Everybody is Ken McIlroy here, and I am very excited to have Anton
from Peak Financing because as you guys know, the Fed's doing a lot of stuff.
There's a lot of commercial real estate in trouble.
And of course, everybody scratching their head about residential as well.
So I wanted to get into all of those topics today.
Anton, welcome back. Good. Good seeing you again.
Yeah. Hi, Kenny. Yeah, same here.
It was great seeing you at the Real Estate Guy Summit.
Unfortunately, I missed you at Limitless.
I heard it was a great event that you had
the look forward to see you next year there.
Well, listen, you know, we've got the Fed.
You know, basically saying they've got
a couple of quarter point rate increases.
You know, they raise rates ten times now.
It's really put things on hold.
As you know, our acquisition team, we're still fighting for deals,
but there's a big disconnect between sellers and buyers.
And I'd like to know if we could start right off the bat.
You know what? What's your crystal ball?
Because, you know, all these syndicators, all these property
owners, landlords, they all go to companies like yours.
And I'm sure that you get to look under the hood
for real, Like you get the real data, the real financials
and and real the real often sees the real management issue.
So what's happening right now in the industry?
Yeah, it's it's really interesting, right?
Always.
Lee you're in multifamily a lot of the loan study
arranging are also on the multifamily side.
We do any commercial real estate, but the multifamily side
is solely a big piece of where we are in Walston.
And in that segment we also work with a lot of syndicators.
And as you know,
and you have touched on this many times on the podcast
and on your own seminars and presentations.
A lot of these properties by indicators were bought
in the past with agency loans,
which was the right thing to do in most cases,
and staying because the price increases were so massive.
Everyone in 2021 shifted over to bridge loans.
Obviously everyone was arguing while it's a value
added property, that's why we do rates, loans.
But the reality is many of these deals
still would have qualified for agency loans,
but only at maybe 50 or 55% leverage,
which never works really for for a for a syndicate or
so as a result, virtually everyone went for breaks loans.
This bought once they went with low leverage
maybe around 70% LTC the not so smart
ones went with 80% LTC
and on top of that very old in the press I could see
and the ones that were the least smart.
Also then by interest rate caps waived.
So you have different pockets there.
Some of them were I think are still perfectly fine
even if they had to refinance.
But the orders with maximum leverage
for equity and or low rate cap, they are in trouble.
There is no doubt about it.
Well, you covered a lot there.
So let me let me just unpack a little bit of it. So.
So what Anton is saying
is there is of there are fixed rate options
and there were floating rate options way back and people had bold choices.
But the fixed rate option required more money down.
But it had, you know, any potential rate increases, whereas the variable rate
options or the bridge loans, they required less money down
and of course they had this big value add component. So,
you know, and at the time.
Anthony You know, Anton, I think that a lot of people,
you know, they were
they weren't looking at it as the risk beyond.
They were always thinking that the market was just going to continue to go up.
And so those are the folks that are in trouble right now.
And then you touched on rate caps.
So so everybody is listening how that works
is that while you're doing that loan, it's like an insurance
policy, basically, you know, it basically caps the rate.
And at the at the time, Anton, you know, those are pretty cheap.
I want to say they were
25 or 30 grand or something at the time and now they're in the millions
as a result.
You know, essentially it would have been just like any kind of an insurance policy
for your loan.
And a lot of the inexperienced syndicators did not get that.
So they went they there were two things that happened.
One is rates went up and two values went down.
So now they're sitting in these these real estate deals
where they had a value add,
but they're cap rates have gone up.
So now there is no value add and then the rates have gone up.
So so that's essentially I do want to get into LTC
are going to cost and LTV and debt service providers and stuff too. But
so so you know,
we're taught we're talking about billions of dollars
of loans on assets where the rate caps are starting to expire.
I think I read like the second half of this year,
there's a fair amount of rate caps expiring.
So one, if they have rate caps at all,
there's a timeframe, moderate caps and,
you know, as you know, and they're they can come due.
So can you talk a little bit about that because we're talking about
some pretty big checks are going to have to be written
or properties are going to have to be recapitalized somehow, right?
Yes, absolutely.
You mentioned earlier
during that time it was pretty cheap to buy a rate cap,
let's say, for 10 million in 2021.
It was not uncommon to pay for a thousand, 50,000 for that
for a three year rate cap at one and a half percent wide.
And that was very, very common spot for biggest the
the short term rates back then,
which was also the sulfur which is the
that base rate that essentially every lender is using
which is very closely tied to the the Fed rate
as a as a short
term rate for commercial borrowers.
So that was virtually at zero at 0.05, 0.1%.
So everyone border protection at 1.5,
maybe a 2% rate cap, thinking, well, that that will be sufficient.
The lender was comfortable with that.
Even with that additional increase.
So if you had, let's say, a spread over your sulfur of 3%,
which was the best that you could achieve as a
as a strong borrower and for a larger deal.
So your well starting rate may have been just around 3.1%.
And even with that protection
that that insurance, it would have been
still capped at one and a half percent
based on the insurance cap less to 3%.
So you would still be at four and a half percent.
So everyone was underwriting to that and that was fine.
And the problem now is that
if you are not able to refinance and many of these deals cannot be refinanced
because the the exit rate with an agency loan is much higher now.
