In this episode of our podcast, host Kim Lisa Taylor, Esq. interviewed special guest Julie Peterson, a senior director at Old Capital Commercial Real Estate Debt & Equity. Julie spoke on the topic: “What’s Happening in Multifamily Lending? A Mortgage Broker’s Perspective.”
Among the areas explored in the interview:
Contact:
email
Syndication Attorneys Website
Investor Marketing Materials
In this episode of our podcast, host Kim Lisa Taylor, Esq. interviewed special guest Julie Peterson, a senior director at Old Capital Commercial Real Estate Debt & Equity. Julie spoke on the topic: “What’s Happening in Multifamily Lending? A Mortgage Broker’s Perspective.”
Among the areas explored in the interview:
Contact:
email
Syndication Attorneys Website
Investor Marketing Materials
Edited Transcript from the podcast episode ‘What's Happening in Multifamily Lending? A Mortgage Broker’s Perspective’
With Special Guest Julie Peterson
Kim Lisa Taylor:
Hey, everybody. Welcome to Syndication Attorneys, PLLC’s free monthly podcast. During this podcast, we talk about topics of interest to real estate syndicators, with the opportunity for live questions and answers at the end of the call. I'm attorney Kim Lisa Taylor. If any of you don't know, we actually have launched an official podcast called “Raise Private Money Legally.” You can subscribe to it on any of the major podcast platforms; we’re broadcast on 20 different platforms. We've reached over 1,000 downloads. We've only been up for a month or two, so it's doing really great. And so if you want to subscribe to our podcast, please do so.
Today, our topic is “What's Happening in Multifamily Lending, From a Mortgage Broker’s Perspective.” And we've asked our good friend, Julie Anne Peterson from Old Capital, to join us as our guest speaker today.
Julie Peterson:
Thank you so much. It’s so great to visit with you and share a little bit of what we're doing over in the lending area.
Kim Lisa Taylor:
Tell us a little bit about you and your background and how you got into this business.
Julie Peterson:
I've been in real estate for 30 years … I ended up getting into becoming a property manager and landlord 21 years of that, and I just finally finished that. And I'm now outside of the great state of California, because we've got such regulations for tenants as opposed to land owners, so I decided I'm no longer going to be doing assets in California. So I am a limited partner. I am a GP. I'm a KP.
When I got into this — when I went into trying to find lending — a lot of the lenders were like, "Go away," if you didn't have exactly what they wanted.
When I came to Old Capital three years ago, I said, “I want to make sure that I'm not telling people to go away.” That I would really look at opportunities to help them, because in commercial real estate, it's very different than single-family. A lot of people come in thinking, “It's the same; I don't need any specific things that are different.” But really it is a real different beast, especially when it comes to getting the best financing, the best opportunities, the right partners … all of those things are really, really important in commercial lending.
Kim Lisa Taylor:
You're not doing just traditional commercial lending, you're doing a lot of other stuff besides that, right?
Julie Peterson:
Yeah.
Kim Lisa Taylor:
So tell us about some of your other products.
Julie Peterson:
About 95% of our business is in multifamily. So we really are a specialist. But we will do mobile home parks. We'll do student and senior housing, retail, industrial, any of the other asset classes we will provide.
Typically, those other asset classes are going to be your bank financing, so a lot different than what we're able to provide for affordable housing for somebody that is living in our assets.
In multifamily, we work with four different types of lending options. So we do bank financing — so that's your local lenders, regional banks — and there's limitations to that. And we can certainly break that down. But we also do bridge, and right now bridge is an amazing product. It is short-term. It bridges you in creating value from unstabilized assets into stabilized.
We also do agency. Agency is your Fannie and Freddie, and there are requirements for that. And then we also do CMBS, which is a whole other type of product where maybe the other three don't work and so we'll go to CMBS as our last option.
Kim Lisa Taylor:
Which means commercial mortgage …
Julie Peterson:
Mortgaged-backed securities. Right. That's right.
Kim Lisa Taylor:
But then don't you also do some equity?
Julie Peterson:
We will bring equity. … We'll provide the debt, but we also want to do the equity. So we're not going to do the equity unless we get the debt, and where we see this is the application is on Class A. We've got probably 28, 29, 30 of these equity partners that we're going with, and they really want top-notch product. So what I'm building out now is where I can bring in that equity partners to the transaction.
