Table of Contents - Multifamily Financing Explained with Adam Finkel
Dave Debeau [00:00:09] Hey, everybody, this is Dave Debeau with another episode of the Property Profits Real Estate podcast and today all the way from, I believe, Pheonix, is that right?
Adam Finkel [00:00:18] Out of that is correct.
Dave Debeau [00:00:21] In Pheonix, Arizona. And I'm headed down your neck of the woods in a week and a half. At the time that we're recording this, I'm still freezing my buns off here in Canada. So definitely looking forward to that. Anyhow, Adam is a very well-established real estate investor. Is also a bigwig in Tower Capital. Right. Which is a commercial real estate structured finance firm. He's been in the real estate game for quite a few years. He's also a proud father and husband. So, Adam, thanks for being on the show.
Adam Finkel [00:00:54] Thank you very much, Dave. I appreciate it.
Dave Debeau [00:00:56] All right. Well, let's start back at the beginning. How did you get the whole crazy world of real estate investing in the first place?
Adam Finkel [00:01:02] That I'm sure, you know, I just kind of fell into. It started in commercial real estate, straight out of college. I was in office leasing guy, rode the wave in the early 2000s, rode the crash and then post recession. I got on to the finance side of the business. I was doing commercial financing on behalf of a company called Johnson Capital, which was one of the largest independent commercial mortgage banking companies in the country. They were acquired by a firm named Walker and Dunlap, a publicly traded firm that specializes in Fannie, Freddie and HUD financing for multifamily properties. And they were acquired. And I decided to jump ship and start my own finance company, where we assist investors large and small with their commercial real estate financing needs, whether it's apartments, hotels, office, retail. We hit most asset classes and finance a lot of different types of deals, whether it's ground up stabilized, existing transitional, what have you.
Dave Debeau [00:02:08] All right. Very good. Now, how about yourself personally? How do you do you actively invest yourself? Do you have a portfolio?
Adam Finkel [00:02:15] I do. I do. And I try to stay pretty diversified with my investments. You know, I have a portfolio of just single family rentals that I have on my own. And then also, you know, is part of my business. I see a lot of deals. So I invest as a limited partner with a lot of my clients who are really just stellar sponsors, owners, operators that I can invest in as a passive investment. You know, typically these are a lot of value. Add multifamily properties, some hotels who are I'll get some good return. And, you know, my whole thing is, you know, doing my day to day business where I make my fee income and then using that to then go invest in various different opportunities. So, again, I mean, I think it's really important for people to be diversified, whether they're investing in real estate or you want to maybe be in some different geographies, you want to be in some different asset classes. But not only that, not have all your money in real estate and kind of spread it out between different things as well. So I think that that's an important strategy.
Dave Debeau [00:03:23] All right. Very cool. So, Adam, this is I think this is a great opportunity. And I hope you don't mind if we go off on a bit of a tangent here, but I'd like to find out from your point of view as a guy who's financing deals, what are some of the biggest mistakes people making when they're coming to you looking for financing? Because I'll just give you a little bit of background. A lot of the people that watch or listen to this podcast are mom and pop real estate investors. Some of them are starting to kind of gain some traction, starting to get into bigger deals. And I want to help them to avoid making dumb mistakes when it comes into, let's say, transitioning into doing a development deal or something like that. And they really don't have much experience in that. Where do you see people screwing up when they're coming to you looking for financing the.
Adam Finkel [00:04:17] Sure. Well, I think it's important for people to understand what the lenders are looking for as far as the sponsor the borrower goes and then how they're looking at the deal and how they're underwriting the property to come up with the loan terms. So typical rule of thumb is that a lender wants to see a borrower have a net worth, at least equal to the loan amount, and they typically want them to have post close liquidity. So that's cash in the bank after your down payment, typically of 10 to 20 percent of the loan amount. They never want the buyer to be putting every last penny that they have into the property as a down payment. So that's the reason for the lenders requiring some postcode equity. So sometimes someone will come to me and they're looking to buy a five million dollar property and they want a four million dollar loan, but their net worth is only two million dollars. In that case, they're not going to qualify for that type of financing. They there need to be looking for a smaller deal or they need to be bringing in a partner that could be a co-sponsor with them, that maybe can add their balance sheet and provide that additional strength.
Dave Debeau [00:05:34] All right. So let's I'm a simple kind of guy, Adam, so let's make this drop dead easy. I like that five million dollar deal example. So let's say I'm Joe Investor. I'm all excited. I've got this. Either apartment building I want to buy or I want to build, it's going to cost five million bucks. I've managed to come up with a million dollars for a down payment, I'm looking to you for four million bucks. So what you're looking for is you're looking that I'm going to have at least a net worth of four million dollars, is that correct?
Adam Finkel [00:06:12] Yeah, that is correct.
Dave Debeau [00:06:13] OK, either myself and or with my investor partners, is that correct?
Adam Finkel [00:06:18] Exactly. So whoever is signing on the loan documents, their combined net worth and liquidity will be taken into account.
