All Forum Posts by: Duke Giordano

Hello All,

Can someone help me understand a particular term, Bad debt.   In addition, what is means to see increased "Bad Debt" at this time, both in general and in quantitative terms.  If this value (Bad Debt) does change during COVID, what changes are most operators seeing in this category.

Secondarily, in relation to two other categories that may change in new deals in relation to COVID I would be curious as what these assumptions or numbers were pre and post in relation:

1. Bad Debt: as discussed above how would you define this and how do you anticipate this changing pre and post-COVID.

2. Concessions: I am guessing these will go up to keep current renters in place but the question is how much from a quantitative standpoint are people figuring into the new assumptions/underwriting depending whether deal is existing or looking at a new acquisition.  Dollar figure vs a percentage of expenses before and after.

3. Vacancy Rate: When looking at a new or existing deal, how are people changing their assumptions based on vacancy rate?

Thanks for input @Charles Seaman and @Thomas Rutkowski

I guess the value to the borrowing depends on the delta from the dividend compared with the cost of borrowing (after tax) taking into consideration whether the borrowing is deductible or not.  So are you saying you think the use of infinite banking or "Bank on yourself" as a funding account for syndications is good or bad?  

Thanks again

Thank for your reply @Charles Seaman.

I was curious if you house your real estate investments in a LLC for asset protection, how does the LLC integrate with the "Bank on Yourself" policy. Does the LLC hold the whole life policy or vice versa?

Hey Guys,

For those who are an LP or GP in Real Estate Syndication deals and invest with Post-Tax cash account (not SDIRA etc.) I am curious about what type of funding account that you use.  I have outlined the considerations below:

1. Brokerage Account/High Interest Savings Account - this would seem the simplest option to use a Brokerage account or high interest savings account to make the transfer/witre.  The negative is you are getting a low interest level in the 1-2% range (cap One 360, Ally, or Fidelity MMA)

2. Infinite Banking Option/Bank on Yourself Whole life Policy - For those who are not aware of this type of account it is a whole life policy that you contribute to lets say 100K and then you have 75K cash value to use year one toward RE investments.  The cash position grows over time and you typically get a dividend interest in the 4-6% range.  When you invest in RE deals you borrow from the cash value, and still get your own interest on the borrowed amount but you have to pay yourself interest on what you borrowed (not sure what the Dividend/Borrowed delta is).  There is also a death benefit, and the typical break even point from fees is in the 5 year range.

Trying to figure out for those who specifically use post-tax accounts to invest in real estate what is the best use cash holding account for funding of the above two options, or that people use more commonly as the funding account?  Whats your thoughts on the consensus for a cash holding/funding account specifically for post-tax RE investments?

Thanks

Duke

@Todd Dexheimer

Thanks as always for your input Todd.  Will be interesting to see how deals and operators evolve over next 6-12 months.  If the value add component is put on pause for a few years in relation to ability to increase rent I am curios wha part of the deal the return will come from?  Or do you think, the return will just be pushed off after year 3 when rents increase?  Are you planning longer or similar hold times?

@Kevin Owens

Thanks Kevin for your comment, guess I should have been more clear in my statement.  What I was trying to say was that new deal flow (Not Refi's) in the multi-family space has and will likely continue to slow down in the near future.  There are several variables that are having an effect on this such as market uncertainty, pricing delta of expectations during this transition time between what the seller and buyers think constitute a fair price, and last but not least lending restrictions.  

I was making an observation that many operators will find that underwriting deals to make the numbers work with the new loan terms and reserve requirements (albeit justified) will lead to less new multifamily deals and less operators that can qualify within the framework of the new lending standards and reserve requirements.

@Ellie Perlman

Your adjustments seem reasonable, I think it is somewhat of a moving target at this point.  Will be interesting to see how the lending terms evolve, as of now  they seem very restrictive (Agency loans) in relation to getting deal flow going.

@Brian Burke

Brian, thanks again as always for your reply.  I think the one other extenuating variable that we didn't discuss may make a fund less desirable for a LP is when the assets in the funds are in different states which can complicate tax filing status.  

A fund that is specific to properties in a single state could get around this, but the idea of having several K1 to file for a single fund is another variable I forgot to mention from an LP standpoint.  Plausibly, if particular funds were confined to a single state that could easily overcome this.

Last variable as you mentioned is how much of the fund assets are blind vs known.  Obviously with the known assets that can be vetted or at least evaluated a bit.  In the setting where future assets are not known, they obviously cannot be vetted thus will be completely on trust of the GP.  However, that adds an additional complexity as with an LP capitol and when will it be deployed.  This may put a sponsor in a precarious position in that if they hold the LP capitol and do not deploy that in essence the LP is losing money on that capitol, in addition this may then tempt a GP to force or at least be tempted to lessen standards simply to deploy capitol.  

It's a tricky game, but I can see both the pros and cons.  However, admittedly you have built up your reputation to the point where you are clearly one of the few operators who can pull this off and likely succeed but it will be interesting to see whether the demand changes in this environment to the fund model.

Thanks as always for everyones thoughts and dialogue.

@Brian Burke

As always, thanks for your time and insight.  I look forward to your upcoming book.

Specifically, great point on partitioned IRR.  I forgot about that, I did make a calculator for that.  Wish more sponsors would divulge this more in PPM, but guess we can calculate ourselves.  Great point though, and more important now than ever.

Interesting point on the Cap Rates.  As a LP I have not seen a whole bunch of deals with Cap Rates much different than before, most still in the 4.5-5.5, but than again admittedly seems like deals have slowed a bit so have not seen a bunch post Mid-March.  It would be interesting to know if Cap Rates have already began to change.

Two quick Follow questions on how COVID May effect specific aspects Deals if I may Brian and others:

1. Split LP Structure: Im sure you are aware of a recent change over the last year or so is that several sponsors have began offering split LP structures with Class A (Higher 10% pref, Higher Min, no upside) and Class B (Lower 7% pref, normal Min, More upside IRR/Eq Multiple). As an upside investor, I am not so fond of these deals, as in effect this pushes the upside class B LP further down the capitol stack. It was assumed that the split structure was a function of being late in the market cycle, if that is the case do you think these deals will become less common and this practice will revert to kore traditional deals?

2. Single Deal vs Fund Models:  Another function of the late market cycle that began to be more common is many operators offered a fund model, as opposed to single deals.  I am curious if you think these funds will be more or less common in future deals now that the market is changing.  I know you guys have implemented a fund recently and I am curious on your thought on this fund model going forward for the market in general and Praxis.  Once again, I am ambivalent on this and slightly negative in that I feel may be in some ways less favorable fir LP in that in does decrease the ability to underwrite a deal.  However, since there are several deals in a fund, but it does decrease risk.

Thanks in advance for the insight.

Thanks @Greg Dickerson, @Spencer Gray, @Roni E. for your comments.

Yea, I agree with two big factor being the debt type, and rent increase assumptions that will be effected in deals going forward.  It will be interesting to see when the May and June rent reports come out to see how deals and assumptions change.