Because I work with a lot of new folks, people that don't have their team put together, I'm bringing sponsors, I'm bringing attorneys, I'm bringing your real estate insurance brokers, I'm bringing brokers themselves, and it's real important when we're talking about partnering: Old Capital/Julie, we can bring all of those partners. … Getting into these deals is really different than what most brokers are doing currently. So that's where I position myself differently.
Kim Lisa Taylor:
That is a lot different. All right, well, so let's, just so that we can enlighten our audience, some of whom may know these things, but some who may not, what is a mortgage broker versus going directly to a lender?
Julie Peterson:
A lot of people say, “I want to go to the chef. I don't want to go and have to put my order in with a waitress or a server.” And we're kind of the waitress, if you will. I can go and I can shop all the different types of products out there. So if you need a bank, I've got that. You don't have to go and try and find the bank. I mean, that's a lot of work. And if you need to have a bridge loan, you don't necessarily have that relationship with the bank.
All of these relationships take time, so when you come to a broker, we have a list of lenders that we work with, that we have a relationship with, that we know what they are looking for and what some of their concerns are for different property areas.
When you go direct, yes, you're getting rid of the middleman, if you will, but if there's a situation where you've only gone down directly to them and they have bought your deal and said, “I can get you 80%,” and I'm coming to the transaction and I'm saying, “I can get you 75,” now you have hooked your wagon to this horse, and that horse can only deliver 75 percent at close, or getting ready to close. You do not have any options but to go back to your investors, to whom you've said, “Your share is going to be worth this much,” now you're going back and having to bolt on more investors, and now those shares become much less valuable. So working with a broker, somebody who's working on behalf of you, as opposed to going directly, you're not saving much in the way of costs, in the way of timing, and in the way of adding value to you.
Because, once again, when I see that either my borrowers are coming up short, I bring an investor, or they don't have an attorney, I'm bringing the attorney. So the value that we're creating is pretty special. And we also educate people. We've got our Old Capital podcast, we've got a lot of outreach to help people understand what it is that it takes to get these deals done.
At the end of the day, it really, really doesn't matter if the transaction costs you a quarter more for using a broker, because if they're going to be able to close for you, it doesn't matter if you pay a quarter more or a quarter less, if you can get the deal done, that maybe you've working on for a year — because some of these things take a long time: I've been working on some of these transactions for nine months. — you don't want to be in a position where you cannot deliver. This hard work, you need to make sure you can execute with certainty.
Kim Lisa Taylor:
Well, yeah, and I've seen situations before where clients have gotten close to closing and all of a sudden, for some reason, one lender just backs out. In fact, that happened to me on a single-family during COVID. With a mortgage broker, you're not stuck, you don't have to scramble and go find somebody else, because you have other relationships that you can go to, some of which can probably close quite quickly and still get the deal done.
I've seen that happen, where somebody had a mortgage broker and they were able to just still go on seamlessly, as far as the seller was concerned, get the deal closed. But if you're working with a direct lender, then you're in hot water.
Julie Peterson:
You're limiting your options because that lender might not be able to pivot. They might not have the product that you need to, now that they can't do it. Maybe you thought they were going to go to agency and now it's shifting to bridge. That happens quite often.
Kim Lisa Taylor:
And a lot of times it's just because there's all of a sudden a shift at the lender that because of some market change or they all of a sudden changed their policy and they're like, “Oh yeah, by the way, we're not going to do this type of loan anymore, so sorry,” even though it's a couple of weeks before closing.
Julie Peterson:
That does happen, Kim.
Kim Lisa Taylor:
I've seen that. And it's a sad situation. But yeah, working with an experienced mortgage broker, I mean, I've seen mortgage brokers pull rabbits out of hats. I mean, seriously.
Julie Peterson:
You know what, when you're looking for a partner and somebody that can get you from transaction to transaction, because you're not just going to stop at one, you're going to keep going. You want to have the person that's going to be able to execute it. The professional. When you go to learn how to play tennis, you're not going to go for the cheapest guy. No. And if you've got cancer, you're going to not look for the cheapest doctor. You're going to go for the people that know how to transact these types of larger assets. So it's real important.
Kim Lisa Taylor:
Well, yeah. There's certain things that you shouldn't try to do by yourself — brain surgery, legal vindication documents, mortgage brokerage — fall in those categories.
Julie Peterson:
I think so.