Dave Debeau [00:06:26] Perfect. And then in addition to that, as far as liquidity goes, you want to make sure if I'm trying to borrow, if I'm putting in a million bucks, then I've got another, what was it, one or two million in the bank?
Adam Finkel [00:06:40] So if you're trying to borrow four million dollars, they're going to want to see that you have roughly four hundred thousand dollars in the bank after you close.
Dave Debeau [00:06:52] OK, so I put my million bucks in. I need to have at least another four hundred thousand dollars sitting in the bank for a contingency fund for some could go wrong kind of fund in addition to the net worth of the four million dollars.
Adam Finkel [00:07:06] Exactly. And that 10 percent, it's not going to be a hard and fast rule with all lenders depending on the situation. Some lenders may be OK with five percent of the loan amount. Some lenders may say we want you to have 12 months of loan payments, which is typical of like a Fannie or Freddie loan for an apartment property. So there's going to be some variation. But regardless, the buyer must be prepared to have some place to put it. That doesn't mean that there's going to be any covenants that you have to keep that liquidity. They just want to know. They just want to see it, that when you close, it's there.
Dave Debeau [00:07:44] All right. That's really good to know. So, I mean, you've been you've been doing this for years and years now. Is that pretty standard across the industry? Yes. Yeah. OK, so what would you suggest for Joe investors just going from small deals like you've got experience with doing single family homes. Let's say it's an investor that's moving from single family homes into small apartment buildings. What's kind of the minimum size or the minimum dollar transaction you guys are looking for in order for a deal to be worthwhile for you?
Adam Finkel [00:08:17] Sure. I mean, we'll we'll do a loan as low as a million dollars, and that's really going to be the limit for the small balance, Fannie Mae and Freddie Mac as well. So that's kind of where we we set our bar. Most commercial bankers, brokers, that's typically going to be the minimum.
Dave Debeau [00:08:36] Yeah, OK, that makes sense. All right. So what other kind of mistakes do you see relatively new commercial investors making when they're trying to get financing from you guys?
Adam Finkel [00:08:48] Sure. So another mistake that I see people make is, as I had mentioned previously, not understanding how the lenders underwrite the properties.
Dave Debeau [00:08:58] So what you mean by that? Exactly.
Adam Finkel [00:09:00] So if you're going in, you're buying an apartment building, for instance, and you're looking to get a loan against the property, there's a couple of parameters that the lenders are going to look at that will limit the amount of loan dollars that you can obtain. One of those is going to be loan to value. So say they're not going to lend more than 75 or 80 percent of the value of the property. Another metric is debt service coverage ratio, which measures basically how much cushion there is in the cash flow that's being produced by the property over and above what your debt service payment, what your mortgage payment is on the property. So if you have a mortgage payment of one hundred thousand dollars a year on the property, they want to see, you know, typically it's going to be a one point two five minimum debt service coverage ratio. So they want to see that the property is producing one hundred and twenty five percent or one hundred and twenty five thousand dollars per year to give you some cushion over and above what the debt service payments is. So that can be a limiting factor on the loan dollars. If the in-place cash flows from the property don't support a four million dollar loan, then your proceeds are going to be limited and then the deal might not make sense. So then you're looking at, OK, well, I can't get the amount of loan dollars at this price. You know, maybe I need to go back and ask for a price reduction or maybe if I'm planning on doing some work to the property, maybe this is more of a value add. And I'm going to go and I'm going to freshen up the paint and change out the flooring and all of the units and do some value add things. Maybe I want to be looking at more of like a bridge loan, which won't put as much emphasis on what the in-place cash flows are. They'll put more emphasis on what you're stabilized, projected cash flow is when you're done with your renovations. So that's. Another strategy to you, so that's really what we do is we look at we get an understanding of what are the goals and objectives of the borrower, what is the asset, what type of asset is it? Where is it located? How is it performing? And we triangulate that with the best source of capital and within the best source of capital. Is it the source of capital, a bank? Is it a credit union? Is it an agency like Fannie and Freddie? As I mentioned before, is it a bridge lending debt fund within that source? Who is going to be the best lender and who is going to give the best term? So it's really understanding the full picture and then really narrowing it down to the best strategy and the best loan terms that are going to help the buyer effectuate their business plan.
Dave Debeau [00:11:43] Yeah, that makes a lot of sense. So do you see I imagine you see situations where it's kind of a combination or a blending of a few different sources of funding, especially if somebody's buying the property and then making improvements on it. Do you see some sort of a combination at times?
