Jerome Maldonado was nearing the end of his retail center construction and about to start developing office condos when the 2008 recession hit. Overnight, his bank stopped all funding, leaving him without the remaining $300,000 needed to complete the project. Jerome takes us through his journey of navigating the recession and how he managed to pull through and succeed with his property.
Jerome Maldonado Real Estate Background
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- Full-time commercial real estate investor
- 20+ years of experience
- Portfolio consist of 400 real estate transactions between buy/hold, flip, development, and more
- Based in Albuquerque, NM
- Say hi to him at: www.jeromemaldonado.com
Check out our previous episode with Jerome, JF2562: $7M in Less Than 2 Years with Jerome Maldonado.
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TRANSCRIPTION
Joe Fairless: Best Ever listeners, how are you doing? Welcome to the Best Real Estate Investing Advice Ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever, we don’t get into any fluffy stuff. Today we’ve got a special segment. We’re bringing back Jerome Maldonado. Actually, we brought him back. He’s here with me, and we are going to talk about a tough situation that he was in, and that should you come across this situation, which some of you might, because the market isn’t always going to be as rosy as it is… Should you come across this situation – well, you’ve got a blueprint for how he handled it and navigated it, should you choose to follow that same blueprint. We’re going to talk to him about what happened during the recession, whenever he had developments for retail and office buildings, and then boom, 2008 and 2009 hit. First off, Jerome, welcome back, and glad you’re here.
Jerome Maldonado: I really appreciate you having me back, and really appreciate you guys taking the time to get me back on the show. Thank you, I’m excited to be back as well.
Joe Fairless: This the first time we’ve talked; you spoke to Ash last time, so I’m looking forward to learning from you through this conversation as well. Best Ever listeners, if you recognize Jerome, you probably are a loyal Best Ever listener, so I appreciate that. It’s episode 2562. That’s the episode that he was on. It released September 7th, 2021.
He is a full-time commercial real estate investor, 20 plus years of commercial real estate experience, completed a bunch of transactions. He is based in Albuquerque, New Mexico. His website is his name, easy to remember, JeromeMaldonado.com, and that’s also in the show notes. With that being said, Jerome, take us back. No need to go through your story like you might have with Ash, because we’ve got that episode already. Let’s go directly to what you were doing leading up to the recession, and then what happened that was challenging for you from a lending standpoint.
Jerome Maldonado: We’re at a high market right now, so the reason this topic becomes very interesting is because I know that there’s people out there that think that this market will sustain itself over the course of the long haul. If you look at history, history can depict exactly what’s going to happen in the future if you just kind of watch market trends. We’re sitting on the high end of the market right now. Now, I never discouraged people to buy at any point in the market. If you’re really in this game, you got to be buying in all market cycles. Top end of the market, median market, or bottom end of the market. Those who do it correctly will always be successful. It’s proven through the test of time. But in 2008, it was my first time going through an aggressive market cycle. When I got started in the late ’90s, we were at the bottom of the market cycle and we were coming out, so I didn’t have to worry about going through that big dip. 2008 was my first real head-on experience, and I was in denial like a lot of people.
When I got into projects in 2006 and 2007, leading up to 2008, I didn’t think about a downturn in the economy. I just thought about what my ROI would be when the project was completed based on the current conditions, which is what a lot of investors do that are new to the game, or have even been with the game for a duration of time but haven’t gone through an aggressive market cycle… 2008 being one of the most aggressive financial market cycles, where the financial institutions themselves were annihilated, so to say, with the collapse of Lehman Brothers, AIG, and what was happening nationwide.
So we had retail centers that were under development… I owned a construction company, we developed our own product, so they were our retail centers. We had office condo complexes going up, they were also our projects. And I had subdivisions going up of single-family residential dwellings. I thank the good Lord that the residential dwellings we facilitated with cash out of pocket, we were debt free on those, so that saved us.
But the commercial sector we had financed through institutional money. We went in, we put our down payments, we acquired the land, we went to an institution, and got a construction loan to build out the asset. Then when 2008 hit, we had a large retail center that was under construction nearing completion, and we had a new office condo complex that was also getting ready to break ground, which we had done all entitlements. So for those of you guys who don’t know what entitlements are, it’s when you do all of your engineering, you do all of your utilities, curb and gutters, you do your water models, your architectural work, and all of the stuff that you need to retain permits to build a project out. A few hundred thousand dollars is what it cost us to do the entitlements on that project, and that was all cash out of pocket. So obviously, we were committed to the game, had a lot of money out of our own pockets, and the institutions were funding us through construction loans.