Kim Lisa Taylor:
It's always a savings to you if you pay the professional, who can do the job correctly. It saves you grief, stress, ultimately it will save you money, even though you might think, I”'ve got to pay additional points to this broker upfront.” But if they can get you a better loan-to-value or better interest rate, you're going to make up for that over and over and over again. So don't be short-sighted; use a mortgage broker so you've got choices.
I liken it to an insurance agent. You go to your insurance agent because they have access to all these insurance products and they can help put together the one that best fits what you're trying to do. I think that's really the role of a mortgage broker as well. So that's great. So what areas of the country are you seeing the most loan activity in the multifamily space?
Julie Peterson:
Well, of course, the Texas market's been the No. 1 market for the last 12 months. So we're definitely seeing…
Kim Lisa Taylor:
The last 12 years.
Julie Peterson:
Well, that's true. I mean, but if you look at with all of the COVID problems with collections, with rent growth, we're still seeing strong assets doing great things in Texas. So yeah, we are seeing Phoenix. We are seeing Atlanta is like a mini Texas, and that is definitely growing by leaps and bounds. Florida is still a great, great market. We are seeing some traction coming out of North Carolina, South Carolina, not as much out of South Carolina, but North Carolina is getting some traction, Charlotte, Raleigh, Durham, we've got some stuff going on there.
We've also seen a pivot from the lender standpoint coming out of Tennessee and out of Oklahoma. And both of those markets were pre-review. On Oklahoma they've removed that just probably in the last four or five months, so while they're keeping their eye on it, they are opening it up. And I have recently seen, and we never could get over 70-75%, and now we're seeing even 80% in some of those markets. So it's something to be looking at. You do really need to, I hate to say it, but be very careful from location to location, from block to block, from next door to each other. In Houston, same thing.
Kim Lisa Taylor:
I've heard that for years.
Julie Peterson:
Be really, really careful. And before you even get started, no kidding, put in your Google search the address and “murder “or “crime.”
Kim Lisa Taylor:
Wow. That's interesting.
Julie Peterson:
See what comes out.
Now be careful because in a lot of cases it might say Apartment Grove as opposed to Apartment Place, so you got to be really careful, dig in, maybe do a real deep search on that, call the local police to confirm what you're reading. But that's where you can eliminate some concern from a lender standpoint.
I was talking about how we didn't know about these murders and we're going down the road and we're looking at, how can we get this done? And once we identified that there were murders on the property, a lot of these lenders left the transaction. They said, “Nope, I'm not interested now. There's too much going on.”
But the ones that are excited about it, we can mitigate it. You got to just understand what happened. Was it somebody who lived there? Is it a random deal? And then let's talk to the lenders. What's it going to take? Am I going to need to put a police officer? Am I going to need to put up lights? Am I going to need to put up cameras or a fence or something like that? That's what the lender wants to know.
Kim Lisa Taylor:
I actually was manager of an apartment complex in California. It was actually a fairly new apartment complex, but they had a full security guard component where we had at least one guard on shift every every hour.
Julie Peterson:
We've seen owners give an apartment to the police officer, like I want you living here, so be here. This is your place. Either come as an office or can you live in the unit? So those are things that you can propose to a lender. It's always very, very helpful. It gives them a sense of confidence. Very helpful.
Kim Lisa Taylor:
Interesting. As far as the areas of the country, you mentioned Florida, and from a syndication perspective, the whole time I've been doing this since 2008, I have not had clients have very much good luck in Florida. I've had very few clients be able to buy in Florida just because the cap rates are usually too low. So it's interesting that you are seeing some activity from people buying in Florida.
Julie Peterson:
I would say they're difficult to get done. A lot of them are depressed assets, because they're just trying so hard to get it, that they'll just do anything for it. So it has a component of work that's needed. We're also seeing JV deals coming in, more so than a syndication. So what I see is a lot of foreign money coming in there.
Kim Lisa Taylor:
That's what I think has been the competition for our syndication clients, is that there are so many foreign investors willing to take pretty much any return just to get their money out of their own country, that unless you're actually working with that group of foreign investors yourself, it's not going to be competitive for your U.S. investors to invest in those markets.
Julie Peterson:
I've seen a big shift from my investors going to single-family. In Florida, particularly.
Kim Lisa Taylor:
Interesting. Southeast U.S. has always been pretty good the whole time I've been doing this. Midwest has always been good. Coastal cities, not so much. If you happen to live in an area and you know that there's opportunities in that area, then that works for you. But for people from out of state coming into coastal areas has not been traditionally very fruitful.
