Announcer:
Welcome to the Global Investor Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host Charles Carillo combines decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now, here’s your host, Charles Carillo.
Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host, Charles Carillo. Today, we have Anton Mattli. He was previously a guest on episode GI18 and is back. Anton has held senior management positions at major New York, Tokyo, Hong Kong, and Zurich financial institutions. During that time, he restructured commercial real estate worth several billion dollars and oversaw loan portfolios consisting of aircraft, ocean vessels, and infrastructure assets. He has since been advising family offices, high-net-worth individuals, and private investment funds, facilitating their direct investments in commercial real estate across Europe and the United States. Today, Anton is the co-founder and CEO of Peak Financing, a boutique multifamily and commercial real estate financing firm focusing on finding the best financing for real estate investors. So thank you so much for coming back on the show.
Anton:
Yeah, thanks for having me on, Charles.
Charles:
So it’s great to have you on and talk about everything that’s transpired over the last two or three years since we’ve had you last on. And mainly I wanna talk about can you give us just a little bit background? I know I gave you a little brief background yourself, but if you can give us a little background a little personally and professionally prior to getting and co-founding peak financing.
Anton:
Yeah, sure. I think that’s kind of important to, to know that background. After I graduated, I’ve went to New York work for an investment bank there. It’s, today, it’s called UBS worked there for five years, then in Tokyo, and then in Hong Kong where we sold a, a division to a British Bank Standard Charter Bank doing all that time. And that was in the nineties. When I started out in New York we still had all the the tail end of all the savings and long crisis that happened in the eighties. So the workouts for commercial real estate back then it took years, right? So we talk about five to seven years later when we still were working on these workouts. And that’s really how I started out. So in the current environment we are in today, obviously with peak financing, we are focused primarily as step brokers commercial debt brokers on the origination side. But right now we help a lot of deal sponsors on the loan modification side for multifamily, for offices, and for other loans that that might be in trouble. And so that’s what we do.
Charles:
So can you give us a little overview of the current commercial real estate market? ’cause I mean, over the last years since Covid and I mean, what it looks like today with lending and as you said, that you’re really focusing on workouts and loan modifications.
Anton:
Yeah. So we are not just focusing on that, but that’s just the nature of the beast, right? When, particularly when we look at multifamily and offices with all the bridge loans that have been taken out in 20 21, 20 22 it’s not just for multifamily, it’s also for other asset classes, including offices. And all of them have some form of of issues, right? Not everyone is in trouble. But on the multifamily side as you well know, and many of the listeners know interest rates, short term rates were virtually at zero in the 10 year treasury was at, at record low rates. So you could borrow for a 10 year fixed as a larger deal sponsor for a larger property at 3% fixed. And for bridge loans, you were able to get in somewhere around 3%, maybe 3.5%. And the problem is that bridge loans for true value add deals is not a problem.
Anton:
But when you do it, even for stabilized properties, because you would only get 50% LTV on a, any or a, any of Fred loan and 80% or even more LTC loan to cost for for bridge loan. So then everyone jumped on on those, and that in on its own still would not have been a big problem. The problem, main problem was that the exit underwriting to stabilization, as we where we are today and where we actually should refinance today, most of these deals were underwritten to an exit interest rate for a permanent financing of around 4% plus minus, right <laugh>. And where are we today? Even for large loans, we are at five and a half plus. And so that obviously it’s a big gap. At the same time, we have seen a lot of stress to, to get the NOI to where the projections were. So the projections were also very aggressive. So it’s really a perfect storm where projections were very aggressive, insurance rates increased, property taxes moved up because the assessors realized, well, when value score up, we need to increase our assessment and overall expenses moved up. And now today, with all the supply that comes online on the Class A space, it still trickles down to BMC where the pressure now is on rents instead of double digit rank growth. We have seen in 2021. Now we have, we see flat and in some places even negative rank growth.
Charles:
Yeah, no, that’s a lot of great information. The, when we’re talking about difference between bridge, we’re talking about then fixed rates. Can you talk about the two underlying really indexes that these type of loan products are based off of? And if you could just explain that a little bit to our audience.
Anton:
Yes, sure. For the, maybe start at the permanent financing, because that’s where typically most borrowers want to start out if they can. Most start the underlying index is the 10 year treasuries. Sometimes lender may take the five year or seven year treasury, but overall, the 10 year treasury is really the core piece. And then there are for CMBS, commercial backed securities loans, maybe then you have a swap rate, but that’s still related to, to the 10 year treasury. So everyone is watching the 10 year treasury very closely, and you typically have a, so-called spread over the 10 year treasury. So for Afeni or a Freddy loan, for example, for a larger deal, 10 seven, 10 million and up, depending on affordability, you may get a spread of, of one 50 to 200 basis points, or one and five to 2%.
