Apr 7, 2020
James:
Hi audience and listeners this is James Kandasamy from Achieve
Wealth through Value at Real Estate Investing podcast. Today I have
Anton Mattli from Peak Multifamily who is one of the leading
multifamily financing agencies. Anton is a CEO of a big multifamily
funding. He graduated from Zurich Business School. He's from
Switzerland originally, love Switzerland for the view of it and he
has been advising family officers’ high net worth individuals and
has done billions and billions of dollars of loans. Anton and I was
discussing before this interview started saying it's not fair for
lenders to declare how many billions they have done because that
can be a lot of money but the experience level and the knowledge
and the acumen of the industry matters a lot when you're doing
financing. Hey Anton, welcome to the show.
Anton:
Yeah. Hi James. Thanks for having me.
James:
Absolutely, absolutely. Actually we are having, originally I
planned to have a meeting with you to talk about what could happen
similar to 2008 crisis because we have been talking about it for
past few months, but now we are in the middle of corona virus
recession, I would say and we are in the first or second week of
this happening. So basically we don't have to predict what the
recession can be, but we can predict what are the outcome from this
event could be. I think a few months ago you and I have a lot of
discussions about how the market would turn, how dangerous is the
market right now in terms of operators or sponsors or syndicators
buying things because overleveraged, overpriced and all that. What
were your thoughts before this Covid19 recession came about and how
was your state of mind in terms of how the economy was and how
everyone was buying deals and we'll go into the details on Covid19
and what's happening now?
Anton:
Sure. As you write on the operator side have seen quite a number of
deals that for me personally didn't make sense but I didn't know a
deal was financeable from a lender perspective, from a debt service
called [02:36unclear] particularly when it's an agency
loan, does not necessarily mean that it's a good deal from an
equity investor perspective. Even though we were able to finance
some of these deals with a number of them I would not have felt
comfortable to invest in those deals. There were plenty of deals
that still made a lot of sense, so don't get me wrong, it's not all
of them, but there were only the number of deals that in my view,
didn't make sense over the last two years, only have increased
dramatically compared to before. At the same time we have also
arranged bridge loans and as you probably know, bridge
lenders, they're extremely active. They have taken a major activity
uptake over the last few years.
So there was a lot of competition in the bridge lending space, which meant that you were easily able to get 80% of cost for your C class property and sometimes in really tough locations and bridge loans make perfect sense when it's a true value-add deal. When it's not really a value add and it's mostly to do with soft rehab, but you feel that you get the agency loans when you need it and you go with a bridge loan, then I think it was much more problematic. So with that obviously we have seen quite a number of these bridge loans and deals that I believe particularly in the current environment will likely struggle. Because this bridge lenders they are not like the agencies and that came down now with the forbearance offer. Don't expect that from bridge lenders.
James:
Yeah, I know. It's crazy. Now I feel so happy. I'm all
in [04:41unclear] for the past one and a half year I've
moved to [04:45unclear]. So are you saying on the bridge side
there is no forbearance or what's happening on the bridge side with
the Covid19 crisis right now?
Anton:
Well as a general rule, bridge lenders have never been; some of
them, the good bridge lenders they have always been willing to make
adjustments when they see that a borrower is behind of the original
plan, the ones that are really in there as a partner, they have
been willing to cooperate and I think those lenders, and they are
not really that many among all the bridge lenders that are out
there, they will continue during these times to help a borrower to
get through that time. But the majority of bridge lenders are not
maybe staying, very often it's not their own money so they
essentially have orders behind that that they buy into and they
have kind of an obligation to fulfil that loan agreement to the
letter and their investors demand that they fulfil their obligation
as per the loan agreements.
So some of them are very aggressive just by nature and the others have to force from the investors they have the loan funded from do actually go into enforcement or you can call it loss mitigation as the nice term sounds with these loans very forcefully and very quickly. So now maybe the [06:25unclear] is a little bit of a shine of positive light here that they may say, look, yes, we could foreclose right now, but maybe it's not a good time to do the foreclosure now anyhow so let's just go through another couple of months and then see if we want to foreclose. But it's still in my view that just kicked the can down the road for a very brief period of time until they go all way in with their loss mitigation process.
James:
But I think it only depends on what's happening in April,
right? I mean, we have another 10 more days to
go [07:03unclear]. But in general, I am already seeing
even in my properties, they are residents who are declaring that
they can't pay and this $3000 a door family units. I'm not sure, as
you mentioned they're going to use it for rent or is it one time?
I'm not sure for how many months is that? But the thing is the
delinquency will be higher. So I believe the sponsors or
syndicators who are halfway to value add and right now they are not
done with the value add. So their value add might be struggling. If
it goes below certain level, they're going to be stuck because it's
going to be negative and as you mentioned, bridge lenders are or
private people. They have the obligation to whoever gave them the
money.
