multiple lenders (IE submitted by NorthMarq and Greystone and CBRE). The lender that comes back with a signed exclusive is allowed to proceed, so it negatively effects the deal to shop multiple Freddie lenders in this case. The Freddie SBL is essentially the same at every shop with a license. The difference would be the timeliness and efficiency in closing, and servicing the loan after it closes.

I've seen some conversations on BP recently regarding balloon payments, refinancing, and interest rates, so I thought I'd share a short article I wrote for my firm regarding forward commitments and how they vary between different capital sources. 

Forward Commitments: Transacting In A Rising Interest Rate Environment

Real estate professionals are always curious about the direction interest rates are headed. For the last seven-plus years, experts have been predicting an increase. It appears that with recent LIBOR increases long-term rates may finally trend up.

In the last 90 days, the 10-Year Treasury has wavered between 2.05 percent and 2.45 percent. Any borrower caught in the middle of this ebb and flow with the potential of closing a loan that is 40-basis points higher than when they signed the application is concerned. This unexpected higher rate erodes a borrower's expected cash flow and ROI and may change the "out-of-pocket" capital required to close the transaction.

The uncertainty affects both borrowers in the midst of a transaction, and those looking to refinance an asset in the next 24 months. Many scenarios play out across every asset class and in every market, requiring an investor to consider hedging against this uncertainty. For example, the asset may not be in a position for permanent financing due to low occupancy, lack of seasoned rents, or perhaps the renovation and lease-up have not been completed. A borrower could also have a prepayment penalty or lockout that is preventing them from refinancing now. They are then faced with gambling that rates will stay low until they can refinance or sell the asset.

So how do forward commitments work?

For up to 12 months, and in some cases longer, life insurance companies can provide a firm commitment to borrowers that today’s interest rate will be the interest rate when they close, barring any substantial changes to the property and its economics. This feature comes with an interest rate premium in most cases; some will provide a forward commitment up to six months without charging a premium, but the usual cost is 3-5 basis points per month when the rate is held beyond a 90-day period. Almost all life companies will lock the interest rate when the application is signed and a refundable good faith deposit is received from the borrower. They will then give a free 90-day period to complete due diligence and negotiate the loan documents.

What are the other options and how do you control your rate?

In the multifamily capital markets, Freddie Mac and Fannie Mae offer a wide variety of attractive loan options, including a 60-90-120 day lock feature with the quoted spreads being higher for the longer timeframes. Banks can usually lock a rate for 60-90 days for fixed-rate loan products, but can create other issues for borrowers by requiring depository relationships and ongoing covenants for property performance. CMBS lenders typically can't lock more than a few days before loan closing. This leaves borrowers vulnerable to rate movements, which can affect loan proceeds and other terms.

Hope this helps provide some color on what options are out there! 

Hi @Brian Schmelzlen! Welcome to BP!

Echoing Kevin's sentiment, always nice to have more San Diegans on here - we're not all at the beach! Let me know if you or any of your clients have questions regarding commercial real estate finance. Happy to help anytime.

Conor