Securing Financing For Your MFR Deal
On this episode of Next Level American Dream, Abigail and Sean are joined by Aaron Moll. Aaron is a mortgage banker out of Detroit specializing in commercial real estate. Throughout this episode, Sean and Aaron discuss the ins and outs when it comes to securing financing for your investments.
Key Topics
What are all the financing options for multifamily real estate?
What are the requirements and qualifications when obtaining financing for a multifamily investment?
Connect with Aaron:
https://www.berkadia.com/people-and-locations/people/aaron-moll/
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SUMMARY KEYWORDS
Multifamily, deal, loan, borrower, lenders, Fannie Freddie, property, debt, people, reserves, buy, months, year, CMBs, business, interest rates, LTV, bridge, Aaron, HUD
SPEAKERS
Sean Thomson, Abigail Thomson, Aaron Moll
Abigail Thomson 00:00
Welcome to the Next Level American Dream Podcast brought to you by Thomson Multifamily Group. Your hosts, Abigail and Sean will discuss how you can take your American Dream to the next level through real estate investing, business practices, and personal development. Join us as we share our experiences as a father daughter duo who are trying to accomplish our goal of financial freedom. We hope you learn more about how to define and achieve your American Dream. Here's another episode of Next Level American Dream. Today on Next Level American Dream, Sean interviews Aaron Moll. Aaron is a Mortgage Banker out of Detroit specializing in commercial real estate. Throughout the episode, Sean and Aaron discuss the ins and outs when it comes to securing financing for your investments. For more information on Aaron, check out the description below. If you're interested in learning more about our sponsors and multifamily investing, visit thomsonmultifamilygroup.com.
Sean Thomson 01:06
Hi, Aaron, thanks for coming on the show. Welcome to Next Level American Dream. How you doing?
Aaron Moll 01:10
Good. Thanks for having me! It's a pleasure to be here.
Sean Thomson 01:14
Well, we're going to talk today about the debt side of Multifamily. It's a little bit of a mysterious world I think for most people that aren't in the business, and they don't have a lot of experience with it. So hopefully we can get some clarification from you on how that works. And let the people know kind of what your background is and what you're what you're doing presently. And so they'll know kind of where you're coming from.
Aaron Moll 01:34
Sure, sure. So my name is Aaron Moll. I'm a mortgage banker with Arcadia. And I'm based in Detroit, Michigan, for Katie is a JV between Berkshire Hathaway and Jeffrey's. So we've got, you know, big, big teams behind us, that helps me, you know, be be better at what what I already do. And it's been it's been good being I've been implicated for a number of years now, previously was a life coach lender work for Lincoln financial, done on the southeast and originated debt primarily in the West, but got some background as a lender on the life coast side. But enjoy my my mortgage banking regime now placing three different debt I work in, basically all the food groups, but for obviously, for the sake of this podcast, and the majority of what I do is multi family. So lender groups are, you know, for the most part, the GSEs, which is Fannie, Freddie and Hud collectively. And then we also work with life insurance companies cmbs, debt funds for bridge products, and then you know, banks and credit unions from time to time.
Sean Thomson 02:39
Okay, great. You're using you're using acronyms. Might have you clarify some of those points too, as we sharpen GSE when you're talking about what was
Aaron Moll 02:49
The Government Sponsored Entity (GSE), so I always say I know you're a single family guy in a prior life, I always kind of equated for the folks jumping into multifamily. When they asked me how do I get a Freddie Mac loan on my apartment community? It's the same thing. If you go down to your local bank and get a home loan, you know, if you go to Bank of America, or if you go to your local credit union, nine times out of 10 and people know this, they're going to sell that to Fannie Freddie. Right, right. But they're going to service it. So you don't really know what gets bought by Fannie Freddie, but it gets bought to government guaranteed that the same thing happens in multifamily with an apartment loan, except there's a more finite group that are originators for Fannie Freddie with multifamily. There's about 20 of us for cadia. You know, I'll stand on my soapbox a little bit. We are number one collectively. So this year, so far, we're number one with Freddie and we typically end up at the top three there with typically top three with Fannie and we're usually number one or two with HUD but if you add them all up on a total production level, across all government sponsored entities GSE we tend to be number one, so I like that because it lets me be your banker a little bit more not just afraid lender. If Fannie fits better on one deal, or HUD fits better on the other deal, we not only can offer all of those different options, we can sell them adequately. So that's what I mean by the gscs is a free home for multifamily.
Sean Thomson 04:19
Yeah, I just wanted to you know, I don't know what the the listeners know and what they don't know. So maybe Sure. I anytime I hear some of that and I'll just maybe have you clarify.
Aaron Moll 04:28
We live We live in an acronym world and they just stopped me I sometimes I get going. So yes, yeah.
Sean Thomson 04:35
I do the same thing. Well, if you can sort of map out some of the the options that people have. So if I'm if I'm getting into multifamily, which which I am doing now. What are some of the debt options or debt structures that that we're going to be working with are trying to trying to put into place what are the various different types and how do they operate?