Julie Peterson:
Well, we work on the coastals … predominantly speculation type of assets, so I'll tell you, I was making $11.59 in California on my asset, but you can walk away two or three years later with $400,000, so that's the great thing about those coastal, but it's not for cash flow, you just don't buy it for cash flow. And that's what a lot of investors want. And that's what you need to deliver, what the investors want. So pick the right place.
Kim Lisa Taylor:
Are there still lingering effects from COVID in lending requirements? Are they still requiring COVID reserves, things like that?
Julie Peterson:
Well, great question. Just last week, actually I think it was this week, seems like it's been so long. We're only four days in, but on Monday, Fannie said no more reserves requirements. So that is a big deal. And so here's the deal. I mean, we're seeing the 10-year Treasury going up, going up. It tips down, but since the beginning of the year, the 10-year Treasury has been on the run and so how that dictates where people, what kind of lending they're going to use with that trending up 10-year Treasury, the rates have gone up.
Then you had the COVID reserves. Now we've got $40 billion of agency financing, and we're only at about $50 billion, so we need to make up for that. So they're taking that away, that COVID reserves, there is some real certainty that the market is strong. So we can take those off. Freddie is still at six months and assets there are at 65% loan-to-value, which is really low leverage. There are no COVID reserves, but on Friday, today, we do have COVID reserves six months on that. So I think we're just right around the corner to see that being removed.
Kim Lisa Taylor:
That's great. Well, that will make a big difference. Of course, with the interest rates on the rise, that's going to start affecting pricing and viability of these deals also. I mean it seems like we're out of time right now, where there's a really large amount of activity. I feel like it's everybody's trying to get in there while they can.
Julie Peterson:
They're paying crazy prices. Crazy.
Kim Lisa Taylor:
Well, and it's a fantastic time to sell, if you've got a property to sell, but unless you know where you're going to put the money afterwards…
Julie Peterson:
Exactly; I'm in a 1031 right now trying to find it. So, it is rough.
Kim Lisa Taylor:
So you think interest rates are going to keep rising for some period?
Julie Peterson:
I do. If you look at the 10-year Treasury, just because we go along with those on the Fannie and Freddie products, so we saw it right at Nova in March. It just took a dive. I mean, we were at 0.06, I think. At the beginning of the year we were at points at 0.9. I mean, it was so low. But every month… And if you look at that Treasury, you can see, we are continually... It's righting itself and then it's up and it's coming down a little bit, but the trend is rising and now we've got compressed cap rates, so it's harder and harder to put these transactions together. And then you go to Class C where you're working so hard to improve it, and the returns are just not... Because of the compression of those assets, the cap rates are just so low.
All that work to get a C product online and stabilized, is so much more work. So if you can find a Class B product where you're getting just about the same cap rates and with the interest rates so low, you don't have to do a bunch of rehab and all of that, you can get to stabilization quickly. Why not? It's more of a yield play at that point. And you can hold onto it for five years and hopefully ride this wave a little bit easier, a little bit more efficient.
Of course, they're hard to find. So you have to obviously find a strategy that works for you to find these assets off market, whatever they are.
Kim Lisa Taylor:
Consider yourself like a miner. I mean, you're always digging for deals and it's hard. Sometimes they're hard to find, but the deals are still out there.
Julie Peterson:
They are.
Kim Lisa Taylor:
We've been very, very busy this whole year. For the last 12 months we've been... It's just like, a year ago we took a pause in first quarter of the year, and then after that it's like the dam broke loose and we've been busy ever since. So people are finding deals. They're getting them done. You know, lower loan-to-value is not necessarily a bad thing for investors, because you're minimizing their risks. So it might be lower returns, but you can offset that by explaining to them that the lower the loan-to-value ratio we put on the property, maybe you can get a better interest rate and maybe you can also minimize their risk by knowing that if there is a market correction and everything drops 25%, and you've got a 75% loan-to-value loan on your property, you're still in good shape. You've just got to ride it out.
Julie Peterson:
That brings up a really good point to talk about, because these bridge loans I had mentioned, they are the place to be right now because with the COVID reserves, that was adding another principal-and-interest for 12 to 18 months, that's taken off they're coming back. But with these bridge loans, you can roll in your CapEx expenses.
You don't have to capital-raise, that's what's been so great about bridge lending, is that you don't have to bring in, on a $30 million deal, $21 million is the loan, You got to bring in $9 million. On these bridge loans, you only have to bring in $6 million and you're able to get 100% of that CapEx. I mean incredible, but the problem is, not a problem, but the risk tolerance on these types of products, you have to be aware of them.