When 2008 hit, we had never missed a payment, we were never even delinquent on a payment. So we got to October of 2008, the banks called us up, and they didn’t want to fund the last $300,000 of our retail complex. When we asked them why they, just said that the market had changed, they didn’t know if the valuation of the assets still sustained itself, they wanted to see leases from tenants, and we were losing tenants faster than we could obtain them. People by this time were aware that the financial sector was under attack due to the Lehman Brothers collapse, so they just halted our funding, $300,000 shy. So we had to tally up that money in-house and finish that product. We did so successfully; a little bit of stress involved, but we did so successfully. The office condo complex we pulled from, we still own the land today, and we pulled from it. So $250,000 worth of entitlement costs went down the drain. It was good a tax write-off, it was the best part of that.
Break: [00:06:13] – [00:07:46]
Joe Fairless: Educate me on going down the drain, because I’ve never done development. If it wasn’t titled previously, does that not carry with the land for the foreseeable future?
Jerome Maldonado: Yes and no. As you guys know, the office sector of development has changed substantially since 2008. Office and retail are, I would consider, more of a distressed asset in certain most areas. There are still big developers that are doing office and retail, obviously. This area was in an area that was migrating in that direction. At the time, Intel was downsizing; that was the biggest employer of that area. The recession halted things. So for city development, this progressive plan was moving directly towards the area that we were developing in. When the political sector changed and the mayor changed in that municipality, they shifted completely, 180 degrees. They migrated where their development plans were, and moved in entirely different direction. So it changed the development outlook of what is viable in that area.
When you do entitlements, you’re entitling that set of plans, that set of architecture. As far as the water models, the utility models, that type of stuff, the hydrology, the civil engineering that tells you the lay of the land, and the soil test – that stuff can be transferred, so that stuff is not dead in the water. But as far as the architecture fees, the engineering fees that are attached to those architectures, fees like the structural engineering, all of the mechanical engineering, the sprinkler for fire sprinklers, that engineering, all of the civil engineering for that pad site, that exact project, all of that is awash. You lose 100% of that when you don’t do that development. Unless you do it down the road, which we aren’t; so we lost 100% of that portion of the entitlements.
Joe Fairless: Why wouldn’t you do that development now?
Jerome Maldonado: Because the market sector changed, the city’s progressive growth plan migrated and changed entirely. So in that area, office isn’t really needed in that area anymore. At the point time we were building it, we were one of the first guys in, but it was supporting the growth towards the new downtown area, or the projected downtown area. The city that we were in…
Joe Fairless: What city?
Jerome Maldonado: It’s the city of Rio Rancho, where Intel is… Which is very similar like Chandler is to the Phoenix Metro area. It’s not in Phoenix, but it’s where Intel is, so Chandler is growing because of Intel. Same thing in Rio Rancho. But when the city development plans shifted, they had to. They didn’t have infrastructure, so the city had to make a radical change to accommodate public infrastructure for roads and for drainage. And since the recession changed the migration of housing and housing development, they no longer had impact fees and housing and property taxes that they were banking on to develop out that area. So what they did is they migrated and focused their development into where the city of Rio Rancho actually attaches to the city of Albuquerque, and they focused their development off of the City of Albuquerque progressive growth plan, so it was able to utilize the City of Albuquerque infrastructure to help the growth of the city of Rio Rancho, at a time where they were hurting financially, just like everybody else.
Joe Fairless: I’m looking at a map now. Rio Rancho is just north of Albuquerque.
Jerome Maldonado: Correct.
Joe Fairless: Alright. So did that end up being a good thing, that you didn’t carry through the development, since it’s no longer the highest and best use of the land now?
Jerome Maldonado: Yes, it was. We would have gone bankrupt; that project would have taken us down. That would have been our demising factor, that project. It was a godsend that we didn’t take that one down; and it was our decision. It’s funny, there’s different sectors of banks – and this is what’s important for people to understand right here. As we go through this, we’re on the height of the market; there’s some of you guys that are super aggressive, and have started moving forward on projects, as I am right now as well. But the way we do it now is entirely different. In 2010, Bank of Oklahoma was calling, blowing up our phones, telling us we needed to get appraisals on our retail centers, and on projects that we were never delinquent on, that we had never missed a payment on, that we work extremely hard to make sure we were servicing our debt.
They knew that we didn’t have the leases to sustain the value of that building, so they wanted to ensure that they had a good debt to income ratio. So they were leveraging us to get annual appraisals on the property, which were costing us about $20,000 a pop. Plus, they were doing forced underwriting on us, which also costs us about $5,000 each time they did that.
Joe Fairless: Will you explain what forced underwriting is?