Aaron Moll 04:57
Sure. You know, it is more of a What I would call the permanent lending shop. So what I mean by that is properties that are stabilized. And if you wouldn't, as an investor or a borrower, a client of mine wants to hold a piece of property for some time, we call that permanent financing. So you buy a deal, it's 90 to 95%, occupied, it's got good history, it's stable, and you just want to buy it and own and cashflow it, and you want to own it for a number of years. We're really good at that. And that's called permanent loans. And we can give you anywhere between, we get we give you a lot of options. But in most cases, it's between a 10, and I'm sorry, five and 15 year term, fixed rate, you know, we tend to have a little longer amortization than banks. So if I just use a rough example, if you're trying to buy, let's say, a $5 million, multifamily asset, and you're talking to your bank, your bank is probably going to offer you a five or seven year fixed rate deal with recourse, maybe partial recourse and get you you know, 25% down 75% loan to value, probably depending on the vintage of the asset and strength of the market, what have you with the 25 year amortization, we're a little different the Fannie Freddie loans, HUD loans, life insurance loans, cmbs loans, those are for the most part non recourse loans. So there's no personal guarantee, just done a limited set of carve outs we call them or even more well known as the bad boy carve outs. So what we mean by that is, it's a non recourse loan. But if it would become recourse if you basically do something bad, and it's defined, as you know, fraud, misrepresentation, waste, willful misconduct, those sort of things. So as long as I guess the punch line is, if the market tanks, if we have another 2006, and the deal just doesn't work anymore, you can throw back the keys and walk away, they're not going to come after your personal assets on personal guarantee. That's kind of the deal. And then in addition to that, we tend to have a little better cash flow with a 30 year amortization, and usually some interest only periods. If you want that as an investor, we can honestly cater whatever loan you're looking for. And what I always do with my clients, before I try to just tell them what loan they should get. I just ask them what they want. And I and I phrase it in a, you know, variety of sets of questions. How big is the deal? How is the occupancy? How long? Do you want to own it? I mean, what's your goal? Are you cash on cash yield driven? Are you IRR driven? Or do you want to just give this thing to your kids and pay it off as soon as possible? And based on the answers to those questions, we can effectively recommend a certain bone product, kind of even before we even underwrite the deal, you know, and kind of get into it from there.
Sean Thomson 07:50
A lot of times the debt the debt is going to be I don't know what you would how you would turn but sort of a partner in in the cash flow of how the operations is going to go, you know, you can structure the debt so that it's good on the front end, or long term or all those sorts of things depending on what your objective is, with the with the business plan in the business, right. So it's good that kind of determine, I guess, like you said, the strategy that you're using, will help you kind of decide what the best debt to put against the property would be. Let's talk about so there was a lot there, I don't know want to dive into that. Exactly. But so the what you're talking about is the things that you like about the products that you have, or that you can get a longer term on the note. And then also you can get longer and longer amortization. So longer amortization is going to give you increased cash flow, because you're able to extend those payments out over a longer period. So it's a lower payment every month. That kind of thing. Let's talk about so let's say I do find a property, like you said it's a $5 million property. What is sort of the qualifiers to get a property to work, I guess, were to qualify for that debt obligation?
Aaron Moll 09:03
I wouldn't, I wouldn't say we're looking for a certain set of qualifications to to qualify for debt, we can put you with the lender based on the needs that you have. So I also do a lot of bridge financing deals that are not operated efficiently, you're buying a deal, it's a good opportunity. Maybe you know this, the seller of the property is an operating that property to its full potential crime or whatever, right so it's 80% occupied and has some issues on the management we see those a lot. So those would not be ready for what I would again refer to as a permanent loan, they may be ready for a bridge loan. And we can offer non recourse bridge debt with some of our you know, debt funds that we work with and even some of our banking partners. And basically we put you in a transitional debt instrument to give you some cash flow. A lot of times these loans are interest only. They are going to be at a little higher. interest rate than a permanent loan. But again, it's offset by the interest only payment. And they're really for like three years or less. So you come in maybe a little higher on the fees a little bit more costly, but you're, it's a higher risk for the lender because it deals not well occupied or not ready term. But it allows you to buy an asset, if it's not performing, put a fairly minimal downpayment down. So a lot of times those lenders will help fund your callbacks and your your improvement dollars to get it up and operating to where it needs to be. And the whole point is why they call it a bridge loan is it's bridging you to either a sale or a refinance. And I have a lot of clients that have come to me with a deal that isn't doing so hot, and they want to do a bridge loan, we'll do a bridge loan and maybe 75% LTC loan to cost. So they'll fund 75% of your purchase, they'll fund 75% of your your capex dollars, your your dollars that you're putting into the property, improve it. And then at the end of that, we want to try to basically cash you out. And so if you do two years and do a nice job, and you lease it up to full occupancy and grow the rents and grow the value of that deal, you know, we have a lot of examples where we've basically returned all of the borrower's equity and put a loan on it with a Fannie Freddie or cmbs or something like that. In that, like second or third year, that's above what they paid for it. So at that point, your your return is essentially infinite, because you've returned all of your equity.
Sean Thomson 11:25
Yeah, and that's, so that's a good, that's a good strategy. So if you're buying something that needs a little bit of work, that's, that's poorly managed, you're trying to recover that property back to its original state where it's, it's cash flowing nicely and operating nicely. And that bridge kind of gets you through that whole process where you get the rehab done, you get the tenant stabilized, you get the cash flow stabilized. And that gives you that two to three years to do those things. And then you can put your permanent debt against it and just carry it into the future. Do those come? Is that is that when you do that sort of thing on the on the bridge? When you put the bridge in place? It's a three year bridge? Do you already have your your permanent funding sort of as a component of that? Or is that something that is redone at the year three? Or is it's Is it something that at year three, we're just going to convert it?