We need to see experience in the sponsorship. You just can't go down and say, “I'm new. I've been doing single-family for the last 20 years. I've been in and out, fixed and flipped 100 properties.” This is a little bit different. You really need to be able to scale it and get people in and out so you can rehab their properties. There's a skill, and these lenders are going to want to see it. They're going to want to see your resume. They are going to want to see somebody's local to that area that's going to be watching the CapEx being completed. And these bridge loans, great, I love the product, but they do become a little bit more expensive.
When we talk about agency, you're talking about a $10,000 application fee. When we go over to bridge, you're talking about $50,000-$60,000 that you could be out. If this transaction doesn't go. So you need to be wise. You need to understand what it takes and be educated and find partners that can help you take this down, especially on a bridge, because you only get one opportunity to work with a bridge lender, because they want to see you execute. It's not like you can do an agency debt, and then you go to another agency debt when you have executed your plan and go to another one. No, no, no. You do your plan and bridge, and if you haven't executed, you're probably going to have to sell at a loss, or not as much as what you would have been able to get had you executed on plan.
Kim Lisa Taylor:
What kind of terms are you seeing for your bridge loans? Are these two-, three-year loans?
Julie Peterson:
Yeah, so typically, and there are lots and lots of bridge lenders, these are people that have a bunch of money and they said, Hey, I want to put out the money. It's like a hard money, not so much, but just the concept of it. So these lenders are two, maybe three, years of interest-only, and they have an additional one- to two-year extensions in case you need it. Now, these are 70%-75% loan to value, plus 75%-100% of your CapEx expense, and the rates on these are between 325 to 425, 450, depending on the area, depending on what your plan is.
But I mean, if you look at that compared to … let's say, your plan is to get out in three years. If you compare that to an agency debt, you're probably going to be starting at 350, and you have to go capital-raise your CapEx. So two different ways to look at it. They're both non-recourse debt, so you could do it every day of the week, like you would with agency, but the time starts ticking Day One to execute your plan. It's critical.
Kim Lisa Taylor:
The exit strategy for these is either that you got to flip the property before the end of the loan term, or you have to flip it, refinance it, and usually refinancing with agency debt.
Julie Peterson:
Correct.
Kim Lisa Taylor:
So one caution I have for people who are buying these is, make sure that you're structuring your companies with the bridge loan in the same way that you're going to be required to have them structured if you go for Fannie or agency debt financing.
Julie Peterson:
Correct.
Kim Lisa Taylor:
For example, if you have over a $10 million loan balance, you need to have a separate single-purpose entity take title to that property. It has to be one step removed from your investors, so you're going to have a separate investor entity. That title holding entity is usually going to be formed in Delaware and registered in the state where the property is located. That's a requirement of Fannie and Freddie, and if you don't have your company structured that way, you put your investors in the wrong place, or you don't form it in Delaware, you're going to have to do that at the point that you're getting that refinance, and that's going to cost you some fees, because you could have to be doing a title transfer, which could cause a taxable event. You could have to be reconfiguring your corporate setup, which is going to cost you some money, some time, and perhaps some grief, and maybe even permission of your investors to do it.
So make sure that you understand what the structure has to be later on so that you structure it correctly from the beginning, even if the bridge lender doesn't require it.
Julie Peterson:
That is amazing information, Kim. Listeners, this is critical. Yeah, I'm the lender and I'm your biggest partner, but if you don't know what your plan is and your attorney isn't directing you to do that, you got to get in with Kim, because all of that stuff that you just said, Kim, is critical to, how are you going to take this plan out? Are you going to have to sell it? Are you going to be taking it out as an agency? It is critical to know. Don't be getting into these and saying, “Well, I think…” — no, no, you have to have a plan. It is really important from Day One. I mean, that whole structure is so important to be thinking about. I love that, Kim.
Kim Lisa Taylor:
Good. All right, so you said that they have to have experience if they want to do bridge debt. What kind of experience?
Julie Peterson:
A bridge that doesn't say two years, like the agencies... I mean, agency is going to say, “I need two years, three to five transactions.” I need net worth and liquidity requirements on agency. Now, as Kim said, you want to get your structure done early on, because when we go to take this out into agency, if you don't have someone on your team that has net worth liquidity and experience when you take this out, you're going to need to go find somebody and you're going to be in a partnership that you don't know if you like that person or that they really are on your team as a support system or whatever.