Jerome Maldonado: You have a clause in your loan docs that states that you will pay all fees associated with servicing your loan. Anything that the bank feels you need to do to service the loan, you’re responsible for any fees. In their terms, for my loan to be serviced, I had to have underwriting done financially on our businesses and ourselves to be able to make sure that we were sustainable enough to continue servicing that loan, and that our financials were strong enough to do so. So that was a little loophole that the bank has that requires us to manage those fees. Another one of those fees being the appraisal, to see if the appraised value is still sustainable, so that the debt-to-income ratio for the bank still fits their business model. If it doesn’t, they either balloon your payment or they make you come to the table with a variance of the appraised value, so that they still sit in a 70% to 80% debt to income ratio, so that they’re not over-leveraged on the property either.
So in spite of being a good Samaritan, a good paying customer, these are little things that commercial lenders do to developers that press them. I know a lot of other developers were going through this at the exact same time. And not only developers, commercial real estate investors. For those of you guys who are apartment syndicators, doing multifamily, those of you guys who are just in the commercial sector, all of you guys are subjected to the exact same thing that we went through back in 2010. It didn’t happen overnight, it did take a couple years… But at a time that we were already pressed financially to be able to make these payments, we were still working on stabilizing the property. Two years later, they were also going in and forcing us to come to the table with additional fees. So it became very stressful.
Joe Fairless: These aren’t on the two deals that you were talking about. These are on other commercial deals that you had at the time.
Jerome Maldonado: No, this was on the retail center… And on other deals, but this was on the retail center itself. At the time that we were going through this in 2008, the thing that was ironic was I had two loans from Bank of Oklahoma. One of them was being halted, and they were telling me that I had to come to the table with the last 300,000. Then a different sector, a different department was calling me, that underwrote the second construction loan for the office condos, and they were pressing me to get going on phase one. Phase one was an $8 million dollar project. So I’m sitting here taking one phone call on my left hand, they’re telling me “Halt. We’re not giving you more money.” And then on my right hand, I’m taking another phone call from the exact same institution saying “Hey, you need to get going here. We’re ready to fund your loan. It’s go time, start turning dirt.” I’m sitting here confused, going “Okay, one sector is telling me stop, the other sector is telling me go.” [00:14:54].07]
I threw my hands in and said “I’m done. We’re going to fund the 300,000. We’re pulling the strings on the new development, cancel the loan.” It was the best decision we ever made. Hence two years later, I had the Bank of Oklahoma so far down my neck that it was extremely stressful so we had to make some big pivots and made some changes in 2010.
Joe Fairless: Like what?
Jerome Maldonado: In 2009 they did the same thing to us. In 2009 when they made us do the appraisal, I kind of just tallied up the money, scratched my head and said, “Okay, let’s do this.” And I thought it was the end of it. They did an underwriting in 2009, I dealt with it. 2010 came around and I got the same exact phone call. As you can imagine, I was upset and frustrated with them, and I expressed that to them… And it got to a point where I had the lenders calling me in a very insulting, demising way, kind of laughing and joking; they were nasty.
Joe Fairless: What did they say?
Jerome Maldonado: Profanity, back and forth. We were cussing each other out back and forth on the phone. We had a lot of four-letter words, they were using them back and forth with me, they were telling me that I was just a broke ass, to tally up the money, and come to terms with stuff… Just aggressive; just super aggressive, just nasty on the phone. So much so that – for those of you guys listening, I don’t care if you work with Bank of Oklahoma, I’ll never do business with those guys again.
Joe Fairless: Clearly.
Jerome Maldonado: [unintelligible [00:16:04].03] never do business with those guys ever again. But anyway, I was lucky enough to be in communication with a lot of people that are in the industry. So really important is to be well connected and well networked within your industry, to know other professionals that do the exact same type of business you do. Because in times like this, those contacts and connections come through with great resources. At the time, I had a really good buddy, did the same type of development I did, we used to go to lunch randomly once every three months, every four months. I told him the story and he said “Don’t put up with that [bleep [00:16:41] because I have a guy, his name is Jason; go to this credit union, they’re doing commercial lending, they’re very loan friendly right now. Get out from underneath that loan.” At the time, interest rates for commercial lending were between 6.5% and 7%.
When we got to 2010, the credit union opened up, it’s when interest rates finally started to go down a little bit. I was able to retain a new loan for 4% interest from a credit union that embraced the property, embraced my loan, and was substantially more professional.
We facilitated the underwriting, and I was able to utilize the appraisal that I had just spent almost $20,000 on, to utilize for the credit union. They accepted that one and we were able to go through underwriting, and with a little bit of nominal fees, I was able to switch over the loan and make up the difference on the interest savings, as opposed to staying with the same bank. It was a blessing.
