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“Focus on cash flow” – Anton Mattli
Theo Hicks: Hello, Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Anton Mattli. Anton, how are you today?
Anton Mattli: Very good. Thanks, Theo, for having me.
Theo Hicks: And thank you for joining me as well. A little bit about Anton’s background. So he is the CEO of Peak Financing, and has 20 years of real estate experience, with a personal portfolio of over 200 units, not syndicated. He is based in Dallas, Texas and his website is peakfinancing.com. Today we’re going to talk about commercial real estate financing as it relates to the Coronavirus. Before we talk about that, Anton, do you mind telling us more about your background and what you’re focused on today?
Anton Mattli: Sure, happy to. As your listeners can hear, even though I’m based in Dallas, Texas, I’m not from Texas. I was born in Switzerland, and right after school, I studied finance, economics, I went into banking, worked for UBS in New York, then Tokyo, and Hong Kong, and then I left banking. So I have worked all around the world, always in real estate related activities and other financing activities. And after that, I started helping high net worth individuals and family offices with their direct investments. I have been involved in this now for roughly 20 years. And separately from that, we also have founded Peak Financing, which is a financing intermediary. Essentially, we are a commercial mortgage broker, and we find the best financing solutions for commercial real estate based on the asset, where it’s located, as well as the sponsors, and we make sure that there is a certainty to close, which is a crucial piece to the puzzle, as you know.
Theo Hicks: Before we go into the financing part, you said that you manage money for families and then high net worth individuals?
Anton Mattli: Yes. My focus on that is no longer as strong as it was in the past. My focus always was on direct investments, whether it was real estate or other types of alternative investments, as they’re also called. So the non-traded securities, obviously, real estate and commercial real estate always made up a big bulk of it. But some of the other investments were also industrial firms, as well as oil and gas, and similar types of investments.
Theo Hicks: Okay. Let’s talk about commercial real estate financing. I’m going to be selfish and focus on multi-family. So do you work with all types of apartment investors, or do you only do agency debt or only bridge debt? Is there a certain unit number you want to see, or a minimum loan amount that you want to see? I’m trying to get a picture of what types of loans you do.
Anton Mattli: Sure. Generally speaking, we prefer to be above the one million mark, ideally above the two million mark, but we have done a lot of deals with a property value of over a million and a half to two million, too. In that space, so only agency debt, whether it’s Freddie SPL, or Fannie, or [unintelligible [00:06:23].20] as long as the property is stabilized. If not, then it’s typically a bank loan. As a property gets larger, we have been doing also a lot of bridge loans. Over the last six months or so, since COVID-19 hit, not as many of those, because a lot of bridge lenders stopped lending. But still, for good sponsors, and good locations, good assets, with a true upside potential there are still bridge loans available. We are also doing CMBS loans, life insurance companies for lower leverage loans, mezzanine loans in certain situations, typically for larger deals, for more experienced sponsors… So we essentially find the right financing solution for a particular situation.
Theo Hicks: Okay. So you do it all then.
Anton Mattli: Yes.
Theo Hicks: Over a certain size.
Anton Mattli: That’s correct. Yes.
Theo Hicks: So let’s talk about the bridge loans first, because you mentioned that in the current environment… And I’ve heard this too, and many people listening, you’ve probably heard this as well, that bridge lenders – some of them have stopped entirely, other ones have slowed down. But you mentioned that there are still some available to good sponsors, good market, stabilized deals. So let’s talk about what you mean by a good sponsor. So if someone comes to you and they’ve looked at a deal that isn’t going to qualify for agency debt, or they want a bridge loan, maybe to cover renovation costs, what types of things are you checking off the list to make sure that, “Okay, this person is going to qualify for a bridge loan right now” or “Okay, I know this person is going to get rejected”?
Anton Mattli: So in the past, because there were so many players that came into the markets for bridge debt, it was very easy to get bridge debt virtually for anyone. As long as you had financial strength with a minimum net worth and liquidity, we were able to do it. And the reason for that really was that most bridge lenders that were out there, did it similar to CMBS loans. So they originated a loan and then they sold it into the CLO market, which is essentially collateralized loan obligation. So it was securitized today; it didn’t really stay on the book for more than maybe three to 12 months maximum. Because the CLO market really has collapsed since COVID-19, most players that are still active, that have a strong balance sheet, and they are willing to keep these bridge loans on the balance sheet if they are not able to securitize it. As a result, they want to focus on sponsors that have a true experience with these types of assets. So they’re really looking for someone who has already done it in the past, or partners up with someone who has already experience with true value-add properties, rather than someone who just feels, “Well, here. I want to have a value-add deal.” And as you know, particularly in the syndication space, everyone is looking for that. That’s not really for newcomers to the game. It’s very hard to get a decent bridge loan. But the benefit is, as you also know, and many of your listeners know, is you can partner up with someone who brings that experience to the table.
Theo Hicks: Is there a specific number of years, or number of units, number of deals? Or is it more on a case by case basis? Or is it just, “I’ve done one value add deal, so now I qualify for it”?