Aaron Moll 12:12
Sure, no, that's a fair question. We the permanent financing is not lined up. But no, we, myself is your banker, and the lenders that I would work with all very much focus on Am I am I gonna be able to get taken out of this loan. So I'm the bridge lender, and I'm giving you this 75% of the cost based on your business plan based on your budget and what you're gonna be putting into the deal. We're gonna look at that pretty closely and make sure that year to year three, you've got enough, you know, noi realistic value lift that you're, you're penciling a fairly conservative perm loan takeout to cover the outstanding bridge debt. So we call that the exit analysis. And they're in the bridge. It's a big focus on exit, we don't want to put somebody up for failure where we say, hey, we'll give you 75% LTV LTC, you do your business plan, but your business plan never out, you know, Outlook outlaid or, you know, outlined enough noi growth to ever get you out of that alone, we don't want to put you in alone that you're you have no light at the end of the tunnel. And trust me, the lenders definitely focused on that as well. And they tend to add a little bit of a buffer to make sure you're getting adequate financing on the back end.
Sean Thomson 13:23
Yeah, exactly, you would want to go into a business plan on your your property. But at year three, you if you hit your marks, you know that you can kind of qualify or get probably is going to qualify for some sort of permanent funding that's going to, again, allow you to cash flow property and be successful in your 456. And future. Right. So you would want to do that sort of analysis on the front end, I guess to to make sure that that's going to happen. What are some of the other so we talked about? I guess we talked about permanent bridge? Is there some other type of lending that you want to make sure people are aware of?
Aaron Moll 14:00
I mean, just those are the two primary main main components. And there's a lot of different layers within those, you know, again, if it's if you're into the perm space, there's a one phrase in the multifamily world is 9490. Do you have 90% occupancy for 90 days, I will tell you that that is not a hard fast rule, there really is no hard fast rule. It's it's a full deal. It's a full analysis, if the deals 85% occupied but trending the right way or added reasonable explanation as to why it did for a month or two, the sponsorship strong and market strong and you know, maybe we can get that through. But yeah, to go into perm with the Fannie, Freddie and HUDs of the world. It's typically a 90% target and occupancy for 90 days. That's how we underwrite deals on an income standpoint, we really focus on what we call the trailing three or the T three collections. So we want to kind of want a really nice snapshot and then 90 days I I'll give you an example I had a borrower of mine That actually heard me on another podcast and reached out to me and said, I got this deal in Columbus. And I paid, it was a small deal, I think he paid like a million bucks for it, or maybe 1,000,001, or maybe 1,000,005 for this one. And he wanted to get alone as close to 1,000,005 as he possibly could. And he sent me his financial statements. He bought the deal with a bank loan. It was, it was not in good shape. It required a gut renovation, essentially. And he did a great job, they fixed it up really nice. And he called me after his improvements were done. But the deal still wasn't cash flowing, you still growing writing, still getting into that kind of peak where you thought it was going to be or that plateau. And I told him, I said, if you're looking for this million five loan, you're not there yet. This is where you need to be on income. So send me a T 12, or trailing 12 statement that shows me the last three months of this income. And he did it. And like six months later, he called me back and said, Hey, I, here's my T three, it's right where you want it to be. We looked at it, we put it under app, a Freddie Mac, and we close that deal at his goal. And it was great as a great story, because we kind of looked at it early for them and said, You know, I hear your goal. This is where you need to get to do you think you can do this? And it did take me a few months took them six months, and we closed them shortly thereafter?
Sean Thomson 16:25
Yeah, that's awesome. So he knew where he was kind of headed and and was able to get there. And so that allowed him to, to put in the place the funding that's going to carry him into the future. That's good. Yeah. In that case, the property itself is the qualifier for for the debt, right.
Aaron Moll 16:44
The ownership is absolutely part of the equation and the borrower strength. Again, it's a poll equation, the deal does need to underwrite adequately nice, needs to essentially stand alone for non recourse debt. That's one of the things I always tell my clients, right, if the deal is so underwater, if it's 50%, occupied, and burned down, building it, like it's not even close to cash flow, you probably need a recourse bank loan, just take it down with a personal guarantee, because it needs some sort of credit enhancement, beyond the real estate, it needs you as a borrower, and your global cash flow to make the lender comfortable, right. But if it's a transitional asset that has some merit to it, and some standalone strength, but it's not quite where it needs to be prepared, then those of those non recourse bridge loans we that we place. But to answer your question, even on the easiest deal, a 50% loan to value perm, the borrower is always going to be part of that equation. And it's just helps us obviously get the deal through credit get signed up, get it closed. And a lot of times, the stronger the borrower, the better terms that they're able to receive. My lenders have very relationship driven every one of them and Fannie Freddie, you probably lead the pack in relationship, the more you do with those two lenders, the better treatment you're going to get. And the better, you know, the the easier it's going to be to work with them.
Sean Thomson 18:05
So let's say I have a property that's that's that you like that's working? What would what would someone like me need to have in place to to secure let's let's use the $5 million project example that you had earlier. So the property's working at? And it looks like looks like debt? What do I need as the sponsor, I guess, to to kind of qualify as well?
Aaron Moll 18:30
Sure, a basic set of qualifications. There is a net worth and liquidity requirement $5 million, a unique example, because it's the small balance loans. It's s SPL we call them Fannie Freddie SPL. And that's any actually pretty emailed out today that it's now seven and a half million or less, I'm alone is considered an SPL loan. So for that, they want you to have a net worth of 100% of your loan. So if we do like a $3 million loan, on that $5 million property, whatever that ends up being, is a $3 million loan behind a $3 million net worth. And it and the splc wants like 10 months of debt service liquid youth large loans is 10%. So if you do a $25 million loan, you need 10% of that two and a half million dollars liquid to qualify now that can be clubbed. It doesn't need to be just you. So a lot of folks, especially on those large deals will have a few, you know, managing member GPS that are controlled that assigning on the carve outs that are really our borrowers. And they can we can club that. So if you have three folks, and we're looking for a $2 million liquid for a large loan, we can add all three of those borrowers up to hit that number.