Anton:
That's right. Yeah. So if you have already a property that is,
let's say a third empty because you planned all your rehab, even if
you do rehab, a lot of tenants that you now can attract and so you
would have to attract them with very aggressive terms. If you find
them and then you still know that at that level that you need to be
based on your performance, which the lender wants to essentially
base their decision on to release more rehab money for future
doors. So then essentially that rehab money sits with the bridge
lender, you have not performed as per the loan agreements. So if
you want to go ahead further, you need to inject more equity.
James:
Yeah. It's basically...
Anton:
It's kind of a vicious cycle.
James:
Yeah, it's a downward spiral because now I believe on the bridge
sites, a lot of loan are based on LTV, loan to value and they're
going to assume the values are going to drop. Because now your rent
is going to drop [08:54unclear].
Anton:
Yeah. It's a combination of loan to value, but as you go through
the draw process, it's more driven by some amount of collections
that you need to achieve and why and then the dead deals that you
need to achieve with that. So it's a little bit of a different
measuring sticks. But at the end of the day, it doesn't really
matter what you use, it's maybe hard to achieve these points that
you need to meet at some point in the timeline, then you property
is not performing and so the reality is all these bridge loans they
typically have very aggressive timelines to start with. So if you
fall behind just by a couple of months, it can become very
problematic. When it says after six months we should achieve this
and you are essentially behind by two or three months and it
continues to go in the same direction as you fall behind once you
are at the enrolment then, and so long. So I would say the ones
that have enough cash on their own that they can inject as needed,
they will be fine. So the ones that suffer the most are the
sponsors that just kind of get by with their own personal
financials and they don't have the ability to inject a couple of
hundred thousand as needed to get the ball rolling at the
property.
James:
Yeah. But it is tricky, right? Right now, I mean most sponsors can
use this Covid19 and burn the equity and get out or they can keep
on injecting and try to; because no one knows what's going to
happen in the next six months. So it's a gamble. A lot of sponsors
or syndicators need to take whoever on the bridge loan if they need
to continue injecting more money or give it back to the bridge
lender. But right now they have a valid reason. They can say the
whole world is collapsing. I'm getting out now.
Anton:
Yeah. If you're a syndicator. So you essentially can ask your
investors, look, we are in really deep trouble. Do we want to
inject more money? Generally I would say what typically should
happen is that you do a capital call and if no one wants to do it,
then you would have to lend yourself or you come up with the equity
yourself. But in most instances it's not equity, but it's more a
loan by the partners. But again, that all requires that the channel
partners actually have the cash available if we lend to the
property and a lot of them I've seen out there they don't have that
capacity. So they'll be very interesting. Obviously that always
assumes that things really get bad but we don't know yet. Maybe
it's a miracle and all that stimulus money somehow entices these
tenants to pay the rent.
Obviously I hope for you and for everyone else who operates properties that that's going to happen. But based on history I don't think that that is really going to happen. I think last night I do have Brian on and he was referring to the situation during the hurricanes in Houston and that's a perfect example I would say but you cannot compare with 2008, I think we all agree with that, but certainly what happened with Harvey and the flooding is probably much better comparison. Because everything had to be shut down. It was very localized, but it had to be shut down. As Brian correctly mentioned like the properties across the board suffered with delinquencies. So I would say we will likely see that we just do not know yet how big the percentages by asset class and by location.
I think it will depend a lot on locations obviously places like the Northeast, the greater New York City areas only suffer more. Same thing in Washington State, in Texas we would have to see how bad it is. Obviously we have also the additional element of oil and gas that has laid a massive negative role here for us in Texas, particularly for the property owners in Houston and we don't even have to talk about Midland and Odessa. But even in Houston it's only something that will in addition to Covid19 will have a negative impact on these properties. So it will be very fascinating to see how the performance looks like in the next a few months.
James:
Yeah, I'll get a good indication in the next 10 days. But we are
already getting our property managers to start probing with tenants
and who's having trouble and all that. So we are compiling that,
trying to understand and trying to work with them. Some kind of
payment plans. That's what Texas apartment association or we call
it TAA has given us guidance. But I think a lot of it depends on
which sub market you are in. I mean, I know sometimes we use and it
depends on and then people think, okay, my property's good but
there's a lot more details to it. So whether you have a base
manufacturing in that area or not, or whether you are CTO or
whenever you invest it's a lot of its service industry or not a
service industry is dead right now. Las Vegas, we used to be the
best place to invest before two weeks ago, but up until now, the
whole Las Vegas is closed down. I'm sure you people don't have
money there because they are both more leisure business and
gambling, hotel business. So basically there's no money, so within
two weeks, things change now. So compared to places where there's a
lot of manufacturing happening, this diversity of employment, you
can still reduce the rent slightly and then you still get people
who can pay because they are still being employed.
Anton:
That's right. Yeah. Yeah. And if you're right next to an Amazon
logistics center, you're probably good.