And operationally we can touch on that to a lot of people struggle now.
They have to likely extend that rates loan or and or the rate cap
and the same rate cut by one and a half percent,
let's say for a 10 million loan today will be around 380,000
for one year to be before that was for three years.
For two years the rate cap was even less.
That may have been just 25,000. Right.
So even if you twist extended for one year, it's 380,000
yet. So
you bring up some really some really, really, really good points here.
So so what we have, guys, is
a lot of the real estate let's just put let's put some numbers around this.
Let let's say I went to Anton and I was buying a $50 million asset.
It doesn't matter if it's a retail building,
an office building or multifamily building, it doesn't matter.
I would put a down payment on that, let's say 15 million
and then there 35 million would be the debt.
So that that at that time, a lot of people were taking this bridge scenario.
Well, why happened was the cost of the mortgage payment
went up so much because rates went up that there's no cash flow.
And and so they're they're now in a position
to where they're having to cash, fall or sell.
And the real issue, Anton, as you know,
is as rates go up,
cap rates also go up, although a lot of people try to tie
the two together, they're not really tied together, in my opinion.
You know, what happens is as rates go up, people like us as a buyer,
we have to pay last week
to get the same cash flow because the cost of our debt is more so.
So we're offering the last and the sellers are now
coming to grips with having to sell for less.
And so because of that, then now cap rates are going up.
The problem with that is that this all this happened in the last year
is that if I bought that $50 million building and I thought that
it was going to be worth 60, it might now be worth 35
because Cap rates, let's say,
went from 4 to 5, which is, let's say 20%, which is I guess 10%.
So that would be, let's say, went from 50 to 40.
So instead of it going from 50 to 60, it went from 50 to 40.
Therefore, the equity is wiped out.
And Anton now is trying to size that loan and get to the new value.
And I think so that's actually the issue
is that that $50 million asset is say work already.
And so Anton is now taking a look at asset that's now worth 40
and Anton's is only probably can only put about 20 on it.
So there's a $15 million problem
with that asset.
And so you know, that's kind of wouldn't you say
that's kind of the general problem that all industries have.
And at the moment.
Yes, that's solely one of the key problems.
Can you walk through the ripple effects?
Because it looks to me like Sam Cisco is kind of leading the pack,
you know, Seattle or or New New York.
I think I read Atlanta, Dallas, you know.
And you're in Houston, I think. Right.
In Dallas.
Dallas. Yeah.
So so, you know, you're probably seeing it firsthand.
Right.
And that's going to make its way into these people think
that the big, big banks or a lot of that stop.
But you'd be very surprised that it's the small and regional banks
that actually have a lot of that.
A lot of those loans, right?
Yes, that's that's right.
And the smaller and regional banks really picked up the
the commercial loan activity significantly
between 2021 and 2022
because they saw an opportunity.
Dave Right.
And there was also a lot of at that point
there were still a lot of deposits slide because interest rates were still low.
So deposits were not an issue.
They tend to be become an issue once interest led the Fed started
to raise rates.
Now the problem with with banks
is that they are they are regulated wide
so they do not have the freedom just to,
uh, to to do whatever they want.
And unlike private equity funds and that funds
that are free to do structured deals the way they see fit
and as long as investors are willing to take the risk, they can do this
with banks, they are regulated and they need to follow these rules.
So the more bad that's they have on the bulk and by the way,
very few loans that banks originate or securitized.
And if they put it off their bulk, very often they sell it to another bank.
Right.
So it is not that it leaves the banking system.
It just goes from one bank to another bank.
And so all of these banks
now have have these offers on the floor
for all their family office buildings that are going to be a problem.
And they still have the capital ratios that they need to maintain.
So what do they need to do?
Yes, they can raise equity, but now nobody wants to guess
a new equity to a bank that is already in trouble.
So now they need to look for
opportunities to to dispose or valuable assets slides,
and eventually they may have to sell off
some of the multifamily loans at the at a discount.
They definitely have to sell off a significant portion of the office
building loans at the significant discount.
And if no one wants to buy them, they need to foreclose on these.
But even if they are able to sell the loans,
whoever buys those loans will likely foreclose on those loans too.
So that is unfortunately what's happening.
And with that and Wyman's naturally they are all in
and or credit constrained themselves with all the capital ratios,
so they cannot lend more money.
And as you mentioned, deposits are a real challenge for these banks.
They do not win as many deposits as they need and as a result they
they just by regulatory insulins, are unable to lend additional money.
Yep, you got that right.
So that's a great, great point to end on.
Now, Anton, what's the best way people can reach you?
This has been fabulous, great information.
But, you know, let's do this again
after we see some of these rate caps expire
and we kind of see what happens with the next two increases,
what's the best way people can reach you? Yes.
So the easiest is by my email.
So that's A-N-T-O-N So Anton at peak financing dot com,
you will find me on social media, LinkedIn, Twitter, Facebook.
Uh, so pretty easy to read by the way.
We are launching separately Alternative
Investors Social Network that is only for rarefied investors
within within the next few weeks
which is actually actually intending
for a for a social network for investors
that they can have that discussion about deals and how they
how they can deal with situations that that they are in.
Thank you. And I can't wait to have you back on soon.