Kim Lisa Taylor:
It can cost you some money. Usually 20%-25% of whatever the management earns is what you're going to spend on bringing in an outside guarantor.
Julie Peterson:
Or more. It could even be 50% of your equity you're giving up to somebody that you don't even know, especially, if this is your first deal. So knowing that, what you need on bridge, I would say your best bet is to be thinking, “I'm going to be taking this out to an agency,” and so your requirement at bridge, I suggest having a sponsor that has the two years of experience with the three to five transactions. I mean, first and foremost, you need to have people in the cockpit who are flying this plane, who know how to do it. Don't be going out and trying to do this alone without somebody.
You need the net worth. It's not something that is required in terms of net worth greater than the loan amount, but we do want to see that there's a good amount of net worth. There is no liquidity requirement, but I will tell you that recently we've seen... We typically ask for 10% of the transaction of the equity coming into the transaction, coming just from the GP group.
On these transactions that are in bridge, we're talking about some people want to just put their money in and then they take it out at close. These bridge lenders are not allowing that. They're not saying, “Well, nobody is invested in this,” like maybe they've seen in the past; bridge lenders want to keep your equity in the deal. So what I've seen is that the acquisition fee, you get $400,000-$500,000. I want to get into a deal because I'm making an acquisition fee. These bridge lenders are saying, “I'm keeping your acquisition fee until we execute this.” So be aware of that.
Kim Lisa Taylor:
Arbor is one that has required clients to leave their acquisition fee in the deal for a year because they weren't putting in 10%. So you've got to be cautious about that. So you've mentioned some fees and I'm sure there's some people on the call that are thinking, “Oh my gosh, how am I going to get all this money together?” Well $50,000-$60,000 application fee, you've got your deposits, your pre-closing expenses, all of those fees, and this 10%, all of these things have to come from the management team. If you're doing a limited partnership we'd call it a joint general partner. … And so it's all coming from that team, so if you don't have that equity in your team to put into these deals, then you're going to have to bring in people to your management team that have that money that they will put at risk.
You can't use passive investor money for these things, because technically, you should not be using any passive investor money until you close on the property. And if you don't close on the property, all that other money that you put up, some of it won't be recoverable because it's been spent on consultants or legal fees or loan lender costs. And those are not things that are refundable. Maybe if you've done some extensions and you've paid hard money to your seller, those are not recoverable. Those are your risks. That's your risk that you put into the game as a syndicator.
You can leverage off other people's resources, whether it's their experience, whether they're bringing some cash into the deal to help get these deals closed, those costs are all reimbursable if you do close, except for if you're dealing with a lender that wants you to keep 10% into the deal, then you're going to have to leave that in the deal.
But if you don't, the other way you can get that money is you can do what's called a GP fund. So that GP fund is where you're actually raising money in advance from people that are going to tag along with management team and take a share of the earnings that the management team would be entitled to for putting up that money, for putting up their experience, for helping guarantee those loans. So you can create a GP fund to pool all these resources that you need to get these deals closed. That too can be a securities offering because in some cases the GP partners that are putting up the money are only doing it passively, but with the understanding that their funds are the ones that are at risk. So you still may have to do your own separate securities offering for a GP fund. So that is something that we can help you with as well.
Julie Peterson:
I do want to say this, because Kim may not say it, but when we're doing these bridge loans, typically, Kim, how much do you charge to do an agency loan? To do your legal?
Kim Lisa Taylor:
The legal doesn't matter to us what kind of a loan it is, just what kind of an exemption that you're choosing. So typically you should be expecting $15,000 in legal fees and costs. So you're going to have some out-of-pocket costs. Some of it's going to go to us. Some of it's going to go for forming your LLCs, filing state securities notices, that thing. So $15,000 is a really good ballpark figure for what you should be budgeting for your syndication expenses.
If you're doing a specified offering, you're buying one property. If you need additional entities, because you're over a $10 million loan balance, then there's some additional fees with setting up those additional entities and operating agreements. But it's not huge.
Julie Peterson:
No, but you need to know about that, and so when we're talking about bridge lending, because the lenders have to work to put together this deposit account that has to go back and forth to the lender, so the lender legal on a bridge loan, I'll tell you, typically on an agency is about $8,000. We're talking $30,000-$50,000, and even over. I've heard of $175,000, just for the lender legal fees. So you got to be aware of what you're getting into.
