Today we will get a breakdown of commercial loans and lenders. Austin has originated over $60 million in commercial mortgage loans since founding RiverStone RECAP four years ago. He’ll tell us the difference between a bank loan vs. CMBS (commercial mortgage backed security) and CMBS vs. life insurance companies. We also get great advice on vetting your mortgage broker. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Austin Peek Background:
– Founder & Principal of RiverStone RECAP, a CRE mortgage firm
– Started RSR 4 years ago and he’s originated over $60MM in commercial mortgage loans across the country
– Recently launched a podcast: Millionaire Interviews
– Based in Jacksonville, Florida
– Say hi to him at: https://millionaire-interviews.com/best-ever to get the FREE quote matrix and CRE Lender List
– Best Ever Book: The Real Estate Game
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any fluff.
With us today, Austin Peek. How are you doing, Austin?
Austin Peek: Good, how about yourself, Joe?
Joe Fairless: I’m doing well, and nice to have you on the show. I’m looking forward to diving in. Austin is the founder and principal of RiverStone RECAP, which is a commercial real estate mortgage firm. He’s originated over 60 million dollars in commercial mortgage loans across the country of the last four years, and congratulations, he recently launched a podcast called Millionaire Interviews… So you’ve got a lot of exciting things happening, congrats on that!
Austin Peek: Yeah, thank you very much. Just something different to do other than just real estate, so I figured I’m gonna go ahead and give it a try.
Joe Fairless: Absolutely, and I’m sure that it ties into your business in some form or fashion, at least I hope it does.
Austin Peek: Yeah, it definitely does. I have some real estate guys on, but for me, I talk to people in all different types of industries, so… I just wanna become a popular podcaster like yourself.
Joe Fairless: Cool, good stuff. You’re based in Jacksonville, Florida… Besides that, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Austin Peek: Yeah, I am in the commercial real estate mortgage side, [unintelligible [00:03:19].11] I only work on commercial. I generally deal on loans with one to ten million in origination size, that’s kind of my sweet point, and can do deals all across the country. So even though I’m in Jacksonville, Florida – this is one of the nice things about what I do… If one of your listeners says “Hey, I wanna get into real estate but I don’t wanna just stay in one market”, what I do is I work on deals in South Carolina, California, New York, wherever. I never even have to go see the property, so that’s one of the beautiful things about what I do on the financing industry – it’s really just about the numbers, and not so much about going door-to-door and selling people on buying a home.
Joe Fairless: How do you decide what range of loan space that you wanna be in? You said you’re in the 1 to 10…
Austin Peek: Really, after you do above one million dollars, basically every transaction is almost the same. So I can do up to 200 million dollars, and there’s plenty of guys that say “Yeah, I do the one million dollar range to 200 million”, whatever, but really, once you get above ten million in the loan amount… Again, I can go up to 20, 30, 40 – basically, it’s gonna be the same type of lenders that do a 10 million dollar deal, are normally gonna be closer to a 100 million dollar deal. But a lot of those originations that get above 10 million dollars – there’s usually private companies that are buying office buildings for example, so they don’t normally need a mortgage broker… They don’t even normally come to me, an independent mortgage broker; they already know what guys to go to, and normally they own billions of dollars worth of commercial real estate. So they usually don’t go to any brokerage companies, and they just do it all in-house.
Joe Fairless: Okay, so you have the ability to do above ten, but you don’t have as many potential clients.
Austin Peek: Exactly, yeah. So my niche just happenstance has been one to ten million, because I found out that’s a niche where I can help the most owners, because if you’re going underneath the one million dollar range, usually those are just a local bank; like, if you’re buying a very small single-tenant office building that might be worth 500k, or whatever. So those are usually just small bank loans. I deal on the intermediate where maybe a grandma or a grandpa owns a Walgreens, and they need financing on it. And that Walgreens happens to be in Tennessee, but they live in Florida. Well, what stinks for them is that usually they can’t get financing in Tennessee because they don’t live in Tennessee, so usually that loan range is gonna be in the one to five million range, so they don’t know where to go, so I’m the perfect guy to help them when you’re looking in that loan range… Because they’re obviously smart enough to be able to buy commercial real estate and be able to get a loan amount that high, but they’re not doing commercial real estate day to day; they’re probably only refinancing every five or ten years, so that’s where I help out the most owners.