Sean Thomson 19:50
But you can do that on the on the SPL loans as well. He said, Yeah, you get yo if I'm trying to get a five I've got a $5 million property. We're looking at a three 3 million rough $3 million loan on that I can bring three guys together that are worth a million dollars apiece, that have was $300,000 would be the liquid requirement there.
Aaron Moll 20:09
It ends up in the SPL instead of 10% is 10 months of debt service amortized. So 10 months of your mortgage payments amortizing.
Sean Thomson 20:18
So that's that's not going to be that's going to be that that would come out to probably still probably about 10%. Really?
Aaron Moll 20:24
It is, it depends on the size of the deal. But usually, it's a touch more than 10%.
Sean Thomson 20:29
Yeah, so maybe 15%. Right? If you have, let's say you have 3 million or three guys each have more than million bucks. You got about $450,000 in liquid assets, then you're going to be able to and and the properties working. That's that's a formula for success in securing the debt.
Aaron Moll 20:46
Yeah, there's you know, credit score, but that I mean, rare, usually the people right that are buying $5 million deals don't have 500, credit score's so it really comes into play. There is you know, there is a minimum, I honestly couldn't tell you what I think it's like a 650, or there is a we do pull credit, but it is just a it's a file filler. I mean, we really are looking for good real estate, we want a good clients that we know have, you know, it's absolutely a benefit. If you already have experience, we can point that, hey, I've got five assets, they're all doing well. Here's my reo schedule shows that they're all cash flowing, it shows the global DCR the global LTV, you know, I know what I'm doing. And if you don't, I would highly, highly recommend if it's your first deal to club up with somebody that has some experience, so you can benefit from them. Bring them on the carve out so that Yeah, you're probably gonna have to give up some that GP right some of that promote, but it's a way in. And, and I would also highly advise to use a third party management company, and just go with the big one, go with the one that has 15,000 units, because all it's going to do is help you in the narrative with the large national lenders, the National lenders that I deal with one larger property management, not boutique.
Sean Thomson 22:07
Right? Yeah. So if you're just getting started, it's almost a necessity to have someone on board your team that has the experience, and has you know, net worth and liquidity, of course, but experience goes a long way as well and owning additional assets that they've kind of been successful with. I think that's a that's a key component that in securing the debt that you're going to need to have. And I was kidding with you earlier, I said, you know, you can't buy an apartment unless you've already bought an apartment almost.
Aaron Moll 22:36
Well, that is a whole different podcast that that is a little bit tougher surface to crack. But yeah, that's we can get we'll get into that one later. That was that for everybody.
Sean Thomson 22:47
Yeah, but this is definitely a team sport, for sure. You know, I have a bunch of people around me that are kind of supporting me and helping me get through these things. And so, you know, in exploring these things, it's good to have those people on board just to help you through those things. But when it comes to crunch time to get the best security, you're gonna it's really going to be a requirement to kind of have people in your space that have experience, as well as all those other financial criteria met as well.
Aaron Moll 23:12
Absolutely, I couldn't agree more. I think you need a team, you need a good lawyer, a good CPA, a good manager, and a good banker, you know, the banker Should not I keep I was just on a podcast. And I was joking with him because he was saying Aaron's broker I said, I'll come on. I said, I know brokers a little bit of a dirty, and I am a broker when it comes to, you know, a variety of different lenders, but really, I want to be your banker, you know, I want to listen to what you have to say, solving problems. And if I'm a developer, I think it's very important to have a good trusted banker that you can take deals to, and say, What do we do, you know, and listen to that advisement. Because if the banker knows what they're doing, they should be able to fill in those gaps for you.
Sean Thomson 23:58
Let's talk about so we've kind of we've kind of talked about the different a couple different types of debt, you've got the perm, the bridge, the interest only funding. And we've talked about kind of some of the qualifications that the that you look for in setting somebody up with debt. So you've got a good property, a net worth requirements and liquidity requirements and credit score requirements and things like that. So what is the process? So let's say I have those things kind of already built are in place for me, I found my property. Now I've got to I've got to call you and say hey, what's the next step? Would someone contact you and then and then provide you all this documentation? What How did the How would I go through securing all this stuff?
