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Anton Mattli is the CEO of Peak Financing. Over the last 15 years, Anton has been advising family offices, high net worth individuals, as well as private investment funds, and facilitating their direct investments in commercial real estate across Europe and the United States, including several hundred million dollars in multifamily developments and acquisitions.
In today’s episode we discuss the commercial financing process for commercial and multifamily real estate, the impacts of COVID-19 on financing including interest rates, underwriting, which markets are suffering, tax strategies, and more.
Financing a Commercial Property from A-Z
In residential, the factors are primary the credit score and debt to income ratio that determine lendability.
On the commercial side, the process is very different. There are dozens, if not 100+, due diligence items that the lender must go through. As a result, it's very important to reach out to a lender or broker early on to determine what is realistic for the commercial property.
Whether it's multifamily, retail, or office space, the process is fairly similar. Net worth is relevant and liquidity is important. When it comes to the underwriting there is different criteria, but it's primarily still the NOI that's driving the decision.
Changes in the Lending Environment During COVID
Retail, office, and hospitality have become a major problem. Today, financing is pretty tricky unless you can come in with a significant amount of equity.
From March 2020 - May 2020, all capital markets came to a complete halt, nothing could be done. Multifamily has recovered more quickly than other commercial asset classes. There was a fear that collections would drop significantly. It seems that collections have actually performed better than was originally feared.
Market panic froze virtually all credit markets. Even agency loans, Fannie and Freddie, could not be financed. Very few lenders have their own liquidity sitting in a bank account. With no access to funding, banks and bridge lenders had immediate concern.
"From an agency perspective, they essentially need to decide whether they are able securitize these loans... They had a hard time to determine how to price these loans in order to securitize later down the road. Until the market was able to determine what was reasonably possible to securitize, nobody was willing to do it. On the bridge side, it was very similar, and we still experience this situation where the liquidity in the marketplace is very limited."
"Fannie and Freddie continuously evaluate where the pricing is going to be in investment markets so they can properly price their loans and essentially communicate the spreads that the lenders need to charge so that everyone can make a profit and that Fannie and Freddie still can securitize these loans."
Concern about smaller deals and inexperienced buyers is here to stay. Looking back a few years ago, Freddie small balance loans were a perfect entry tool. Now, new buyers with no experience likely need a bank loan or a more experienced partner.
A lot of people have the view that interest rates will stay low for a long time. Anton believes it's most likely that we do experience some inflation in interest rates in about six months or more, as our political and economic environment smooths out.
On the residential side, Anton does not see Fannie and Freddie tightening up requirements. Generally, a 20% down cushion is sufficient, so Anton doesn't see much change in underwriting terms.
On the multifamily side, there is a strong focus on supporting affordable properties. Many syndicators are buying B and C class properties that fit into this affordability segment.
In big city markets, it's very tough for lenders to project where we will end up. These largest markets are the most difficult for underwriting because lenders aren't yet aware of the scale or consequences of the exodus. Where do the rents end up, where do the prices bottom out? In suburban markets and sprawling cities, these markets are doing really well and financing has been readily available.
Anton has seen many investors going more heavily into cost segregation studies, especially in syndications. Passive losses are still beneficial to real estate investors. As a deal sponsor, it's not your responsibility to try and determine when and how your passive investors will use these losses.
Learn more about Anton and his work: https://peakfinancing.com/