Adam Finkel [00:12:00] Well, there are lenders that can offer kind of a seamless one stop shop where they can provide the bridge loan. They're also an agency lender. They have balance sheet products that, you know, that could be used once the property is renovated or stabilized. Some banks will structure what we call a mini perm with some interest only at the front end. So maybe it's a five year loan where your first two or three years are at interest only. So that provides the borrower with additional cash flow that they can use to then reinvest into the property and fix up the property and then in, say, year four and five, it will go amortizing based on, say, a 30 year amortization schedule. So that's one strategy. One, we're doing larger, more complex ground up developments. We might layer in multiple different sources of capital, and that's what we call the capital stack. So you have in the capital stack, at the bottom, you have debt and at the top you have equity. Equity is the amount of money that the buyer is putting in themselves. The debt is obviously the loan that debt can be broken up into, you know, the first position in a second position, Lien, so that they can lever up their loan dollars instead of debt. We could use equity structured as preferred equity and different types of equity. So, for instance, on one project that we recently financed, that was about a fifty three million dollar total project cost is two hundred and twelve unit ground up multifamily deal. Here in Phenix, we brought in a very low LTV, low interest rate bank that provided funding for 60 percent of the total project cost. And then we brought in a preferred equity piece that was basically structured as sort of similar to debt, except there's no additional lean on the property behind the senior lender. So we're getting into a little more complex structuring here. But so you had the first position that you had the second position, preferred equity, which effectively brought the borrower's proceeds up to about 80 percent LTV LTC, and then they actually had an additional equity joint venture equity partner that was able to bring in their balance sheet so that our sponsor could qualify for this size of a transaction. So there's a deal that was structured with three different types of capital in addition to the sponsors own funds.
Dave Debeau [00:14:35] That's awesome. So, I mean, when the deal makes sense and there's a will, there's a way, basically, right? I mean, there's.
Adam Finkel [00:14:41] Yeah, exactly. And you know, it honestly, it's really just about putting a good team around you, you know, making sure that your general contractor has built this type of product before. You know, that's another major mistake that people come to us. Maybe they're novice. They want to start getting into development and they've never built something before. So they go out and they hire a GC to build an apartment property for them. But this do you see, they've only done built single tenant retail properties. They've only built Walgreens. And CVS says they've never built a multifamily property. So you really need to make sure that you're finding a contractor that has experience in this particular asset class. Another positive is if members of your team have worked together before. Has your architect worked with your JC before? Who what property management company are you using? You know, are they experienced in this area and this geography with this asset class? How many properties do they have under management currently? So these are all things that lenders will look at and assess.
Dave Debeau [00:15:46] Yeah, it sounds I mean, it sounds like there's there's a heck of a lot of due diligence that the two. Do to make sure that a loan makes sense for your company.
Adam Finkel [00:15:58] Oh, yeah, I mean, yeah, there's a ton I mean, just looking at the borrower, the property, going through all of the pro forma as all of the numbers of the market data, you know, when you're putting a pro forma together, Re-stabilized performed to show to the lender, well, where are you coming up with your expenses? Where are you coming up with your rents? Are your rents justified? Are they justified today? Sometimes people come to us with a Value-Add project and they'll be projecting rents that haven't yet been achieved. But they think they're going to be achieved at some point because the market keeps going up. Well, that's not good enough for most lenders. You need to be able to show is a property getting that today and you have to be able to support all of your numbers on the revenue side and the expense side.
Dave Debeau [00:16:44] Awesome. Adam, time flies when we're having fun.
Adam Finkel [00:16:48] That was easy. That was painless, man. I could go on forever.
Dave Debeau [00:16:52] Oh, it's a great conversation. We'll we'll probably have to go back and revisit this, because I'm sure a lot of our listeners have a lot of questions for you. But if people want to find out more about you and your company, Adam, what should they do?
Adam Finkel [00:17:03] Sure, they can visit my website, W-W Tower Cap, LLC dot com. They can email me directly at Adam at Tower Cap LLC dot com, and they can also reach me by phone for eight zero four two six zero five seven six.
Dave Debeau [00:17:22] Excellent. So, Adam, obviously you've got a lot of experience financing deals around Pheonix and in the United States, a lot of our listeners are Canadian. Some of them are Canadians doing business in the States. Do you also offer financing for Canadians buying properties in the United States?
Adam Finkel [00:17:41] Yes, actually, I do a tremendous amount of business with Canadians. Some of the biggest pools of outside investors, actually, that invest in Arizona are from California and from Canada. I have many clients from Vancouver, Toronto all over. So know typically the same financing is available to Canadians, is available to Americans. Something that the lenders will often look at is does the person have any ties to the market in which they're buying a property? Do they own a second home there? Do they own any other assets there currently? If they do, that makes the lenders a lot more comfortable. If they don't, well, you have to start somewhere, but you may not be getting the most aggressive terms after after you might not be getting the lowest rate. You might not be getting the highest LTV, but they're still financing available. And that's part of it, is someone just getting their feet wet by a deal, by a small deal, get one under your belt and it's a lot easier after you've done what makes sense.
Dave Debeau [00:18:49] Adam, thank you very much. It's been a lot of fun chatting with you, and I appreciate your insights.
Adam Finkel [00:18:53] Thanks to you as well. Have a great one.
Dave Debeau [00:18:56] All right, everybody, take care. We'll see you on the next episode of. Well, thanks very much for checking out the property profits podcast. You like what we're doing here. Please head on over to iTunes, subscribe read us and leave us to review it. Very, very much appreciated. And if you're looking to create a regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.