Aaron Moll 24:38
Sure. Another fair question. We we size deals all the time. So Katie also happens to have a very large brokerage shop investment sales shop, we are only chartered in multifamily on the investment sales side so I can write mortgages and I do like retail properties, office properties, self storage, kind of everything but I more of them. multifamily expert, our investment sales team, which is all over the country, are only for multifamily we have but we also have a Hospitality Group by DC that does some hotel brokerage. But we're really a multi shop. And so with that we have listings that we're always sizing, we have a lot of folks looking at those listings. So we need to be in the know as far as I what what are these indicative terms? Or how is this long going to work for a variety of different loan executions? And so to answer your question, though, in addition to that I have borrowers that are constantly looking at acquisition opportunities or refinance opportunities. I got a loan coming up in two years, my prepays pretty minimal interest rates are silly right now, which they are, should I refinance? Well, if you have that deal, you have an acquisition, send me the T 12. The rent roll. And if it's listed somebody's offering memorandum, so I can just get some my head wrapped around the details of the property. That's a bare bone minimum, that is a started, if it's a transitional deal that needs a bridge, if it's a deal, that is an acquisition and has some, maybe some color to the story or something like that. And I'm probably going to want to see a budget to see how you're going to finagle that and transition it sort of thing. But at a minimum, a rent roll at t 12. And we can really get started. And from there, we're able to dive in probably ask a few questions, hey, Rnm is up in these months, this catbacks, we pull that out? Where you budgeting on insurance, the guy who's selling it seems to be running pretty fat insurance bill, you know, so we try to perfect our noi. And then once we get around and wide perfected, we can start to ask those questions, are you looking for a seven year deal with your term, what's your LTV, bogey, all of those things. And then once we get all that answered, we can we can provide you our terms that we see in the market. From there, if you win the deal, or if you want to move forward with refinance, we put together our official submission to the market. So if you tell me, hey, I want to I want 75, LTV, 10 year deal, five years of IO, and, you know, auto refi. And we decide that's a Fannie Freddie execution, we would essentially submit to Fannie Freddie at that time, it firm up our loan quotes. Whenever we do that with Fannie Freddie or life insurance companies, or cmbs, we're ever going to bridge we make sure our lender is pretty fully vetted. So, you know, I also work with banks, and I know a lot of clients that are early on in the process, or use the banking experience, we're not going to be as quick to issue a term sheet because we really vet that. And so we're doing a lot of due diligence, to get you to a point where when we issue a quote, we're basically ready to issue an application, take your deposit and start the approval process in order to third party reports. So I don't I don't like to put clients into positions where they're banking on me to perform a debt based on the terms I provided them, and they're going under contract, to buy something, then I turn around and say, Oh, you know, those addictive terms, I provided a way off, or way less dollars way higher interest rate, we don't do it that way. So if we, if you like, well, we're kind of selling on an indicative basis, and you want to try to move forward, we fully vet that and have deliverable terms.
Sean Thomson 28:24
So the process really is contact you I guess, and then start the process of giving you the information on the deal that we're that I'm looking at, or whoever's looking at it, so that you can underwrite it a little bit and figure out kind of where it fits in the debt side, and you kind of really tailor everything for my needs and the requirements of the property. And it sounds like it's kind of a one on one process that you go through with, with whoever's bringing you the deal to craft it. So that it's, it's going to be optimal for the property that the property needs based on the business plan, and then the needs of the borrower. And then what will fit with with the lenders is that so it's really kind of a, it sounds like it's kind of a conversation that is going to go on for a while that you that you go back and forth to sort of sort this out, right?
Aaron Moll 29:14
It depends. I mean, if your experience level is some something where you already know what you want, I there's a lot of people out there that they've done 10 deals, so if they see one, they already know it's gonna be a failure for the execution. Maybe they've already done eight Freddie loans to Fannie loans and they like work with Freddie Mac better than Fannie. They pretty much know it's going to be afraid of execution. So those conversations are pretty limited. It's a got another deal. Here's the T 12. Here's the rent roll. This is where it's located. What can I expect out? Well, I already know you want a 10 year deal because we've done a 10 year loans for you already. Right? This is this is the term but if it's someone new, then we absolutely want to start asking those questions because we don't want to be presumptuous that you want a 10 year deal. You may want a seven year floater because You want, you know, optimal prepay flexibility people that are like, I only want to live for three years, I don't want to be stuck with a large domain. It's a pre you know pre pay, then we can talk about like a floating rate.
Sean Thomson 30:14
But it's a little bit different than like a single family. You just it's an application and an appraisal when you got your loan pretty much. Yeah. So it's like, it's not, it's not too terribly complicated. There is a lot of document presentation and things like that. But they're not they're not as in depth Lee looking at my business plan, right. So they're not looking at, what's it renting for? What's my rehab cost? You know, they do that a little bit. But I think it sounds like you work more closely with someone to kind of hash out the strategy that's going to be taken forth with the with the operation of the business, and then tailor something to kind of work with that that business plan as well. Hundred percent.
Aaron Moll 30:51
We are not single family, we can offer a lot of different models.
Sean Thomson 30:55
Yeah, it's not it sounds more.
Aaron Moll 30:57
Do you want a 15 or 30? year? It's, you know, there's, there's a lot to it. Right? So we want to make sure we're hitting the targets?
Sean Thomson 31:05
Yeah, okay, good. Well, it sounds like someone just would need to contact you and sort of go through that process with you and get everything lined up and sorted out, or whoever they're using, I guess it doesn't, it doesn't have to be airman but you know, but it's, it seems like it's gonna be a one on one conversation with your, with your banker or lender and and our broker, and kind of work through that stuff to find the most optimal. Next step.
Aaron Moll 31:34
Absolutely.
Sean Thomson 31:36
Let's talk a little bit about, you know, it's kind of an interesting time right now with COVID. And all that's going on with that. He talked about how that's affecting the lending environment. And then maybe we'll talk about interest rates as well. So talk about first of all, how COVID is kind of affecting everybody's lending?