James:
Correct. Correct. Correct. Absolutely. Absolutely. I am still
getting rent right now, up to now for the past two, three days, I'm
still getting rents for April, so that's a good sign but ours is
all automated. It's all virtual. So probably they already set up,
the ACH is all coming online, but we'll know more in the next 5 to
10 days, where it's very interesting times. But as I say, I mean
last time, everybody was doing very well because the market was
doing very well. Right now no sub market location becomes very
important and the good thing is whoever has this agency load, I
think they have many ways to weather this; either take the
forbearance or just ride it through because your loan is there. But
guys with short term loan, this is very, very tricky right now and
you talked about the bridge loans and all that. Do you see the same
issue with loans on credit union, the banks, small banks and all
that? Do you think they still have issues similar to bridge loan
guys?
Anton:
No. I mean, what we have seen was actually so far has been very
positive where particularly these small credit unions and banks
have been very cooperative in finding solutions better rates for
barons. And that seen before it started. Why it's almost like,
okay, we understand, we are reaching a now a tough period of time
and that you're willing to either modify it along to stretch it out
to lower the right. So they feel very at least a good number of
them that we have heard back from, from various borrowers have had
a very good experience there.
James:
Got it, got it. So are they being managed by a FHK well? The small
banks and credit unions?
Anton:
No, it's all balance sheet based. So these are really the easy
loans to long straddle which unite the loans and then secured the
heist then too, they are in the same boat as I would say all the
other loans that are out there. I'm talking the ones that typically
it's more the small loans somewhere in the $300,000 to maybe 2
million, 3 million range. So not really the large lumps, they are
some exceptions there but they are loans that are not a significant
burden on their balance sheets and it's much better for them to
work out these existing lumps that they have on the balance sheet
that are on the basis of still that we sound them just going
through a hard time but they are willing to work it out with the
borrowers. So that's really for the ones that are on balance sheets
and the ones that really have had success, the borrowers or the
ones that have already very good established relationships with
these banks. So they know the owners or the branch manager and that
brings us back to that relationship. Now is more important than
ever. Whether you do a new loan now or whether you already have an
existing loan, the way you will have managed your relationships,
whether it's your tenants, whether it's your property management
company, whether it's your lender. Now that all comes back to you
but if you treated them badly, they will remember if he treated
them well, they are more willing to work with you.
James:
Yeah. And just for the audience, I mean, if you guys read my
book, Passive Investing in Commercial Real Estate, I did very,
very specifically mentioned that bridge loans may not be the best
loan during the market peak. I'm not sure how many people read my
book, but I did mention it there and that was written like two
years ago. As I say, I stopped doing it just for my peace of mind
and I want to make sure that I protect my investors’ money as much
as possible than doing these flips at the end of the cycle and
giving them; taking large risk and trying to do a flip at the
end. I rather go on a much better, safer bet with the better
finance strategy. So when was this triggered to you? I know we
are talking about; I think we are like two weeks into this crisis
right now. But this happens so quickly. When did you feel like,
okay, we are in trouble right now because you and I spoke and we
had like 12 different reasons why the market can go bad. We have
Brexit, I don't know if we have 12 things. I can't remember what
the exact things. We had so many things we laid out what could go
wrong, but I believe this is completely out of the norm. A medical
health issue, a virus infection that's causing everybody to stay at
home. I mean, is that right? When did you start to think that, oh
my God, this could be the next recession?
Anton:
Yeah, I mean, we have seen already pressure in the system for a
while, where we have seen that
already [21:06unclear] was an issue and in the
banking system we have seen it already last fall and we have seen
it in January and February. Just because of the all whole world
view that we have reached a point where everyone is getting more
concerned. But it was still possible with the fad essentially doing
all these liquidity measures in the past, as soon as there was the
slightest view that there might be a little bit of a slowdown. So
they were able to essentially put as much liquidity into the market
as they needed to. Now, I would say the current situation and where
we are now on the lending side really has started just about two
weeks ago. It's not that it really built up. Obviously everyone was
watching what was happening in China and then slowly in Europe. And
as it was building up in Europe, suddenly the clouds came out. But
you may recall at that point the treasuries dropped significantly.
The fed already dropped the rates once and that actually resulted
in some of the best time to borrow and to refinance. So that we had
maybe a period of two weeks, maybe three weeks. But I think it was
just around two weeks. Then we were able to get essentially 10 year
and 12 year loans at close to 3%.
I know someone that was not arranged through us, but I know someone who bought the rate that was below 3%, I think it was 2.94 or something like that and that lasted really just for a brief period of time until two weeks ago and everyone realized we have a problem and that problem really just was shown again in the market that there was no liquidity. And the fed will stay in coming out with their one and a half trillion injection where they said we are going to buy as much treasuries as we need and we are going to buy commercial papers and that still didn't do anything to the market. And then so the spreads started to do tighten on the agency loans at that point and then we were up into the mid two, three, 3% in Olin rates. And then this weekend and the lamps, as you may recall last weekend, that we, the fed announced that they are now buying also agency NBS for as much as it is needed.