Worst case scenario is probably going to be $150,000-$175,000. But I do want you to know that's going to be in your closing costs, that's not upfront. The lender legal on bridge, I told you about the deposit is going to be about $50,000, this lender legal, you got to put a space on it. That is going to be more…
Kim Lisa Taylor:
Because the personal borrower is the one who's going to ultimately pay for that.
Julie Peterson:
Exactly. And then the other thing is really critical to know about these bridge loans, is they're in a fluctuating … they're an adjustable rate. They run on the Libor or the SOFR index. Those typically have been slow-growth indexes, and so we thought, “Well, by the time in 2028, we're going to be a 1% on that index.” Well, with some of the uncertainty, with a 1031, we got unemployment, there's a lot of concerns out there that we're now speculating that that Libor or SOFPR getting to 1% is going to be four years earlier, so there's a lot of speculation that these adjustable rates are going to be going up.
For that, you have to take out an insurance policy. It's called a rate cap. And depending on how far you are in that forward curve to us seeing us get to 1%, that rate cap policy — it really is a policy — can be anywhere from $30,000 to $100,000-$250,000. So I can take you through that at another time, but it's something that you have to have a place holder for this thing called a rate cap. It's super important.
On closing costs, we usually see below $10 million, or we usually see about two and a half to 3%, but when we look at below a $20 million bridge loan, we're talking about 4% closing costs. It's huge. So be aware of that. It's really important to do in your modeling that you don't forget those costs.
Kim Lisa Taylor:
Those are super-important points to understand. And all right, so to bring this all the way back around, why would somebody use a bridge loan instead of agency debt?
Julie Peterson:
Well, as mentioned, you get the CapEx. So what that that means is, I know I'm going to put a million bucks into this. From a lender standpoint, on a bridge lending standpoint, I'm going to give you that 100% for free, and you don't have to capital-raise another million bucks. Now in the past, with agency during COVID, you'd have to bring in your CapEx, so that's a million bucks, and the principal and interest. So let's say it's an additional $2 million. Now, if you're not good at capital raising, or you're new to this, a $2 million raise above what you are thinking is going to be hard. So that's where this bridge idea can be really interesting.
Kim Lisa Taylor:
… if your occupancy rates don't meet Fannie or Freddie criteria.
Julie Peterson:
Right. Good point.
Kim Lisa Taylor:
Which is usually what? What are those…
Julie Peterson:
90% occupied for 90 days is what agency is looking at. If you want the gold standard — which, in my opinion, is agency, it's amazing product, you can have it for 10 years, it can be assumable, all of that great stuff— but if you find an asset that is 75% occupied, or even if it's below rents, you're at 90% occupied but the rents are below and you need to do some improvements, a bridge is the way to go, and we can get you from 75% occupied all the way up into 90% because of your business plan. That pro forma is really important for us to understand.
Kim Lisa Taylor:
Do you guys do development loans?
Julie Peterson:
We will. We will do development loans. What you're typically seeing is more so a bank financing on that. Some of my bridge lenders will do it, but the uncertainty, a lot of... Obviously we can't do it on the agency because this is more stabilized, this is people living in at 90 and 90, so that's not an option. So look for other options and many times it's going to be your banks.
Kim Lisa Taylor:
All right, well, Julie, I think we have some people that have some questions. So before we go to that, let's give out your contact information and tell people how they can get ahold of you if they have questions specifically for you.
Julie Peterson:
Absolutely. So I'm on all of the social media, Julie Anne Peterson. And my phone number is 972-833-2774. I am happy to have a conversation with you.
Kim Lisa Taylor:
What is your email for them?
Julie Peterson:
Jpeterson@oldcapitallending.com
Kim Lisa Taylor:
S-O-N.
Julie Peterson:
S-O-N. @oldcapitallending.com. Now, listen, I also want to plug Zoom at 8:00. Zoom at 8:00 is every Tuesday night, and we have great speakers, like Kim Lisa Taylor, who's coming up in July. She's been with us previously. We all love all of the content that she presents. And then we network, and we have closed six deals with the community so it is a great place to meet new folks and investors, sponsors, attorneys, stuff like that.