Anton:
And that’s your all in rate on the bridge loan and construction loans. In most instances today, before we had LIBO, now we have sulfur, which is a overnight rate which can also be a, a, a monthly rate. It’s typically the monthly secured overnight financing rates that is being used. And there again, it’s a spread that is being added to that. So back in 2021 because the fed rate was virtually at zero, guess what, the software was also virtually at zero, right? So it was 0.05 or point 10.1. So it’s a, VE was a very low basis as an index. And even if you added a 3% spread on top of it, then your borrow cost for 3%. So today the sulfur is is a little bit above 5%, 5.3. It fluctuates a little bit, but it’s pretty stable.
Anton:
It’s very closely mirroring really the fed rate and add a spread, which also have wine a little bit. They have come down a little bit, but let’s say still three and a half percent to 4%, obviously now you are in the eight to 9% range, right? Instead of three. So we virtually talk about dripping your short-term borrow cost. Your fixed rate cost is not that not that substantially from a compared to the short end, but it’s still essentially doubled, right? So instead of three to three and a half, you are now at five and a half to 6%. For smaller loans, it’s closer to the 7% range. So that’s where we have, we focus on and the market focuses on, and obviously that’s when everyone talks about the 10 year treasury and the FED rate, the software and the the 10 year treasury, really the key pieces to watch.
Charles:
One thing that I always thought was that it’d be like a correlation between more of a correlation between the 10 year and also SOFR. But what we’ve seen over the last few months is 10 years come down and the SFR really hasn’t, I mean, why, do you have any insight of why that might be?
Anton:
Yes. so fr really is, is again, very closely mirroring the fed rate, which is the short end. So and that is driven by the Fed, right? The fed rate is driven, obviously by the Fed, and software closely mirrors that. So you will not see the software going suddenly below the fed rate. Now when it comes to the 10 year treasury, at least in the United States, there is no, so-called yield curve control. We have seen it in Japan and in Australia, where their side, the government is actually controlling the yield of of the 10 year treasury there in the United States, to a large extent that has, is not taking place. What does that mean? The market is really driving the, the changes in the 10 year treasury. And the best example we have just now over the last two weeks everyone was talking about and two weeks ago with Powell being a little bit more doish on his, on his statements that there will likely be cuts.
Anton:
We have inflation under the control. The 10 year treasury with the market came down to around 3.8%. Now we are to 4.3% today, two weeks later via that, because that’s where the market is listening constantly to signal CPI and order inflationary measures employment numbers, and obviously also what Powell and all his colleagues are saying, right? Mm-Hmm, <affirmative>. So it’s kind of crazy that Powell makes a formal statement then, then he goes on a 60 minute interview on a Sunday, and suddenly his tone is changing and the market dissects that tone and the treasury yield immediately goes up <laugh>, right? So in other words, the market is really driving the, the dre the yield curve from to the, from the short to the, to, to the long end. Whereas when it comes to the fed rate and the related sulfur, there is not really any, any market that, that can, can adjust it that way.
Charles:
Oh, yeah. It makes perfect sense. Thank you. So when I speak to, we were speaking about this briefly before we hit record, and you know, when I’m speaking to multifamily groups out there, and I imagine you’re having these same conversations, and I was speaking to one last week in particular, and they were telling me that they’re doing capital calls. And it’s been a kind of a recurring theme that I’ve heard from other groups is that they’re, they’re working with their lender to modify their loan terms and create workouts. And when I speak to some lenders, they talk about it’s the strength of a lender that makes that decision if they can do that. I mean, what do you see currently with multi-family borrowers? Are we gonna see an influx of properties maybe coming on the market in the next 12 months with a lot of these 20, 22 rate camps that are gonna be come up? ’cause Most people just got two years. They didn’t really get three years from my experience, ’cause of the cost difference. So when, when this happens I mean, where do you see that, where do you see us coming out with that, and are you seeing a lot of lenders working with their borrowers?
Anton:
Yeah. so to the last question some lenders are more flexible than others. And I would say it’s only if you are lucky enough that you have a, have a bridge loan with a bank, you are probably in the best position to have that discussion. Banks generally have their loans keep them on the balance sheet. Sometimes they have participating banks, but generally speaking, banks are a little bit more flexible with those negotiations. When it comes to bridge lenders, some of them also keep these loans on their own books there. It’s also easier to have those discussions and those that have so have securitized those loans into so-called CLOs. It’s, it’s a little bit tougher to, to have these discussions, but it’s only doable. But I would say what is happening virtually in all cases, there are always exceptions, right?