So now obviously the hope was there that they would provide the contents to the market that was so much liquidity that they are willing to put into the market that no investor in these NBS should be concerned and that that would stabilize at least the multifamily market. Always leave a half note to say that they will buy all the commercial mortgage backed securities like hospitality or retail based NDS. But it still did not help when it came to the agency side. And I would say that was probably the biggest surprise so then that deal ended on Sunday and then on Monday the agency spreads actually went up by 75 to 100 basis points. So, even though they announced it that they will buy us many agency mortgage backed securities as the market needs to get the liquidity in the market, obviously they didn't believe it and spreads moved up even further and we all still in the same situation today.
So if you wanted to get into new agency loan today with the new Fannie loan, ten year Fannie loan, your rate will be at four and a half percent for a large Fannie loan that passed some form of, as we call it, permission-based, like with affordability elements to it. If there was no affordability element to it, you're probably closer to 5%; and that's coming up from just three weeks ago when we were at the low threes. That's all grim because the markets, there are no buyers out there, so no one is able to price right now. Obviously the hope that that will be sorted out and I think as market participants see how the impact on multifamily is going to be in April or May it will calm down because then they understand how big that impact is and are able to determine where the priority should be, but until then, it's essentially there is an old one that is buying. That puts Fannie and Freddie in a very difficult position because obviously they are obligated to buy that loan from a lender that originates that loan and then they need to securitize it and sell it. They do not want to keep it on their book.
Even if they keep it on their book, they still have half the credit risk transfer buyers that they are going to so they're good. Fannie score has always been that they will find and Freddie too that they find other risk participants and in order to find them, the loans need to be priced so that these risks, participants are willing to buy whatever share of risks that they are participating in and right now, no one is willing to take that risk.
James:
I know it is crazy. I mean where we are looking at to do deals or
to refinance should wait a few more weeks or because, I don't know,
a few more weeks or months or what do you [27:43unclear]?
Anton:
Yes. I think for refi is in my view is easier. Why? Because you are
not really under immediate pressure unless you're really in a very
difficult financial situation. But then it's probably the last
thing to consider refinancing now. I would wait on the refinancing
side until the market has calmed down. Why would you want to now
deal with an interest rate that is four and a half to 5% when the
10 year treasury holders are under 1%. If the market calms down,
there is a reasonable expectation that the spread narrows again and
that you're back down. Maybe not to the three and a half, but maybe
in 4% or four and a quarter. It is such an uncertain time, but in
my view it just doesn't make sense to campaign and apply for
refinancing.
Also the other point is since your future collections are still taken into consideration. If you apply today, a lender may underwrite your T12 up to March and everything looks great and as April and May and June come in and if the drop is pretty significant, that will impact your loan proceeds at that point too. So not only have you applied for a loan potentially at a very high rate but now with the loan proceeds are getting customers. There is so much uncertainty that in my view just doesn't make sense right at this point unless it's an absolute emergency to do so. When it comes to acquisitions I mean it needs to be a blazing deal in my view to even consider an acquisition. Because you have the same situation. How you negotiate with a seller? What clauses can you put into a contract in terms of occupancy and in terms of collections that a seller would feel comfortable with, but you are also comfortable with? Because that's really what you should do, in my view, if you go under a new contract, you should say that the occupants who need to be at certain level and the collections need to be at a certain level. And if not, then it's going to be through a re-trade.
If you don't have that, then I think the risk is just too high. And on the other side with the loan, it's essentially the same thing. So yes, you can apply for that loan, but unless you have these clauses in that PSA, you'll run the risk that you go in for a higher price. You should reprice the seller, but you cannot. But the loan amount is still being cut. So my recommendation is if you find that deal the first step is we need to get these clauses with the seller and the PSA. And if you have these clauses the way out, then you need to decide whether it's worthwhile to spend, let's say 20,000 in loan application fees and all that that you may lose. But that's ultimately the session that depends on that you feel that deal is so good. So I wouldn't say don't do it, but have these clauses in that PSA that allows you to re-trade with the seller that essentially then reflects the lower loan proceeds that you would likely get the occupancy and collection slow.
James:
Got it. Got it. Got it. Yeah, and also, I think it's a very tricky
situation. You want to raise money but I'm sure if you find a deal,
which is screaming good and you fear an experienced operator, you
probably can raise the money. But it's just so uncertain right now
and I don't know whether you probably already know this, I heard
Fannie Mae right now is asking everyone to put like 12 months
principle and taxes and insurance into escrow, I guess, right?
Anton:
Yes. Up to 18 month. It depends on the tier, if you're on tier two;
it's up to 18 months. It's massive. At least I say it's cap that
10% of the loan amount, it's a massive amount. So obviously what
does that mean? Now you need to raise more money. So you've likely
also, I would say there haven't really lowered the LTV or increased
that service, Coleridge recline that may come too but I would say
it's more on a deal by deal basis anyhow now but let's assumes they
are still in place that you still get can get these maximum
leverage and the same service coverage. Just the fact that you have
full these escrow that you need to build is a on top of the higher
interest rate deal, which means that you need to get the lower
price from the seller, there is just no way around.