Kim Lisa Taylor:
And if anybody wants to get ahold of us, the best way to do that is at our website at syndicationattorneys.com. There's a way for you to schedule an appointment. And also you can check out our library; there are a ton of articles, one- and two-page articles, on all different aspects of syndication, frequently asked questions. You can get a free digital copy of my book. So I have, if you don't know, I have a No. 1 Amazon bestselling book called “How to Legally Raise Private Money.” You can either get the free digital copy at our website — there's a tab that says, “Get the Book” — or you can go to Amazon and you can buy it. It's gotten a lot of great reviews and I think it's helped a lot of people.
Somebody asked, “Can syndications fund opportunities on properties?” And the answer is yes, absolutely. Just realize that if you're going to do that, you have to have two separate classes of investors. If you're going to have gain investors and cash investors, they are treated differently by the IRS, so you have one class for your cash investors, one class for your gain investors.
In order to get the full benefit, the gain investors have to stay invested for 10 years, so you couldn't do a refinance and pay them back some of their capital; it would negate their gain deferral. But you could cash out your cash investors. Your cash investors get absolutely no additional benefit from investing in an opportunity zone project, nor do you as the syndicator.
The only people that really benefit from that are people who are investing gain from another source, and it is an alternative to doing a 1031 and it does have an advantage over the 1031 in that the gain can come from any source, and it doesn't have to have been through an intermediary. You could have actually taken possession of the gain. And then as long as you invest it within a specified period of time, then you can still defer the tax on that gain and you only have to reinvest the gain, you don't have to do the boot that you have to do with a 1031 where you've got to get it in the loan amount equal to, or greater to what you had before and invest the cash equal to or greater than what your equity was.
That's just a little bit about opportunity zone. We do have two different articles about opportunity zones in our library, and we've also recorded some previous podcasts about opportunity zones, so you can listen to those if you'd like.
Let's see, we have somebody who asked, “What was the rate again?” I think they were asking about the interest rates that you're seeing right now, Julie.
Julie Peterson:
On agency, and again, every business, every asset, is different depending on the location, the age of it, who's buying it, so high level on agency, we're looking at we can get on a Freddie floater at 2.95, and we can go up to probably about 4.5. That's agency, so that's a huge span. On a 10-year fixed, you'd get three years interest-only, so those are the rates for agency.
When we go to bridge, depending on the location, we have seen 3.25 up to about 4.50. So again, a big span, but the great thing about that bridge is that you can throw in your CapEx, which is almost up to 100%. I mean, it's fantastic.
Kim Lisa Taylor:
That's great. I just want to tell you guys all that we do have a pre-syndication retainer. If you're not a Syndication Attorneys client, you can become a pre-syndication retainer client for $1000. It gives you up to three hours of one-on-one time, but it also gets you access to our weekly Masterminds. We do them on Friday mornings. It's like open office hours, but it's clients-only. It's an opportunity for you to interact with other clients of the firm, and with me, and we just talk freely, we don't record them so that we can have very frank conversations, and they're usually pretty great calls. I feel like everybody gets a lot of value out of them and I've been told that from our attendees. So that would get you into our Masterminds and also get you some one-on-one strategy time.
We would also give you an investor marketing plan template, and an investor relations blueprint so that you can create defensible relationships for doing your Reg D rule 506(b) offerings, and you can start creating a very robust database of potential investors, so that when you have a deal, you don't have to fret about not having enough investors to fill your deal.
Our goal here with Syndication Attorneys is to give you all the education you need to be able to confidently go out and syndicate as many properties as you want to do, and we want to give you all of the moral, ethical, and legal support that we can to help keep you on track with that.
We're so thankful that Julie came today. She was a wealth of information.
Julie Peterson:
Thank you.
Kim Lisa Taylor:
This was a very, very lively conversation, and here's a question, somebody asked whether you're in every state. So Julie, you answer first.
Julie Peterson:
Yes, I'm in every state, so across the nation, but I'll tell you, California, not a lot going on, as we talked about. Florida, you can't get what you really need on a syndication to be able to return in those markets, so you just got to be careful. I'll look at them, but I can't really... When I say 50 states, there's limitations. What makes sense?
Kim Lisa Taylor:
We're able to help clients in every state, because most of what we're doing is under federal law and so we're able to do that in any state.
Anyway, I want to thank everybody for taking time out of your busy day to join us today. We really appreciate your attentiveness and your attendance on these podcasts, it helps make them so much better when we have participation from the audience, so we appreciate that as well. And wishing you all the best in the rest of your week. And Julie, thanks so much.
Julie Peterson:
You're welcome. Great to be with you.
Kim Lisa Taylor:
All right. Bye-bye.