All Forum Posts by: Jonathan Twombly

Andrew, your response very much reminds me of the people who post with questions like, "What cap rate should I be using at this point in the market?"

That's putting the cart way before the horse.  As you know, Andrew, you have to bid based on what the value is to you.  The current market cap rate is what other investors value the property at right now, and at any given moment that could be a bad thing for you to tag along on.

"Retail" or "current cap" rates fluctuate depending entirely on how much of a frenzy investors are in.  The very same property could have different prices at different points in the cycle, all things being perfectly equal.  Does that mean that the property has a higher intrinsic value at the top of the market than it does at the bottom of the market?

If you answer that question in the affirmative, I, for one, would much rather be buying when the "intrinsic value" is in the toilet than when it's in the stratosphere.

As a practical matter, it’s going to be very difficult to put the syndication together if you have not already built a network of potential investors in advance.  Once you sign the contract things move pretty fast so if you don’t have your team and your investors lined up ahead of time closing will be very tough.  

Bloomberg has a very interesting article about how retail is on the verge of imploding - not because, as we usually hear, of Amazon, though Amazon doesn't help.  It's because so many chains have been purchased by private equity firms in recent years, and PE firms have overloaded them with debt.  This will take down some healthy chains too, Bloomberg argues.

What I immediately noticed was where the debt-laden chain stores are.  They line up very nicely with the MSAs where a lot of investors are now flocking because they feature high cap rates, even though those MSAs feature declining populations and other bad fundamentals.  This article makes the fundamentals seem even worse.

What are your thoughts?

Here's the article:  https://www.bloomberg.com/graphics/2017-retail-debt/

if they're passive, which means they have no management rights, then you're selling a security and the SEC rules kick in.  Doesn't matter if they are friends and family or just a few of them.  What matters is whether they are passive or not. 

But just a word of caution.  I'm not a securities lawyer so please verify what you're doing with an actual securities lawyer. 

 Not quite sure what you're asking.  PM me and we can chat more specifically.  

 And I definitely would not be buying right now if my play were 100% appreciation, either.

 I saw this starting to happen two years ago, when I attempted to raise a fund from private family offices.  After "we don't invest in funds," the next objection I got was:  "we are full up on real estate."  I distinctly remember one investment manager being very nasty to me about why any fool would invest in real estate anymore at that point.  Now, obviously, he was wrong about the timing, but the sentiment was already forming two years ago that the real estate market no longer offered a buying opportunity.

As I have said elsewhere, I do not expect a 2008-style crash.  There are many reasons for this that I won't go into here, and people like David Dachtera has already laid them out better than I could.  However, many people on this site never knew or have forgotten that real estate is cyclical.  It does not always go up, and many, many signs are pointing to the fact that it pretty much cannot continue to go up from this point.  A correction is due.  It's not a matter of if, but only a matter of when.  And even thought that is always true, I think that "when" is closer than many people believe.

I'm selling everything, Andrew. 

Of course, I cannot predict when, exactly, the market will correct.  But that is why I am selling.  The opportunity to sell into a feeding frenzy exists now, and I feel confident that the time window of opportunity for that is closing.  

Is it closing fast?  That, I don't know.  But there are some signs that we are in the final innings - softening rents in many major markets where the big money focuses; pipeline of new construction drying up because of land prices/lending in major markets (Tishman-Speyer, one of the biggest developers in the world, laid off its ENTIRE development staff earlier this year.  I know, because one of my friends works there.  They did it because it no longer makes sense for them to develop anything in this cycle.); the Chinese government finally acting on its threat to turn off the spigot of Yuan moving abroad for real estate deals.  And, on top of all of this, this cycle has been going on for a VERY long time now.  Volume of multifamily sales is dropping because there is so little product that has not already been transacted in this cycle.  All of these things add up to it being the beginning of the end, in my mind.

When the big money gets scared of what is happening in the big cities, the economics of other markets won't matter much, in my opinion. The big money will pull back from big cities, making deals there slightly more attractive to the slightly less big money that was chased to smaller markets in this cycle. That money prefers to be in the big markets, and when the opportunity comes, they will go back there. The tide will go out from the smaller markets when it happens. The economics on the ground in smaller markets will be irrelevant when the big banks get skittish. That will present a great opportunity for those of us who know what is going on there.

This cycle has been my first go round as an owner.  (I watched the last one closely from the sidelines as a real estate litigation lawyer.)  One of the obstacles I have had to raising money from investors is that I have never been through a full cycle before.  So, selling now is also strategic for me.  It is an opportunity to create a track record in amber that gets my clients very strong returns, so that I can go out and raise more money next time, without this objection coming up.

Taking everything together, I look at it this way.  It is far more likely that the selling opportunity is going to get WORSE in the next 12-24 months than that it is going to get BETTER.  Is anyone out there willing to go on record as saying that cap rates will be lower than they are now in 24 months time?

Now, let me be clear about one thing.  I am NOT telling other people they should sell.  If you have cash-flowing properties that are doing well, and you intended all along to hold them indefinitely, you should absolutely keep holding.  That's the beauty of cash flowing MFRE - it will continue to cash flow for you no matter what the market is doing in terms of asset prices.

However, if you have dogs in your portfolio, I would say the window for dumping them on someone greedy and unrealistic is closing.

Make sure that your co-op board will agree to whatever you are doing as well.  Usually board approval is required when you refinance your mortgage.

@Milan Obradovic  Assuming you're talking about a lender for the new deal, at this size deal, you are still looking at residential mortgages, rather than commercial ones, which start at 5 units and larger.  

Community banks in the area of the property are always a good place to start on small projects like this.