Joe Fairless: Where are you getting the loans from?
Austin Peek: Most of my lenders are called CMBS lenders (commercial mortgage-backed security) or life insurance companies. So life insurance companies actually lend out just like a bank, but their terms are a little bit different. So those are usually the two types that I go to on a regular basis.
I can go to Fannie and Freddie as well, but some owners like to go to them directly. It just depends on where the property is and what the owner is looking for. Like I said, most people I work with, they usually own probably three to ten commercial properties… And again, this is just general; some of them own one, some of them own 20, 30 or even more. But generally speaking, they own a few, so they’re refinancing all those loans every couple of years, or every five or ten years, and they’re just rolling at different times. So usually they call me, because hey, they don’t need to look at the loan market but every one year or two years or every three years.
Joe Fairless: Let’s talk about the pros and cons for CMBS insurance companies and an agency loan, so Freddie or Fannie.
Austin Peek: What I like to do, if it’s alright with you – we’ll first talk about the difference between let’s say a bank loan and a CMBS or a life insurance company loan. So what I was talking about earlier – I live in Jacksonville. If I own an office building in Jacksonville Florida that’s worth two million bucks, and I want just a one million dollar loan, 50% loan-to-value, some of these people might go to a bank, and what bank usually does is they’ll have a loan term that maxes out at three years, or five years, or sometimes just one year, and they just have different options. So every one, or three, or five years I’m usually refinancing that, or doing the loan again with them. And usually, that amortization schedule is like 20 years, so it’s not very long.
Then also, the other thing is that most of those banks require a recourse – it was just one episode right before this of your podcast, where… I think a lot of owners find out what the difference is between recourse and non-recourse when you’re signing a loan… So almost every bank requires a recourse. There’s some special exceptions, but I’d say 95% of them require that.
Joe Fairless: And recourse, real quick, is if something goes wrong, the bank can come after you financially, versus non-recourse it can’t, unless you trigger some sort of obscure clauses.
Austin Peek: Exactly. So that’s the number one difference between, say, a local bank – if I wanted to go do a loan with that local bank at one million dollars, or if I went with the life insurance company at one million dollars. Usually, if it’s a lower LTV, the life insurance company is interested in it and they usually do non-recourse loans. So even if something went bad with the property, if it’s a single tenant and they left, they can only go after the loan amount, and not your personal property and everything else.
So that’s one difference between a bank and CMBS/life insurance companies. The other one is usually you’ll get a longer amortization schedule, and also it depends on — there’s gradual differences between all of them, but you can lock in a term, generally speaking, for a life insurance company up to 25 years. So it could be like a 25/25, so at the end of the 25 years you pay zero.
One of the negatives is that there are pre-payment penalties if you’re doing a life insurance company loan or CMBS loan. So you can’t pay it back early; usually, you can only pay it back three months before the maturity date. So if it’s a ten-year loan, usually you can pay it back nine years and nine months right after that you can start paying it back without penalty. So those are the subtle differences between a bank and a life insurance company/CMBS.
Joe Fairless: Just so I’m summarizing it correctly, and these are just generally speaking – local bank, the loan term maxes out between one to three years, whereas with a life insurance company, that would be the opposite end of the spectrum. You could do maybe 25 years on a 25-year amortization.
Austin Peek: Exactly.
Joe Fairless: Most banks require recourse, whereas CMBS and life insurance it can be non-recourse. The disadvantage – one of them that you mentioned with CMBS and life insurance would be the pre-payment penalties tend to be pretty steep, compared to a local bank that might have more flexibility, which really if it’s a 1-3 year term, that doesn’t even factor into it, because it’s such a short period of time.
Austin Peek: Exactly, so that’s part of the reason that they don’t even worry about it, because usually your term is so short anyhow. It’s not worth negotiating.
Joe Fairless: Okay. What about the fees involved for bank versus CMBS? You basically steered us in the direction of grouping CMBS and life insurance into the same category, versus banks.