Aaron Moll 31:53
Sure. Sure. Well, I will tell you before COVID, the market was very good multifamily has been kind of the gift that keeps on giving for a number of years, it's outperformed the variety different assets outperformed essentially every asset class on a national scale. We were seeing some construction coming into certain markets and oversaturation, but ultimately, multifamily was good. When COVID hid. It definitely made everybody rattled a little bit now. And I'll say, if we start from, you know, the all the lenders that we work with in the major groups of those lenders, we saw a lot of them exit space, and rather quickly, banks started working on PPP loans to save their existing clients and manage their portfolio. So we saw banks essentially sidelined. We saw cmbs completely blow up and stop lending. And the reason for that was a lack of liquidity in the bond market and the corporate bonds blew out to such an such a level that it made no sense for people to buy commercial real estate bonds, they just bought corporate bonds. So we saw cmbs sideline, we start dead funds and other bridge lenders essentially stopped lending. They were getting margin calls and the warehouse lenders were shutting down so it kind of ties into the banks. And then life COEs also took a pause. They were one of the first ones to come back. But they have now come back. But I would say in the first 30 to 60 days there was there was not a whole lot of activity. The only exception to all that is the GSE Fannie, Freddie and Hud kept on rolling. And what we saw in the beginning days was them trying to understand how to structure around Cove and and try to understand how is this potential employment? How is the shelter in place going to affect multifamily collections. And they were pretty rattled. I mean, there were some initial reports coming out from the FHFA. The National regulator, rightfully basically from Congress, that, you know, I think this is back in like March or April, by May one apartment collections, we're going to be 75 cents on the dollar. And by June one there'll be 50 cents in the dollar. It was like Armageddon, it was gonna be bad. And we didn't see it. Luckily, they know. And so the space has continued to be fine on a collection standpoint, and animate seeds from these big firms and putting out huge market studies to track our renters still paying our borrowers doing sort of a lot of defaults, you know, how just how's the market and the market held pretty darn well. But Fannie Freddie HUD did Institute some structure to their loans that still remain today, while they've remained open for business. And while they have maybe tweaked the credit box a little bit been a little bit more selective on borrower and you know, maybe not going to full leverage, especially in the early days. They they instituted a COVID reserve and that's still around so it's evolved a little bit And it's gotten a little bit more borrower friendly. But in the beginning, they basically said, Hey, you have to escrow 12 months, so a full one year of debt service payments, and taxes, insurance and replacement reserves escrows. And everybody kind of when are you kidding me. And then but then they start with the interest rates were going, you know, the Fed kept dropping the the federal fund rate live or basically went to zero, the Fed funds rate went to zero, the 10 year Treasury dropped like rock, and the rates just kept getting lower and lower and lower. And then really the the, the cherry on top was the federal government bap, only government sponsored real estate bonds, which is Fannie, Freddie HUD. So all of the liquidity in the bond market pushed to Fannie Freddie HUD driving down the rates even more. And so borrowers got over pretty quick, because rates today have continued to mate remain very low, I would say pre COVID. We were, You know, right before the shutdown 350 was like, Congratulations, you've got a fantastic interest rate. And today, it's probably 250 for a fantastic interest rate, I think, all day for a 10 year note of full leverage, you know, depending on a variety different things here in between 275 to 3.15, again, depending on a lot, but that is significantly inside of where rates were before, when you're talking about a five to 10 or 20 or $50 million mortgage, every single basis point counts in a big way. So those investor yields went through the roof, and they got over that coat reserve pretty quick. So today, you know, we still do see for full leverage deals to 7575 LTV, you know, depending on DCR, Freddie's gonna be between six, nine months of reserves, Fanny's probably gonna be you know, nine, but the rates are fine. And in the borrower does get those reserves back as long as the adequate cash flow, post loan closing. And if they don't, you know, they can perhaps use those towards debt services, you know, if there's a significant issue and the deal doesn't cash flow, but so we are still seeing Cove reserves, we're seeing interest rates, you know, at or below 3%. For full leverage. HUD is in the low twos. Base, it's a good time to be a borrower as far as interest rates are concerned. No doubt.
Sean Thomson 37:31
Yeah, the interest rates are crazy. It just seems like it's unheard of. It's almost like free money almost, you know, compared to where we were, you know, a few years ago for sure. Right? So the dates are the top month reserve, is that still is that still in place? Or I thought they back to that didn't they back it up to like six months, was it still 12 months.
Aaron Moll 37:50
That's a pretty set up bogey on DCR of a 140. So if you're at 140, DCR, and full leverage 75, LTV, that can go to six. If it's below 140 and 75, LTV it's going to be nine, Fannie is going to be nine or you can go lower leverage. And if you go to 65%, LTV or even 55%, LTV, those reserves will just get less and less Freddie, if you're at 60. LTV and above at 140 or 145 DCR, there is no reserve and faint if you go to 55 LTV, there is no reserve. So you can offset that with leverage. Most folks that I deal with, especially in the middle market space want every loan dollar they can get to maximize the return. In that in those cases, you're looking at six to nine months of code reserves.
Sean Thomson 38:43
Yeah, you're gonna you're gonna max your LTV and then just put the reserves in because the reserves the reserves to get kicked back after Was it 12 months of successful debt payments.
Aaron Moll 38:52
It's it's tied to the amount of reserves. So if it's nine months, after nine months, you can you can cashflow adequately and get those dollars back.
Sean Thomson 39:00
Yeah, so you just have to, you just have to operate your business plan successfully for nine months. And then all that come can come back to you it would be nice to drop your LTV.
Aaron Moll 39:11
is kind of an IOU, we've tried to wrap our mind around in a multitude of ways where it's a lot easier on a refinance, because a lot of times you're going to pull equity out and refi anyways. So it's like, well, if you're going to pull $2 million out of this property, we have to hold back 600 K, you get a million for now you get 600 k later, you're just deferring your cash out, right? On an acquisition, it's a little more tricky. So we've we've tried to look at, you know, offsetting cash and cash yields and how much that affects the deal. You're gonna have to raise additional equity for that maybe 12 months or whatever the reserve period is that you don't get it back. So there's a gap and equity raise, but then you get it back after the reserve is replenished back to you. So we've we've looked at different artists runs in what have you to see what yields and how that how that changes things. There is so many different ways to look at it. In the models I've ran, it's a fairly de minimis offset of cash and cash yield. But I'm not the borrower, and I'm not the guy that has to raise additional equity dollars, I understand that that can be challenging. And so it's been more of a, you know, an uphill battle on the acquisitions and revise.