Anton:
So when you hear someone where I was able to have a low modification without bringing cash to the table, these are exceptions. In most instances, there is a need for bringing cash to the table in one form or another. In some lucky cases, there might be still a significant amount of of CapEx reserves and interest reserves that may be interest rate cap reserves where the lender rent the service are willing to pull that money out rather than having a, a, a equity injection. But that is really not the common situation blatantly because CapEx money is really needed to bring the property and the properties annual way up to where it needs to be. And so everyone talks about, well, why can’t we have the release the CapEx and and, and all that? Then it’s, it’s really a problem to keep the property in the, in a position that they actually can at least keep the current NOI where it is, right?
Anton:
As soon as you don’t spend money on at the property, it usually deteriorates particularly c and p properties very quickly. So I would say that is is what we are seeing. Some lenders are willing to have negotiations rather than going into foreclosure to have brief foreclosure negotiations where they may talk to potential partners that may come in. You can call it rescue capital or anything else. Rescue capital is really a misnomer in my view. It’s, it’s not really a rescue, it’s just kicking the can down the road, but in most instances for the LPs, the money is likely not, not coming back to them or, or only a, a tiny fraction of the capital investment once you have rescue capital coming in because it’s so expensive when you have to pay 15% for new capital that is in front of you.
Anton:
So some lenders are only willing to do it, but I would say the maturity want to go through the proper process. It’s also a little bit of a liability issue, right? Because if you are negotiate grief or closure and bring in a new partner, let’s say you sell it to a new partner and you avoid foreclosure, then the question is, did you really do the best as a lender? And did you give the the property away, if you want to call it that way, to, for too low of a value to a new buyer? So you potentially have to risk that LPs can sue the lender for, for doing that. If you go through a proper foreclosure, there is no, no discussion about this, right? Because then obviously you had to foreclose, you buy the property back as a lender and then you remarket it to whoever it is. So the process is definitely much cleaner with a foreclosure. But some lenders have been willing to to find solutions pre foreclosure, I would say it’s those that have more trouble loan on the books today. They need to move a little bit faster than the others.
Charles:
Do you have money sitting in the stock market? And you’re worried about it or worse. You have money sitting at the bank, not keeping up with inflation. My name is Charles Carillo, founder and managing partner of Harborside Partners. And since 2006, I’ve been investing my money and my family’s money into income producing properties. These are real assets, real properties with real addresses that produce real cash flow. At Harborside Partners, we provide passive investors who love real estate with a turnkey investing solution. If you want to put your money to work in real estate, but can’t find deals, don’t have the time to get funding in. The last thing that productive people want to do is manage real estate. We find the deals. We fund the deals and we manage the tenants, the termites and the properties. Partner with us at investwithharborside.com. That’s investwithharborside.com. Go to investwithharborside.com. If you love real estate, you like the idea of passive income and believe that income producing properties will appreciate over time. Go to investwithharborside.com. That’s investwithharborside.com.
Charles:
Do you see with do you see that we’re gonna have I know you spoke before and you, you had the numbers of how many properties are really up for are really in this tight position. Do you see that there’s gonna be a influx of properties coming on the market probably, or do you think that it’s gonna be something where I mean like just from what you see, obviously you don’t know about every property. Yeah,
Anton:
Yeah. We obviously, we, we don’t know, right? So overall, I would say that you, we, we certainly have a, a, a situation in the bridge space, multifamily bridge space specifically where it’s hard to tell what the exact number is because we have a lot of on bound sheet loans. But my guesstimate is that we have somewhere between 60 to 80 billion of, of, of bridge loans that are outstanding among various lender types. And of that, I would say at least half has some form of issues. I would say it’s probably more than that, but I would say from, based on the studies that we have done, looking at it on the securitized side, because that’s where we really can dig in. We don’t know the balance sheets, the loans that sit on balance sheets because then we don’t get the reporting. But based on what we see on the securitized loans, I would say at least a, a third of all these loans that were taken out were very high leverage loans, very aggressive underwriting. And those I would say need some form of a loan notification. In the best case, they may have a foreclosure in the worst case. So we still talk about probably 20 to 30 billion and several hundred properties across the US that are going to face this this year and next year. Right.