Yeah, I can differentiate between those. I know we only have so much time, so… The difference between CMBS [unintelligible [00:10:31].15] life insurance companies, they’re both non-recourse, again, but usually CMBS is gonna cost you a lot more as far as closing costs, because attorney fees can range up to $25,000 for closing a deal, and that’s even when we’re talking a single tenant. We can get it lower to maybe 20, I’ve even seen 15, but the big thing is because they’re using New York lenders, and New York lenders use New York attorneys. So that’s why the fees for closing a CMBS loan are usually higher, but the amortization schedule for them, they can usually go out to 30 years, versus a life insurance company – usually we’re talking about… Depending on the loan size, again, we’re talking about a 1% to 1,5% closing costs; that’s without a broker fee.
A broker fee is generally 1% as well, so I say all-in you’re looking at about 2% on a life insurance company loan. To close that, there is way less closing costs and there’s usually way less headache, because the CMBS, again, it’s just all these lenders that are securitizing a group of loans, so your one loan is usually a package of maybe 50 loans. They basically package all those together and then sell them on Wall Street.
Joe Fairless: I wanna make sure I heard you correctly… Will you repeat the life insurance estimated closing cost and the CMBS? You said 2%, but I wasn’t sure which one you’re talking about, because I think it got mixed up in my head.
Austin Peek: I would say generally speaking that — and again, CMBS, what they can do is they can work it into the rate. So it’s gonna look maybe about the same on the closing costs, but all in I would just say for both of them it’s slightly higher with a CMBS loan, because instead of the $5,000 attorney that you’re using for a life insurance company loan, you’re using usually a $25,000 attorney for a CMBS loan. So you might be adding $15,000 to $20,000 to the closing costs, but in general if you add them all up I’d say it’s 2% for closing these loans.
Again, the smaller the loan — it really doesn’t matter if I’m closing a one million dollar loan versus a ten million dollar loan. It’s not gonna be 2% on the ten million dollar loan. We’re gonna talk less than 1%. So it doesn’t really change much, it’s just the smaller the loan amount the higher the percentage. Because all these are fixed costs – the appraisal, all the third-party reports etc.
What I try to do for my clients, and I don’t think enough brokers do – I put it in what I call a quote matrix where I’ll put three or four of our best lender quotes, put it in Excel, say “Hey, put the terms, the amortization, the differences between each one”, so you can compare apples to apples. Because I know especially talking over a podcast that maybe it gets confusing talking about all these different things, and trust me, I’ve been doing it for almost ten years, so it gets even confusing to me just saying it verbally. But when I put it in a quote matrix so you can actually compare apples to apples, see which guys and what your overall rate is after you pay the closing costs – that’s what I try to do, so they can make the most wise decision for them.
Joe Fairless: What are the components of a quote matrix, what categories?
Austin Peek: You have the term amortization, and then I’ll put in closing costs, because that matters obviously a lot. I’m bringing up one right now, so I make sure I can just read off exactly one. Then I put in the interest rates, so we can see what the actual spread is. Also, for a CMBS loan – here’s the difference between this and a life insurance company… It’s that they’ll usually acquire reserves for tenant improvements and leasing commissions, and also for capital expenditures. So I’ll put that in the quotes matrix saying “Hey, this lender requires 80 cents per square foot of reserves, versus this one only requires $1,15, or this one requires actually zero, because it’s a life insurance company and they don’t care about that part.”
Basically, I’m taking a lot of different calculations where I put it all in one where they can look, “Hey, this is my interest rate if I add in all the closing costs.” So although the interest rate might look higher on, say, a life insurance company, but overall it might be lower because if you factor in the closing costs of the other one, even though the CMBS lender might look a little bit lower, once you add in all those closing costs, you’re like “Oh, my overall rate is actually not as good.”
When you get 15-page documents from these lenders, it gets complicated. I’m there just to try to make it uncomplicated, and try to put it all in a simplified form for them.
Joe Fairless: And do you have pre-payment penalty in there, too?
Austin Peek: Yeah, [unintelligible [00:14:48].10] Some of them are like — what it is for CMBS is there’s defeasance, it’s called the pre-payment penalty, and then the pre-payment penalty for life insurance companies is yield maintenance. They used to have their own calculators; CMBS is pretty complicated as far as defeasance penalty.