James:
Yeah. Yeah. I think Fannie is just saying we are actually out of
the market, but if you can meet this, we maybe come back. Let me
just basically break it down.
Anton:
Yes, that's right. Yes. Yes. So actually that's always the
conventional Freddie side and Fannie on the Freddie SPL side. I
mean there has nothing being communicated officially, but there are
solely some rumours that Freddie may stop any new origination for a
certain period of time just to see their things all settled. So it
will be again, the next few weeks will be extremely fascinating to
watch how the market participants will from tenants to operators to
lenders respond and right now we just do not know, but it's already
extremely difficult even to get an agency loan into place that
makes sense. But also would say it's really dangerous if someone
still seek quotes from brokers and lenders that come in at the
three and a half percent, because I guess they often threaten you
or just to get the borrowers into the door knowing that it will be
re-traded. That is another thing that borrowers really need to be
acutely aware of. Do not trust any quote until you have it
validated and validated, ask the broker, ask the lender
multiple times, is that still valid?
Again, what we said just a couple of days ago is already outdated. It's important to be really on top of it and know what the current situation looks like. So maybe just to go quickly back to the forbearance discussion. Obviously it's a very attractive program. It's good news when you have agency loans, but I still would caution to use that forbearance and just would, because you can. Both Fannie and Freddie obviously they have implemented it. It came down from FHA, so it was not really Fannie and Freddie that wanted to do it, but it's essentially a government driven decision that it's necessary and I think it's the right thing to do and it's a very good backstop for all the operators. However, if you operate the property in a good fashion or take it if you have owned the property already for a year or two years you should have enough operating reserves to get through a month or two without having already to suffer so much with let's say a 20% or even 30% collection loss that we needed to go back to the lender and ask for forbearance.
Now could you do it? I would say you probably could, but generally speaking I would say you really should only go back when you see that you are getting close to the 1.01105 of that service cover and essentially make a case, look, it's all bad at my property. I have a collection drop for 40% or whatever it is, I need your help. But if let's say the drop is 10% or even 15%, even 20% and you go right now to Fannie and Freddie they may agree to it, but I think it will be a negative Mark with them down the road when you go for a new loan that they feel that you really haven't attempted to work out the solution on your own first before you lend to them. So I will just to be a little bit careful there in how quickly you want to pull that trigger.
James:
Yeah. Yeah. And also forbearance is not free. You have to make sure
you don't even meet the person for 90 days or whatever time that
you're getting that forbearance.
Anton:
Yeah. That's actually an interesting part. So with Fanny, it's
actually not just the 90 days. If you have that forbearance, so
you're allowed essentially you have that 90 days and then you can
pay it back over a stretch off twelve months without any late fees
and interest charge on it. Now, Fannie has communicated that you
are not allowed to extend the 90 days of forbearance, which is
obvious, but also that you're not allowed to be late until you
bring the loan current, which includes that 12 month of repayment
period if you choose to scratch it out for the 12 months. Now,
Freddy so far only refer to the 90 days. I suspect that they just
forgot to mention that by the way, you need to bring it current. So
I have seen it on Facebook and in some other places where people
say, well, Freddy is easier because you only need to have 90
days. The eviction is halted and then you can do it
again.
I suspect Freddy will probably also come out and announce that you need to bring the loan current and only then are you allowed to run your evictions again. So in other words if you want to or if you need to go back to normal that your property allows to do action, the property manager, you essentially do pay after these 90 days, then if you do not and you want to stretch out for an another three month or all the way up to 12 months, you essentially have potentially 15 months at your property. They cannot do any of evictions at all.
James:
How do they track whether you're doing evictions or not?
Anton:
I don't know how they...
James:
There's no way to?
Anton:
Well always a way that they can, I'm pretty sure that they all have
access to the local court system and validate that you have not
filed any evictions.
James:
Got it. Great. Yeah, but somehow it may trigger
bad [39:49unclear] if you go and not follow the
agreement [39:53unclear]?
Anton:
That's a good question.
James:
You can only say you violated our agreement, so...
Anton:
Maybe it's not triggering the bad [40:02unclear] but
don't go back to Fannie or Freddie if you didn't follow these rules
to the dot.
James:
Okay. Got it. Got it. So it's just so crazy. So I mean are you
already seeing that a sponsors and syndicators are getting bridge
letters for people on bridge? I mean it's still very early right
now to say?
Anton:
No, we haven't seen anything, what we have seen is that the number
of bridge lenders walked away from their loans at the last moment,
I mean there are several bridge loans that we know of. Lucky for us
it was none that we were arranging, but I know of a number of a
sponsors that had bridge loan commitments in place that are
supposed to close within a week to two weeks and the bridge lender
said sorry we cannot fund. So these are situations that have
happened already. It's more that lenders essentially have pulled
out, but we haven't heard anything yet on existing loans that are
in place by then. It's really too early. We need to see how April
comes in and I would say probably takes until May until things get
really bad, if a property has a massive loss of
collections.