So for those of you guys that are sitting on projects right now, exercise your contacts wisely, and diversify your relationships with lenders, know who they are, know where your relationships lie, and make sure that you follow the lenders, not the banks. The biggest problem I had is that in 2008 and 2009, the lenders that we had relationships with, that drug us to these banks, they moved.
A lot of variances in employment at that time – the construction industry, the mortgage industry, everything. Anything that had to do with construction, real estate, and banking, all three of those sectors got hammered. It was something that there was a lot of migration of employees all over the place. Those relationships no longer existed, so I landed up following people, not banks. Through that, we were able to stabilize our assets, and it was a huge blessing.
Break: [00:18:24].12] – [00:21:15].12]
Joe Fairless: I’d like to go back to the office condo complex where you said “We didn’t do it. But if we didn’t do it, we would have gone bankrupt, because there’s not a need for it now.” What about your assessment then was incorrect, or were you not looking at, that if presented a similar opportunity right now, you would now know to ask XYZ question or look at a certain data point or data points?
Jerome Maldonado: Here’s what I used to do. I would go in and I would find out where other developers that were larger than me had purchased land and were proposing projects. The projects were not coming out of the ground yet, they hadn’t gotten their own entitlements, and then I would go in and piggyback that; but I usually did it before them. So I was always in front of the big developers, looking at progressive growth patterns where other big investors were going. Now what I do is the opposite, I no longer go in before them. I go in, I do the exact same thing where I’m studying market trends, city development plans and projections, and I watch the exact same things. I just don’t pull the trigger on stuff as quick as I used to. I wait for them to come out of the ground with their projects then I piggyback it on the back end instead of the front end. There’s another big piece to this…
Joe Fairless: Slightly less upside, but significantly less downside,
Jerome Maldonado: Substantially. You’ve got to call the shots. But one of the big things that I do now… I used to purchase my land in advance, and then I would start my entitlement process once I retained the land and had ownership of it, thinking that I had to do it this way. I got substantially smarter, both on my residential developments and my commercial development. This is the way I do it now, so listen up everybody, because this is the key. I take control of the property, but I don’t take ownership of the property until I have all my entitlements done. Okay, I’m going to say that again. I take control of the property, but I do not take ownership of the land until I have my entitlements done.
For the sake of example, I have a 350-unit, 10-acre development project going on right now in Port Orchard, Washington. I am in the middle of working on entitlements for the property. We’re working on architectural work, we’re working on all of our engineering, we’re working on our zone changes, we’re working on all of our entitlements, all the pre-development stuff that needs to go on, we’re working on right now.
I control the land, but I don’t own the land. I go in and put an offer in on the land, I work out terms, and what I do is I retain the land with just a modest deposit, and I put all the terms in advance. Then I work with a seller, letting them know that we have our due diligence period. During that due diligence period, we work through all of our entitlements. When those entitlements are nearing completion or fully completed, then we go in and close and retain the land, which substantially decreases our liability. If a time like 2008 ever happened again, we can dust our hands off with a couple $100,000 loss, take the tax write off and walk from it, as opposed to going into a multimillion-dollar project, that being like a $55 million project that we’re doing, and then being stuck in the middle of it, and the bank calls your note and then you’re just between a rock and a hard place. So this allows us to work through entitlements in a much safer way and be able to protect our assets and our money substantially better.
Joe Fairless: Jerome, I know why you were invited back. Thank you so much for being on the show. This has been awesome. I am jealous that Ash had the first conversation. I wish I also was in on that. I appreciate you sharing your specific examples of how you navigated a challenging time, because as you said, challenging times are going to come up again… And it’s better not to be scrambling to find information like this when that happens, but rather listen to it now and just expect for it to happen and have a plan in place when it does happen. Thank you. I’m incredibly grateful for this conversation. How can the Best Ever listeners learn more about what you’re doing?
Jerome Maldonado: We’re really easy to find. My name is obviously in the podcast. If you just Google my name, go to any social media platform from Facebook, LinkedIn, Instagram, Tik Tok, any of them, and just put in Jerome Maldonado, you’ll find me. On Instagram, it’s @jeromemaldonado1, or you can just go to our URL which jeromemaldonado.com. Anybody who has questions, any outreach from people that need help and assistance, to be able to save you guys headaches, or save you guys money, or prevent you guys from going the wrong direction, we’re always happy and I’m always here to help assist and help people grow. At the end of the day, if we all work together, we’ll all make more money, we’ll all live better lives, so I’m here to help and serve.
Joe Fairless: Grateful for this conversation. Hope you have a Best Ever day and talk to you again soon.
Jerome Maldonado: Thank you so much. God bless you and have a great day as well.
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