So yeah, I’ll put that all in there for them. Again, I’m just trying to simplify it, even though it might not sound like it from me talking right now… But I promise you, I’m a visual person, so that’s why I try to visualize it and put it all in something that they can actually compare it to.
Joe Fairless: And then you’ll probably have the loan-to-value, right?
Austin Peek: Right, and then there’s usually a minimum debt coverage ratio, or there’s also a minimum debt yield. All these lenders use different percentage or terms to make sure that “Hey, I make sure that they get their loans amounts”, so I look at what the actual NOI (net operating income) is of the property, and make sure we’re meeting their loan-to-value. Because it could quote a higher loan amount, that they’re willing to do a higher loan amount, but if it exceeds their loan-to-value the way they calculate it – because each lender is gonna calculate it a little different… And hey, we’re not gonna get the loan amount that they’re quoting. They might be quoting a two million dollar loan, but hey, using my matrix, and if I’m using 75% LTV, and based on their underwriting in the past, I think the maximum amount we’re gonna get is 1.8 million.
So those little calculations, those really make the difference to make sure the owner picks the right lender. And then also I tell them which ones are the easiest to close with. Because some of them are very difficult. It might take three times longer with one lender versus another, so I’ll just tell them my past experiences on who’s been the easiest to close with.
If you send me your quote matrix and just black out or erase whatever private information you have, can we share it with the Best Ever listeners?
Austin Peek: Definitely. Actually, I’ve put something else together, too… I’ve put a list together of 150 commercial real estate lenders. I put a link on my website, and I can put another one where it directs to both of them.
Joe Fairless: Oh, let’s just do that. So how can they get that, where do they go?
Austin Peek: It’s Millionaire-Interviews.com, and then if you do /bestever, I already have it set up so you can see what it looks like. All you’ve gotta do is put in your e-mail address and you’ll be sent a list of lenders that has 150 of them that… Basically, I put “Hey, this guy likes to do this type of deal” – retail, office, or multifamily, and what their general loan ranges are. I try to be as transparent as I can, because I thought that would be the most useful. But I can also put a [unintelligible [00:17:12].17]
Joe Fairless: It’s be good. I’ve obviously gotten a bunch of quote matrix for our deals, and it’s fascinating to look at, and look at all the different ways you can analyze it, and since you’ve mentioned you’ve got one that you’ve put together, I think the Best Ever listeners would enjoy that. Your URL, what is it again?
Austin Peek: It’s millionaire-interviews.com, and then if you just do /bestever, then it redirects you right there.
Joe Fairless: So how about you just e-mail my assistant afterwards, and then we’ll make sure we have that link in there, because it might get misconstrued… That’s kind of a long, ugly URL, so we’ll get it so they can easily get there.
Alright, cool. So that’s that. Based on your experience as a lender, what is your best real estate investing advice ever?
Austin Peek: Make sure you read the loan docs and understand what you’re really getting yourself into. With Google out there, you can kind of google all the ups and downs, and I would just make sure you do your research.
Joe Fairless: What are some things that a client of yours who hasn’t worked with you a lot, but is working with you on the first couple deals, they tend to overlook?
Austin Peek: The ease of the transaction. So again, just because one lender is quoting maybe 100k or 200k in the loan amount, if their metrics are not being met, then they’re gonna cut the loan proceeds right before we close, and then my owner is gonna be ticked off. So the main thing – that’s what I try to get over and tell them, I’m like “Hey, these guys give us the best interest rate and they’re giving us the best loan amount, but I want you to know that these guys can be difficult to deal with.” Over a two-month, three-month closing, sometimes they’ll say “Hey, we need to cut the loan term”, or whatever. So that’s the main thing, trying to get over that hurdle with the owner.
Joe Fairless: Yeah, and that has happened before… I’ve interviewed guests on the show for who that unfortunately took place, and they weren’t able to close on their loan, because the lender said on the closing day that they weren’t getting approved. Episode 599 is titled “Big Money Raised, Investor Partners Set, And On The Closing Day The Lender Says…” Mark Mascia, he’s a billion-dollar real estate developer and a friend of mine; he is the interview guest and he talks about that disaster situation where just that happened.
