Welcome to the real estate espresso podcast your morning shot of what’s new in the world of real estate investing I’m your host Victor Menasce this is the weekend edition where we interview notable people from the world of real estate investing today is no exception we have our great guest all the way from Silicon Valley welcome to the show Neil Bawa thanks for having me on Victor I’m very excited to be on the espresso podcast great to have you here Neil we’ve got to know each other and we’ve been looking at all kinds of different projects over the span of the last year and I’d love to get your perspective for our listeners you’ve got a fairly sizable portfolio what’s been happening in the capital markets I know there’s been a lot of movement in the last 60 to 90 days and love to get your perspective on what’s working what’s not working and what’s the current landscape I think we’re currently in the part of the cycle where the capital markets are still trying to figure out where they want to be where they want to be at and so the first thing that we’re seeing in the capital markets is inconsistency across the board there’s lenders that are behaving completely different from how they should be behaving there’s lenders that are driven by fear not by data this happens very early in a in a event like this we saw it happen very briefly after 2000 and and and me and I for the 911 event and so certain parts of the market have frozen up completely simply because they don’t know how to underwrite so we are seeing CMBS loans pretty much being locked out of the market at this point most of the insurance lenders who were really a phenomenal source of lending especially for those of us that are in multifamily are just sitting on the sidelines I mean I think these people have a huge amount of dry powder to deploy they just don’t have a methodology that works for them they’re worried about you know asset prices going down they’re worried about potential defaults they’re worried about tenants not paying nationwide rent strikes whatever you want to call it it’s led these people to at this point just say hey we’re just gonna sit out of the market for the next two or three months and see what happens which basically means that if you’re looking at the capital markets and you have a project today if it’s a you know obviously things depending upon whether it’s a value-add project or if it’s new construction but the number of players has reduced to you know there’s Fannie Mae there’s Freddie Mac there’s local banks and the biggest variation that I’m seeing is in the local banks we’ve got some banks like some of our projects are still being quoted they’re quoting lower rates than they were quoting you know in February they simply because you’re seeing you know ten-year Treasuries down this much which is puzzling to us because in in in in my mind those rates should be higher now because the risk levels are higher but those banks haven’t adjusted so we’ve talked with local banks for our project in Austin sorry in Dallas we’ve talked with local banks for a project in Phoenix and one in in Utah in those banks are actually quoting lower numbers now but there’s a big but they’re those banks are making sure that the liquidity amongst the general partners is higher they’re making sure that the net worth numbers are higher before they were a little bit flexible on that so 20 million dollar loans if the networks are the partners was 15 million sort of work if the liquidity wasn’t five percent it still worked today not only do they want that liquidity and they want you know ten percent equity instead of five percent liquidity but they’re being a lot more careful about who it is that’s actually putting the aquitted into the project there was this process where everyone was bringing these piggy back a balance sheet people into the project where you know it’s it’s really Neal’s project or Victor’s project and then you bring one other person in just to kind of shore up the balance sheet the banks are not looking at that as something that they like today so there are loans being turned down because ninety-five percent of the balance sheet the liquidity the net worth is coming from some third party that clearly had nothing to do with the project and that’s not being allowed anymore and that’s putting making it really difficult for for folks that are looking to buy you know value-add projects so so that you know on that’s what we’re seeing on the capital market side and then on the fannie and freddie side of course we’ve we’ve heard about this where Fannie and Freddie are like well we don’t know if you’re gonna be able to pay your mortgage so what we’re gonna do is ask you to pay a year’s worth of your insurance a year’s worth of your mortgage a year’s worth of taxes we want that you to impound all of those taxes together and give it to up up but give it to us up front when you’re buying your value-add property and then then this part is not 100 percent here we’re gonna basically allow you to draw from that now initially that guidance was no you you still have to pay us we’re not gonna let you draw from it and then they started saying yeah there are some cases where you could actually draw from that and that money and and not pay your mortgage so now we have the syndication industry which is like wow so all of a sudden for a twenty million dollar property I have to raise a million and a half more and and and what happens a year later I mean when I pay this when when these impounds go away but now I’ve raised a million and a half and equity oh my car you know I have to pay a lot less of the property so people are still at that point where they haven’t figured out there are there are intermediate financial engineering solutions and I can discuss one of the solutions with you and so a lot of people are now preparing to raise a million million and a half extra in equity and that is inevitably going to drive up cap rates because you’re gonna end up paying you know quite a left but a little quite a lot less for that building
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