James:
Based on your experience, because you have gone through 2008 and
you have been in the industry for a very long time. Let's say right
now Covid19 is gone within one month, so everybody start going to
work, what will the impact be as we move forward to the financial
market? Because that's a big shock happened in the financial
market. There are a lot of people, who didn't have income for one
or two months, is there a downward spiral or are we a good back
again, the sun shines and everything goes back to normal. Where do
you see it? What would happen?
Anton:
I wish I had a crystal ball, but I think the harder we land over
the next few months. I think the quicker the upturn is going to be,
but I still feel that they probably will take 18 months to two
years until we are truly stabilized. I know some feel that
everything will jump back up again right afterwards. I think the
damage to consumer confidence will still be a lingering around for
quite some time. Yes, there is that pent up demand for some items,
but places will still suffer particularly the small businesses,
some of them really are suffering tremendously and some of them are
not able to come back and also I think a lot of the service
employees, restaurants will be very slow in hiring. It also
the reason to keep wages lower so it's the impact I think on
the GDP or we probably go through obviously little jump up very
quickly, again, form from a deep drop, but this year it definitely
will be negative in my view but Goldman Sachs talks about roughly
3.8% for the year after a 25% drop.
I think Morgan Stanley in talks about a 30% drop, who knows? But I think when you look back on 2008, also when you look back into the savings and loan crisis I haven't been around for the actual savings and loan crisis in the past but I was when I first started out in New York in banking, I was involved with a lot of the workouts of loans that went through in the early nineties that were caused during the savings and loan crisis in the 80's. So it still took several years to get out of that. And as we have seen in 2008 it took a long time to get back running. Yes, it was a very different situation then, but here the shock, in my view, is so much faster and also it's at the global level, the global economy is suffering so much and a lot of the US companies are dependent on global rate too. So everything just will take much longer to recover. That's my personal view and again, I think it probably will take two years, 18 months to two years just to fully stabilize.
James:
Got it. Got it. So yeah, that's a lot of discussion about, H=hey,
this is going to be a sharp V. So we go down very quickly we're
going to come back and everything is normal. Even the government
saying our economy's going to be roaring back again and everybody
go back, it's normal again, but what you're saying is in terms of
recovery, a lot of us businesses, global trade, yes, impacted,
maybe the hiring would be slowed down because the profit has been
lost I guess. They want to be careful, I guess. But for example,
let's say a restaurant has been closed down for two months, so the
third month they open again, back to business again. So do you
think that will be slower in terms of hiring as well? I mean,
because they're back in business. I mean they probably have two
months of rent that they didn't pay.
Anton:
So it won't be very interesting to see how the human behavior is
going to be at that point. So particularly the first six months to
nine months. So you have seen that if all the governors at federal
level to say now we all clear, obviously the virus is still
lingering. So I think people will still practice a little bit more
of that social distancing. Everyone is a little bit more careful.
Personally I feel air travel will probably not pick up nearly as
fast. Why? Because everyone feels why should I want to be in that
airplane with other people next to me, I cannot really walk away.
Also I think launch events will have a much harder time to come
back. It's really hard to tell but I just feel based on all the
downturns we have gone through. Very often people say, well it
comes back fast and I think the initial recovery undoubtedly will
be extremely strong. I think there is no doubt about that because
we are essentially shut down to a large extent so it has to come
back drastically. But really come back to the confidence level,
where we were before I think it will take much longer.
James:
So you're talking about consumer confidence?
Anton:
Yes, yes and business confidence.
James:
Got it, got it, got it. Yeah, I mean I read somewhere that consumer
confidence is the most important indicator for any economy or any
crash or any recovery. If that comes up, everything comes up; if
that goes down, everything goes down no matter what you do that
consumer confidence in terms of probably spending money and doing
events and taking flights and so. So for example, let's look at
class A, B and C renter’s base plus B and C is a lot of service
industry. People are on pay check, pay check. I don't know I'm just
thinking this quickly, they may be okay. So about third month,
fourth month we are back in business. I mean, unless they are wage
is lower than say impacted them but if their wage is the same they
probably have that wage coming back to them again. Maybe they are
scared. Maybe they want to go to a lower rental amount. Maybe, I do
not know. But I think still the impact to the flights and to the
big companies it's going to be more because now this is a global
trade. So could that be the A-class renters are more impacted
compared to B and C in the long run? I'm not sure. I'm just
thinking this quickly. It depends on how fast it comes back
and what is the wage they are getting and how confident they are
buying.