Sean Thomson 40:26
Yeah, no, I think it also depends on your strategy. So if you're looking long term, if it's if this is a 20 year property, you know, that those that six months or nine months is not going to be a very big deal. But if it's, you know, if you're trying to flip this in three to five, it's going to be more of a concern, I guess, because you want to you want to get action on the property right away and not having that cash in your in your business plan is going to be a hindrance. So I also want to mention to DCR dscr DCR is your debt service coverage ratio or debt coverage ratio? A lot of people don't know what the term we've used a lot in this conversation. But I don't know. I don't know if I mentioned that. If we mentioned that earlier on what what that was or not, but I wanted to throw that acronym explanation out there.
Aaron Moll 41:08
I promise Google will answer all your questions. Yeah, I've done I've certainly done the Google searches.
Sean Thomson 41:17
Are you? So let's talk again, about COVID. I was I had a couple of questions based on what you were talking about. Do you see people you know, there's a lot of there's a few deadlines. Now one of the corporate layoffs are occurring, you know, September 15. And October 1, a lot of the larger corporations are kind of holding off on layoffs and things like that until those time periods. Is anybody worried about that time period for unemployment? Being a problem.
Aaron Moll 41:40
There's there's Yes, there's a lot of economists, especially in the lender in the in within the lenders for Katie has some folks, but within the lenders, they all kind of economists that they had to lean on or have in house. And it's it's been an open conversation from day one, like I said early on, and MHC and various economists came out and said, we think you're going to lose 25% of your income next month. And the month after that you're you're 50%. But it didn't happen. But of course, the open conversation is now election is the second wave, perhaps COVID is college is going back and schools going back. And of course, unemployment with the incentives running out. And also potential layoffs, job reports, annual earning reports, quarterly earning reports, various retail companies, there's there's a lot of different ways to look at it. And I don't have a crystal ball. All I know is we were very pleasantly surprised with what happened in the early days, because it was a full shelter in place for a lot of folks. Right, myself included in Michigan. And the collections help, I think to about 990 to 95% for basically the entire shutdown.
Sean Thomson 42:53
So you're seeing so even in spite of kind of the unknowns or this or that volatility of what's going on in the economy, you're seeing the lenders are still sort of positive about about giving out loans and participating.
Aaron Moll 43:11
Yeah, life insurance. It's an open conversation, no doubt. But life insurance companies are back. They like multifamily. They don't like retail office, and hotels. But they'll do grocery and retail. So to stick in the in the vein of multifamily. Clearly for this podcast. The life insurance companies like multi, they want more multifamily loans right now, I would say their interest rates are basically back to where they were preco cmbs is back almost to where it was pre COVID. There's maybe a little tighter credit box there. They would do more multi, but the thing is the Fannie Freddie and Hud lenders in the industry right now have had such a benefit of their government guarantee and liquidity in the bond market that their interest rates are far superior to even a lot of life coasts. And so they can get higher leverage and cheaper rates. It's hard to compete with that. So the gscs have been rocking and rolling. They're going to have good years, they have allocated funds from Congress every year, or appropriations. And they want they're very focused on those so they can only lend a certain amount every year. And they want to try to get as close to that, you know, goal line as possible that can't exceed it, but they also don't want to be well, you know, in front of it. So they've maintained a good a good open book of business. Again, for Acadia and my team and like give my colleagues across the country have been tremendously busy. And it's been Fannie & Freddie and HUD show, we we sit I think we're still number one with Freddie your date. I think we're number three with Fannie and we're number one with HUD. Don't quote me on that. But, you know, ultimately, we're definitely seeing a lot of business get done with it within the multifamily space. On acquisition unrefined, I'll also say to my investment sales colleagues, that shut down in a big way where investors didn't want to sell because they didn't think the properties could be worth as much as they were pre COVID. And would a buyer even buy it? And what was going to happen? Right, and then buyers didn't want to buy because they also didn't know the uncertainty that has come back in a huge way. Our investment sales teams are actively listing deals every day, new deals, were putting deals under contract, I had a personal pipeline that went on a big pause on my acquisitions for the first 30 days. And I kind of I kind of figured Some were going to come back, not all of them. And I would say, I think pretty much all of them have come back. And we've closed close to all of them already. So. And I'll also say at no discount, we haven't seen any discounts. In my experience. I'm sure there's been a little bit across the market. But the we had a lot of investors saying find me the deal that was pre COVID. I didn't find it at a 20% discount. It's not there in multifamily if you're actively looking to buy, in my experience, and what I'm hearing in the market is those cap rates and those values have held and it's buoyed by the low interest rate. I think people are getting over the perceived risk of covid. By having a sub 3% interest rate, they can kind of just wrap their mind around that and make some sense to those returns.
Sean Thomson 46:28
Right, yeah. So just based on the strength of multifamily in the growth or you know, the larger economy that gives everybody sort of, I guess, positive, positive outlook for for that specific sector. You know, I know industrials, industrial multifamily are kind of the two, the two golden children of the commercial real estate space right now there are outperforming everything. So I guess that just just because it's multifamily, the lenders are more inclined to get involved in it because of the strength that it's had. Pre COVID and during throughout COVID, and what the future looks like to I guess so. Yep. So it's mostly because not necessary because the economy, they're watching those sort of things, but the but they're they like multifamily, just because of its performance. And they're inclined to lend in those spaces. So it I think that's what you're saying, right? Absolutely. Yeah. Well, Aaron, let's how he's talking about I know you and I talked about technical stuff today. But I you know, normally I'll talk to people about kind of their, their path in life and stuff. And we talk about the American Dream here. The name of the podcast is next level American Dream. And I always ask everybody, you know, kind of what is your American Dream in order? What are one or two things that you've kind of done in your life that allowed you to take it to the next level?