Charles:
So with lending terms and requirements changing over these past few years how has, I mean, how has that changed after lenders seeing this going through? How has that changed? Where are requirements for underwriting on properties and borrowers getting tighter? And I mean, how is that also affecting the loan to value that lenders are willing to provide to investors?
Anton:
Yes. So when it comes to FAN and Freddy, they have always been pretty conservative with their underwriting, right? So they only underwrite to in place cash flows and they don’t do projections. And obviously that’s saves them from a lot of trouble, right? There are not that many distressed deals in the Fanon Freddy space as well as not many in the HUD space thanks to that underwriting. Usually those that are in trouble were relatively weak sponsors, and that’s what what we see is only on the Fanny and Freddy side. They are tidying up their sponsor requirements. They look for more experience. They also look for financial strength including liquidity. So they are only much more focused on that. I would say looking at it, most, most of the deals that are in trouble on the fan and Freddy side are those with weak sponsors, or then they had a major event at the property, whether it was fire or a storm, and the sponsors were financially not in a position to, to float the, the repairs before they got the insurance claims back, right?
Anton:
So and when it comes to the bridge lenders there are tons of bridge lenders out there. It’s still a very aggressive market, so you can get bridge loans today very easily, as long as the, the deal makes sense. And however, they also look at stronger sponsorship groups, more financial strength by the sponsorship group and the LTC they are definitely, generally speaking, they’re always exceptions of, generally speaking, compared to where we were at 80% LTC plus breadth on top. In most instances, it’s now probably closer to the 70 mark, 70% LTC mark, maybe 75. But so we certainly have come down five to 10% of the maximum leverage most bridge lenders are willing to do.
Charles:
Oh, that’s a lot of great information. So what are some suggestions to real estate investors who may be looking for financing in this new lending environment? Are there some key questions that borrowers should be asking to brokers to lenders while they’re searching out the best solution for the properties?
Anton:
Yeah, so it’s really important to understand the current landscape. Don’t underwrite to to where you thought the landscape was three months or six months ago. We constantly changes. We have new lenders coming online, always dropping off. So it’s extremely important before you submit an LOI that you really understand what is likely available for your particular situation as a sponsor and for, for the property, so that you are not mis what you are actually able to get with, with, with the financing.
Charles:
No, that’s a lot of great information. So what are some common mistakes other than overestimating where the NOI is gonna be over leveraging a property? What are some other common mistakes maybe you’ve seen real estate investors make when in regards to financing?
Anton:
Bringing it back a little bit to what I mentioned before, all the lender owners are tidying up the sponsor requirements. Do not overestimate your own capabilities as a borrower, right? More likely than not, if you, if you have done just one deal and it was a smaller deal than what you are looking at now where you would like to get financing, you will have a very hard time more important than ever is really your team. I would say lenders, like teams that are full-time teams that are not doing it on the side. They also have a consistent team that the not sponsors that jump from partners to other partners, to other partners. And they also tend to prefer those that are better integrated operationally, including vertical integration, including the property management side. Because if you obviously property management is not a money making machine for anyone, but it’s only helps you to control your operations much better.
Anton:
You can give the property management more incentives when you also own the property management company. So I would say if you are a relatively small deal sponsor, I would consider partnering up with someone who actually brings significant strength to the table so that you can do these deals. So that is, well, that would suggest on the sponsor side. And then it’s do not submit offers without really having talked to, to that broker or to a lender beforehand that you really understand what this property can can get in terms of of, of financing. It, it, unfortunately, it happens all the time where some sponsors in large amounts submit in an offer and then realize that their financing assumptions were, were completely off. Now the third one is really put in plenty of cushion when it comes to, to your underwriting.
Anton:
And we briefly talked about it, the 10 year treasury was at roughly 3.8%, just a little bit more than two weeks ago. Now we are close to 4.3%. That throws off everything in your underwriting, right? So I would say add at least 50 basis points to your loan assumptions, the interest rate, and make sure that the deal still makes sense for you with that. And so then you have to cushion that even if interest rates and for whatever reason jump up when you need to rate lock, at least you still are comfortable that the deal will pencil out for you.
Charles:
Yeah. Thank you. That’s a lot of great information. So Anton, how can our listeners learn more about you and peak financing?
Anton:
Yeah, so we’ve, our website is peak financing.com. My email address is anton@peakfinancing.com, so it’s a NTO n@peakfinancing.com. You also find me on LinkedIn, Facebook, and X. So it’s pretty easy to connect with me and my team.
Charles:
All right. Well, thank you so much for coming on today and looking forward to connecting with you here in the near future.
Anton:
Yeah, thanks again for having me on, Charles.
Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.
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