Anton:
It think when you look at most people that live in any class
properties they have really decent jobs and always leave some of
these jobs are now being lost or at least they are in a furlough,
so they are not getting paid right now. So they can collect their
unemployment; and I would say if they cannot afford it then the A
class, they may move down to the B class. So that's where I would
see people that struggle in these shops do not get back that I need
to move down into B. I just do not see that someone who is in an A
class will be willing to go into a C class property. So I would say
they would probably rather move somewhere else than into a C class
property. I feel kind of the same for the people that live in B
class properties that moving into a C class property is for them in
my view, is also kind of the last resort. Now the big question is
how the residential market will evolve. We haven't even talked
about that, will there be a massive dropping in prices in the short
term, because no one now in some markets can even see
properties.
James:
Are they getting forbearance as well, the single family
houses?
Anton:
I think when you are a residential and not active at all in in the
single family space but my understanding is if it's your own
primary residence, you get forbearance you can apply for
forbearance too but not for less than property. But I think I'm
more wondering how it would work for someone who is in the B class
property would they have an opportunity potentially then buy a
property and if still not able to buy your single family home.
Whether they will be able to rent a single family home instead. I
just do not feel, and again, some people say that doing the last
downturn, a lot of people move down from A to B and from B to C,
it's hard to track. I do know that really believe anyone has been
able to properly track that, but based, at least on what I have
seen during that time, there was not really much movement. There
was a lot of moves from A to B because of that pricing point, but
it's still a decent quality property. When you are used to an A
class property, but they have not really seen much coming from a B
class to a C class. But again, I'm not an expert in this light
there may be economist out there that have studied this.
I just feel that these movements are really happening. Now when it comes to the service employees I agree with you. Once they start back up, they need to employees right away. There is no doubt about that and that thing that's really in my view is kind of that positive flight for C class properties at the end of the tunnel. Once the shutdown is over and restaurants are able to operate again and stores are able to operate and all the other service type related business including hotels they have a job again.
James:
Provided they don't have a negative wage growth, I guess which
could happen as well. Businesses may be covering this, but
this is, I mean, within two miles, if I'm an operator, if I'm a
restaurant, I will hire back the same people. I mean I have two
options, either pay them the same amount before they leave or I pay
them slightly lower. I just don't hire, that's the
option [53:36unclear].
Anton:
So there the question again is how many restaurants are able to
reopen. So we just don't know if it's just for another month or two
month, I would say the majority are able to cover the loss and go
back to normal afterwards or go back to business. But a lot of them
I think will without some form of a bailout, wherever that comes
from will probably not be able to reopen. So that's fair. That
question comes in. It's there all sort of pressure, at least in the
short term on wages that whoever is in the service business now
does not have as much choices as they've had pre-Covid19.
James:
What about the construction loan? What's happening in that space? I
mean people with construction that is ongoing right now. From what
I understand, the construction loan is also a loan where if the
value of the building that you're constructing drops, they may ask
whoever the developer is to put in more money right now, could they
be in trouble as well?
Anton:
Yeah. They haven't really seen that yet. It probably depends on
what phase you're in, in that construction loan. If you're in the
early phases or just started the earth movements or started with
going vertical and you're still in year last to start your lease
up, I don't really see that that impacts it that much. If you're
already doing your lease up period span, I think you need to go
back to your lender and find out how you can extend that loan.
You'll see, usually you may have to do three years, two and a half
to three years of the construction before you go into perm and you
may not need another six month to complete that lease up, but if
you're early or right in doing the construction I would say it
shouldn't be such a big issue because when you consider the
leverage for most of these loans is relatively low anyhow. Value at
your 60, 65 of cost, maybe 60, 65 to value if it's a more an
established sponsor. So the leverage is not really in most senses,
it's not that high to start with. So I don't think that these
lenders will be holding back. I'm more concerned about, again, the
harm on the construction lenders that are out there too.
James:
[56:31unclear]
Anton:
Yes. So where you are in your eight, nine, 10% construction loans,
so these players I'm more concerned about.
James:
Is there a chance for the construction loan guys to say, okay, I'm
not funding anymore because they go on draws based on the progress
of construction. Is there a chance they said, okay, we are done. We
are no more funding you; we are out, even though they have signed
the commitment because they probably don't have the money. I mean
it’s all come from some pool of money?
Anton:
Yeah. I would say you have that risk. The law to the player I would
say the less likely it is. I would say if you have a strong bank, a
bank will continue to do lends, if you have a life insurance
company that has provided that, they're likely will continue to
lend and have the access to the funds but if it's a private lender
then that would be probably more concerned that they are able to
continue to fund the draws.
James:
Yeah. That's interesting because I think in 2008 that's what
happened. A lot of construction projects. Everything stopped
because everybody ran out of money.
Anton:
I mean, it could happen, we do not know but at least so far we
haven't seen it where they have come to a complete halt. And again,
the private space I do not know, but suddenly the institutional
space hasn't come to complete halt yet.
James:
Got it. So the other thing that I want to just give some education
to the listeners is how a loan can be made from non-recourse to
recourse. And I know since we talk offline in the past crash or you
had that one of the function that you are familiar with or you are
doing is like lenders are trying to figure out how to make deals
from non-recourse to recourse. What are the potential ways that
that can happen? I mean, we know we talk about
this [58:48unclear] agency loans.