Anton Mattli: Yeah. Obviously, the more, the merrier, right? But at least one that went full circle; they want to see ideally in the same market where the new deal is being targeted, as well as the similar size.
Theo Hicks: Perfect. And then let’s talk about the agency debt now. I know one of the big changes is the upfront reserves that are required. So do you want to talk about that a little bit?
Anton Mattli: Obviously, that’s on everyone’s mind. And it makes it tough, particularly for syndicators; they need to achieve a certain cash on cash return in year one and year two, and they need to raise more equity. There is just no other way around it. Depending on the leverage, and again, for syndicators specifically, most long to go for maximum leverage, so the reality is, for most of these agency loans, it will be nine months to 12 months of principal and interest, and if it’s a smaller loan on the small balance Fannie side, then it’s still 18 months. At least on the Freddie SPL side, it’s 12 months. So that’s certainly a benefit to go with Freddie SBL. Frankly speaking, whenever it’s possible, in that sub $6 million mark and it fits into the Freddie SBL box, I would generally advise to go with Freddie SBL anyhow, compared to Fannie.
But coming back to these reserve requirements that need to go into escrow – it obviously is a hard pill to swallow. But frankly speaking, other than the fact that the lender controls these funds, rather than you as a borrower, you should really, in my opinion, raise those funds, regardless. Even if the lender didn’t require you to raise escrow –this 12-month or nine-month, or whatever it may be– of principal interest, it’s really advisable to have that raised anyhow. Because at this point, we still do not know how the situation will evolve after the election and into 2021. So if you have a new deal, it’s really worthwhile to have plenty of cash cushion.
Theo Hicks: Sure. So if the lender does require the reserves, and I raise 12 months principal and interest, what happens to that money? Do I have access to it after a year? Do I have access to it until the deal is sold? When do I have access to this capital?
Anton Mattli: Yeah. So generally, with Freddie, you can get it back a little bit later. The rule there is – it needs to be, essentially, for 90 days all the restrictions have to be lifted, and then you need to be sure that your property has been performing for two quarters. So I would say in the best-case scenario you may get that money out within six to nine months, but realistically speaking, it’s probably more than 12 months to a year and a half, unless you’re in a just perfect situation.
So I would anticipate if I raise money, that that money potentially sits with the lender for a year to a year and a half. Now, if you need that money for debt service, you actually can have access to it. It is really meant as a principal and interest reserve. So if for whatever reason, due to COVID-19 or other reasons – it’s very hard to tell, but whether it’s very specific to COVID-19 or not, but if you have collection issues, if you have occupancy issues and you, in turn, have cash flow issues, that makes it harder for you to service your debt… You can ask the lender to pull from these funds to service the debt, right? Obviously, you cannot just decide that on your own, but you can make that request.
Theo Hicks: That’s what I was going to ask you… So I’m assuming that they’re going to check to make sure you actually need it. This might not be something that changed during the current pandemic, but when it comes to these reserves, these upfront reserves are different than ongoing lender reserves or…?
Anton Mattli: That is correct. That’s completely separate. Yes, so that’s definitely completely separate; you still have the replacement reserves that you have to fund. If the lender also requires you, and that’s depending on the program and how the lender assesses the risk, you may also have to escrow insurance and/or taxes. Very often you don’t have to do that. But the replacement reserves definitely have always to be funded separately from that principal and interest.
Theo Hicks: And that is that then kind of held by the lender for the entire hold period, or…?
Anton Mattli: Well, it’s really meant for replacements, right? So as you do replacements, you can draw from these. So essentially, it’s money and money out, eventually. So as you spend more, you can request to get money back for proven replacements that you have done. And all the while, you continue to do your monthly debt service that also includes a certain amount for replacement reserves.
Theo Hicks: So besides the bridge loan and the agency loan, you mentioned a few of the other loan programs that you do. I imagine that bridge loans and agency debt are the most popular. So correct me if I’m wrong, but assuming they are, what’s the third most common loan program that you see apartment syndicators specifically will use for their deals?
Anton Mattli: Pre COVID-19, I would say in the non-recourse space, CMBS loans were really popular. Whenever they didn’t fit into the agency box, whether it was a sponsor that was too weak or the property was close to stabilize, but just did not meet agency standards in terms of location, or repairs, or condition of the property… With CMBS loans also having fallen off the cliff in March, they have come back a little bit, but it’s still a very tight market to actually put deals into it. It can be done, but it’s still not something that is nearly as readily available as before.
For syndicators, other than that, bank loans are still a valid option. Obviously, under the 1 million mark, most indicators actually go with bank loans, even though they are non-recourse. But we have also done bank loans above the million mark, for various reasons, even though there might be recourse. Some banks are doing non-recourse if the leverage is a little bit lower, but the majority is recourse. But some still prefer to go with a bank loan rather than a bridge, because you have much less restrictions compared to a bridge loan, you have much less upfront cost… And some also go with a bank loan, because they don’t want to get into the prepayment penalty issues that you have with agency loans, so they are happy to go with a five, or seven, sometimes 10-year bank loan, even though the amortization is typically 20, 25 years. But they can easily refinance later, or sell the property without any issue.