Austin Peek: I know which ones do that, because I’ve had one or two do that to me before where they do it a day or two beforehand, where they’ll try to cut the loan amount or raise the interest rate 0.5%, and being a real estate owner, these guys — it’s not even about the extra percent, it’s that they to screw them at the end and they’re gonna remember that, and then they’re like “Hey, I’m not gonna do the loan with you.” Those are the lenders that you’ve gotta watch out for; they might have the best terms, but if a broker hasn’t closed with them before, it gets a little iffy.
Joe Fairless: Absolutely. It is not just about black and white, it’s the grey space in between, and knowing who’s an ally of yours and what type of relationship you have with them.
Austin Peek: Exactly.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Austin Peek: Let’s go!
Joe Fairless: Let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Austin Peek: I’ve got two of them right here. One is called The Real Estate Game, by William Poorvu, and he’s Harvard Business School, and if you wanna get into commercial real estate, he has all these different stories about different property types and how to look at it. I love that, I’ve read it six or seven times and highlighted and underlined things.
The second one is if you’re trying to get into brokering, even though I’m on the commercial side, Your 1st Year In Real Estate; I think it’s like a $15 book, but it gave me a lot of ideas on how to grow my own mortgage brokerage business. Little tips that you don’t think of, maybe one you want to start a business, they’re in there. So I recommend those two books.
Joe Fairless: Do you invest in deals?
Austin Peek: No, not investing. I’ve done some residential flips, but I’m not getting in the commercial end yet. But best ever deal that I’ve done personally – it’s probably my first one, because that gave me the confidence to go ahead and do other deals. It was called the Austin Laurel Building, which is funny because that is my first name, and there was a girl in high school who used to hate me, and her name was Laurel. So the Austin Laurel building in Tampa, Florida. That was my first deal.
Joe Fairless: What’s a mistake you’ve made on a transaction?
Austin Peek: Probably not supporting the owners the whole way as far as checking in or hand-holding. To me, what I’m really good at is doing all the upfront stuff, throwing in quote matrices, making sure I can compare them and give them apples to apples comparisons… But I’m not the best at “Hey, I wanted to let you know where you’re at”, every week checking in, letting him know. Even though I’m doing that on the backend to make sure the deal is getting done… Just communication I think is always key, so that’s probably always one thing that I need to work with as far as just letting the owners know where we’re at all the time.
Joe Fairless: What’s the best ever way you like to give back?
Austin Peek: Really, it’s been now through my podcast. I wanted to do something new and I felt like it was a way to get back to the people who wanna start their own businesses. I was making a lot of old rich guys more rich, is what I like to say with the commercial real estate and mortgage brokering, and I wanna do something a little different. So I’ve been doing that and that’s been my best of giving back I think so far… Just trying to interview entrepreneurs and inspire people who wanna start their own businesses.
Joe Fairless: How can the best ever listeners get in touch with you?
Austin Peek: The best way is Austin@Millionaire-Interviews.com.
Joe Fairless: Cool, and I have since discovered the link, and I guess what was throwing me off was that dash… Millionare-Interviews.com/bestever. You don’t have to remember it, it’s in the show notes link, and I am officially subscribed to your newsletter, I’m going to get that guide for the lenders and their contact info and looking forward to seeing that matrix too, once you have that up and running.
Thank you for being on the show. This was jam-packed, full of practical and specific insight into the lending world and how to think about it, pros and cons of bank loans, and CMBS and insurance companies, what to think about, what to compare against, and the overall approach that we should take in terms of it’s not just about the numbers, it’s also about your relationship with the lender to make sure that even though the numbers look good, the relationship is ever better, so that everyone delivers on what they say they’re gonna deliver on.
Austin Peek: Yeah, absolutely. One last word of wisdom is with financing there are a lot of sketchy guys. I’ve got my CCIM, which is the top 1% of commercial real estate, and I’ve got my masters in real estate, so… Make sure that there’s people that you’re dealing with on the financing that have some credentials, because I will tell you, time and again I feel bad for the owners that get screwed by it, because there’s a lot of sketchy finance guys with hard money out there that are trying to screw the owners out there.
Joe Fairless: I agree, there are a lot of people who are not of integrity, especially in that space; I’ve come across it. So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Austin Peek: Thanks again, Joe.