Anton:
So obviously I think most of your lessons that for now have
that [58:54unclear] which essentially means that if you
cause fraud or gross negligence, then that loan can turn into a
personal recourse and one of the examples for this kind of obvious
when it comes to the property operations, when it comes to gross
negligence can be that you are not maintaining the insurance. That
can be, even if you forget about it, that's gross negligence. So
even if it's unintentional, it's still gross negligence. If you do
not verify that the insurance meets all the agency requirements,
particularly when you might change the insurance from one to the
other and the somehow you feel, oh, I get a better rate and then
suddenly you get that better premium, but you may not meet all the
requirements of the loan insurance requirements. So these are kind
of the obvious things like this now will all
be [1:00:10unclear].
James:
But usually the agency have the specialized insurance department to
verify all insurance requirements met whenever we change the
insurance provider?
Anton:
Well, yes they should. It's essentially the service server is
supposed to track this but it's still up to you to verify that you
would actually need these requirements. You cannot say well the
service from that lender didn't save me anything so I'm fine,
that's not the way it works. It's really important that with an
insurance change, always leave if you'll get the approval from the
insurance person that the lender or whoever they are hiring and
gives the green light and it's a different story, but that's not as
you are in a loan, that's not necessarily happening, I'm not
talking about when you apply for the loan, but more down the road
when you make changes to that insurance.
James:
Yeah. Yeah. I mean, my experience has been like they are very, I
mean, even I've made changes to my insurance and the insurance
department is so particularly they go into every line item, they
make sure we are reading it. So there could be some of those
lenders, which is not doing a detailed job, I guess.
Anton:
Yes, that's why and it really varies from lender to lender how
detailed they are now. What a lot of people do not realize and
that's something that we have to discussed offline is that
your representation and your order, guarantor representations when
you apply for that loan are also part of that bad boy car found. So
what that means is that if you or any of your guarantors make a
representation when you apply for that loan, that can ruled as
inaccurate. And I'm not talking about, oh, I put in a value for a
property that I felt was a million and it's only 900,000 or
800,000. I'm talking about a gross misrepresentation of your
financial strength, of your experience but particularly your
financial strength that can be triggering that bad boy carve out
and we have seen that in the past.
You need to understand why particularly when it comes to Fannie, what a lot of people do not know is that each Fannie lender has a loss share agreement with Fannie. So they take a loss. If Fannie takes a loss, they take a loss too. And though they have that first loss arrangement. So they have an interest of loss mitigation. And obviously if the property somehow will not pay back the loan plus all the accrued charges they need to look through all the solutions. Then one of the items is that they will have a in house or external lawyers look at all the representations that were made pre-application to approve that loan or aside from all the documentation that was submitted throughout the loan being in place.
So it's very important that you trust your partners that they are or not lying. We have seen it a lot, a lot of people claim that they are accredited investors and they are participating in deals that are a 506 deals and because we don't need to verify that you are an accredited investor with these 506 deal offerings but then they suddenly then pop up and do their own or attempt to do their own syndication and then you suddenly realize, well you are not really an accredited investor.
James:
But that's not really a loan thing, that's more of a system
guideline?
Anton:
No, that's not a loan thing. I completely agree. But that is just
an example of another thing to read, most people they are
so desperate to get into deals, particularly on the GP side,
so many times they are stretching the truth or into deals that they
are sometimes stretching the truth of what the true situation. So
it's really important to ensure that all the partners and
guarantors that you have on board, that they are not grossly
misrepresenting their situations. Whether it's experience,
financial strength, that everything on the REO schedule is really
true. No one is really verifying this.
James:
Oh yeah, no one read that in detail.
Anton:
No one is looking at tax returns. So there is solely a risk that
someone can inflate their balance sheet and their experience
tremendously without being verified.
James:
Got it. Alright Anton, why don't you let our audience and listeners
know how to get hold of you?
Anton:
Yeah, sure. So my email address is anattli@peakmff.com and that's
probably the easiest to reach May also then when you're on Facebook
or LinkedIn, just type in my name and then I will pop up. It's a
pretty unusual name, so you should find me there and I would say
that's the easiest to reach me.
James:
Awesome. Thanks for coming on the show. I think this is a really,
really timely show in terms of discussing the loans and all that.
So sometimes when nothing happens, when we talk about how risky
bridge loans are, nobody really cares. No passive way to look at
what a sponsor is taking loan; they just look at the numbers and
did that. But keep in mind, I did write it in my book like two
years ago. So if you have read it, I mean, there's a lot of
resources out there as well. You would have been warned about
it, there is nothing wrong is just market risk, sometimes you
make a lot of money doing bridge loans as well, but it just depends
on the market cycle and the sponsor and the syndicator, how strong
they are as well. I mean, there's a lot of sponsor who's going to
write this bridge lending uncertainty as well, fine. But just for
anybody to be aware of, I guess. Thank you very much Anton.
Anton:
Yep. Thank you James.