That typically only happens when a syndicator is strong enough to partner up, or do it by him or herself, or partner up with someone who is strong enough and who also feels comfortable to go with recourse. Most syndicators cannot do it, because they have to rely on other financial backers that insist on non-recourse loans. But there’s only a pocket of syndicators that are perfectly fine with that.
Theo Hicks: Okay, Anton, what is your best real estate investing advice ever? And I’m going to add context to that and say, apply it to apartment syndicators looking to do deals during COVID-19.
Anton Mattli: Sure, absolutely. I would say I have applied that rule since I started investing personally, and I see it over and over again with syndicators – it’s focus on cash flow. Do not focus on appreciation potential. If you get it, it’s a cherry on top, but you need to focus on the cash flow… The in-place cash flow, as well as the projected cash flow, and make sure that the projected cash flow is realistic, rather than just a number that you need to get to in order to entice investors to invest with you.
Theo Hicks: Perfect. Okay Anton, are ready for the Best Ever lightning round?
Anton Mattli: Sure.
Theo Hicks: Okay. First, a quick word from our sponsor.
Theo Hicks: What is the Best Ever book you’ve recently read?
Anton Mattli: Well, there are a number of them. Once in a while, I read The Tipping Point by Malcolm Gladwell. And particularly now with COVID-19, I think it’s a perfect book to reread, with COVID-19 really creating that type of tipping point that no one anticipated. But certainly, I think it’s very worthwhile to mention, since it’s a syndicator show [unintelligible [00:20:02].12] it’s a Joe Fairless show, I have enjoyed the Best Ever Apartment Investor Syndication Book by Joe too, which I think is really worthwhile for any upcoming syndicator to read. But there are some others, like Frank Gallinelli has written a book about cash flow in real estate. He’s probably done that 20 years ago, but he has [unintelligible [00:20:26].05] on his book and that’s more technical, but it’s really also importantl and again, for cash flow, for me, it’s so crucial for syndicators. So that book by Frank Gallinelli is also worthwhile to read.
Theo Hicks: If your business were to collapse today, what would you do next?
Anton Mattli: Pick up the pieces and restart. I have been an entrepreneur – or business owner, whatever you want to call it – for 20 years. I have my failures with ventures I attempted, and the only thing that you can do is pick up the pieces, and move on, and restart.
Theo Hicks: What is the Best Ever way you like to give back?
Anton Mattli: Because we have been involved in multi-family and particularly also in workforce housing, we obviously meet a lot of people that are in need, and a lot of them are in need not because of their own fault, but because of just bad luck… And we support a homeless shelter that is local to us, that has a very unique approach to them. It’s a Samaritan Inn in McKinney; that’s just North of Dallas. And it’s not the typical homeless center, but they are actually bringing in families and teach them to get back to independent living. So it’s not just, “Okay, here you have a roof over your head. Here you have food.” But rather, actively help them, everyone in the whole family, to get back out and live an independent life.
Theo Hicks: And then the last question, what’s the Best Ever place to reach you?
Anton Mattli: I would say the best is probably by email. My email is firstname.lastname@example.org. I’m also very active on Facebook, I’m on LinkedIn… So I’m really easy to reach.
Theo Hicks: Perfect, Anton. Well, thank you for joining me today and going into lots of details and updates on commercial real estate financing, specifically multi-family financing, due to the current virus… And we talked about the bridge loans, and kind of the reasons behind those that have slowed, down but how they still are available, but only available to sponsors that have true experience… Whether that be me, or you, or the individual themselves, or a business partner. And more specifically, what you mean by true experience would be doing at least one deal in the same market, similar size, same business plan, and have it gone full cycle. So not just buy, but manage, and then disposition on the backside.
We talked about agency debt and the upfront reserves, how those have gone up, and how that affects syndicators. But you recommend raising those funds regardless of whether they’re required or not. We’ve talked about the best-case scenario – you have access to those funds within six to nine months, whereas 12 to 18 months is more realistic. And then you’re still required to do the ongoing replacement reserves. So they’re separate from the upfront reserves. And that’s a pay-it-and-take-it type of account.
You also said that the CMBS loans were the next most popular before COVID-19, but obviously, that’s not the case anymore. And then you also talked about some of the pros of bank loans over the other programs, and when it might make sense to go for a bank loan over an agency loan or a bridge loan.
And then your Best Ever advice to syndicators during these times, and all times, is to focus on cash flow and not appreciation, which as you know from our book, is one of the three immutable laws – buy for cash flow, not for appreciation. Appreciation is the cherry on top, whereas the in-place cash flow and then a realistic projected future cash flow is the cake in that analogy.
So Anton, thanks again for joining me today and sharing your knowledge on financing. Best Ever listeners, as always, thank you for listening. Have a Best Ever day and we’ll talk to you tomorrow.
Anton Mattli: It was a pleasure.
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