Aaron Moll 47:43
Oh, man!
Sean Thomson 47:45
Good question?
Aaron Moll 47:46
Yes, you know, I came from a small town of suburban Detroit, no real estate experience, my family, my dad bought a couple, you know, few pieces of vacant land over the years and did okay with that. And the first one of my mom said, to go to college, so humble beginnings and kind of proud of that. And I just, and I also graduated from college in oh nine with a real estate degree in Michigan. So you know, awesome timing, right. So I started, started, kind of ground up started as a teller to get a little credit union and quickly became, you know, a loan officer doing auto loans over the phone and doing home equity line of credit and some funky stuff like that, and credit cards. And then I always wanted to get into commercial. That's what I went to school for. But it just was, it was bad timing in No, 90 I was applying with 50 year olds as a 22 year old, there was no way I was gonna get those jobs, right. So I took this job at this bank that Friday and things sold foreclosure sold single family homes for them, and just kind of kept my eye on it and wanted, I knew what I wanted to get into. I wanted to get into big loans, big real estate loans. And it took me a lot of job titles, right. And it took me a lot of time to just kind of maneuver my way around and within the bank, and then I took a job with the SBA, the SBA loans, and I was, you know, literally financing like car washes and restaurants. And it was awesome. It was really rewarding work. But it wasn't what I wanted to do. And I took a flyer and I took a job and a pay cut, and moved down to North Carolina, and to work for this life insurance company. And I'll be totally honest with you. I had no idea. Like insurance companies even didn't work just like big real estate mortgages. And I went down and I knew I was hooked. And from that moment I was in I liked what I love what I do, I don't work. I love what I do, and I've been eating and breathing real estate ever since. I love the finance side. I like to understand the ownership side. I commend you guys. I love how that stuff works, but I'm a tech guy that I love. I love helping people out and structuring their deals this way. So I did, I did a life coaching for a number of years had a couple babies, one in the southeast and one on the way, and just move back home to Michigan. And I guess I couldn't get enough for that year round golf. I had to move back to the Arctic tundra up here in the north, but it's been great. I love Arcadia. It's a great company. They let me be made. It's, you know, it's, it's awesome. So I don't I guess that's, that's kind of how I got here. And it's been my American Dream is finding something that I really, really enjoy. I knew I couldn't have it right away, because the recession and kind of where I graduated where I was, and that sort of thing and what I knew and who I knew, but I just kept my eye on the ball. It took me a number of years to get there and and finally made it and here I am.
Sean Thomson 50:47
You're there now. Yeah. And in a way I was as I was listening to talk in a way you are instrumental and helping other people achieve their American Dreams too. So, you know, for me, My dream is to own you know, commercial apartment buildings and, and you know, that sort of thing. And without you that wouldn't be possible for me to do what I want to do. Right? So you're actually you're actually helping people fulfill their American Dreams as well. Yep, I enjoy it. Yeah, that's good. Well, if you don't mind, if someone were trying to trying to do this sort of thing, and they needed someone to talk to you about getting debt put into place or lending, how would they how would they get in touch with you?
Aaron Moll 51:25
Sure. A phone number. We're all working from home. So phone number is (231) 360-1840. And again, my name is Aaron Woll. So email is aaron.moll@berkadia.com.
Sean Thomson 51:45
Okay, great. Yeah. So if someone has a loan that they need, they should contact you, and you can help them help them through that process.
Aaron Moll 51:51
Yep. If you're, you know, if you're like me, you're just gonna use Google my name. I'll come right up Aaron mall for Katie, and I've got a page. So feel free to feel free to reach out. I work with folks like yourself, for sure that are getting into space. I've had really fun success stories like that, like that example in Columbus, where again, that was his first deal he ever bought. And and then I also work with large institutional pension funds and what have you. So everything in between, but absolutely,
Sean Thomson 52:19
Yeah, perfect. Well, thanks, I really appreciate you coming on the show. And it's this, this is such a thing, that's it's kind of a mysterious thing about, you know, buying real estate, you know, securing debts. And there's so many layers, and there's so many variations, and there's so many technical details in it. And it can get really kind of complex. And we really just kind of scratched the surface. I mean, you did a really good job of kind of giving some details there. And I appreciate that. But it's there's a lot to know. So having someone that knows what they're doing, that can kind of walk you through these things as you're trying to buy properties, I think is going to be critical. So hopefully, people will reach out to you when they need you. And get that taken care of, you know, they can count on someone like you to help them through the process. that's invaluable. So I appreciate you coming on and sort of sharing some of that with everybody. So they at least they have a little bit of knowledge moving forward.
Aaron Moll 53:10
Thanks for having me, as well!
Sean Thomson 53:13
And well hopefully we'll have you back on to talk about some other stuff once I get once it once we kind of get some deals going through. You know, we'll talk about some success stories and things like that, too.
Aaron Moll 53:21
I love it. Looking forward to it. Well, we'll get our first one closed and we can use a case study!
Sean Thomson 53:25
Yeah, do a case study. Exactly. That's. That'd be a good one. Alrighty, awesome. Well, thanks again. Appreciate you coming on!
Aaron Moll 53:33
Thanks. Take care!
Abigail Thomson 53:34
Thanks for joining us for another episode of Next Level American Dream. If you would like to learn more about what we talked about today, want to contact the team directly, or interested in passively investing and being a part of our deal room, head over to our website at www.thomsonmultifamilygroup.com. Before you go, please leave a review! Your comments help us create more episodes for you to enjoy.