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If there is one thing syndicators wish they knew, it is how to get past the lending process of mortgage banking firms. Managing Director of Commercial Real Estate Debt and Equity at Aline Capital, LLC, Scott Williams educates us on how to get a loan and how all that process works in the syndication business. Coaching syndicators on how much deal they can afford even outside of the multifamily world, he reveals why you should never disclose anything to a lender and always be backed up by a rock-solid business plan. Also, find out what post-close liquidity means, the types of loans that match your business plan, and the similarities and difference of defeasance and yield maintenance.
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Getting Funded In Syndication with Scott Williams
Our guest is Scott Williams. Thanks for being on the show.
Thanks for having me, Whitney.
Scott is a Managing Director of Commercial Real Estate Debt and Equity at Aline Capital, LLC based in Greenville, South Carolina. He works with a lot of rural state syndicators across multiple property types with some emphasis in multifamily due to the market activity in that sector, although they’re very bullish on several other property types as well. He has a deep credit background, having underwritten and closed over $2 billion in credit capacity. This credit experience makes them extremely effective at working with syndicators. They say working with them is like buying a car from a mechanic, not a car salesman. Tell the audience a little bit more about who you are, what you do, what your focus is and let’s dive into how we get a loan. How does all that process work in this business?
We’re a mortgage banking firm that covers the majority of the southeast. We’ll go out of the market on deals and borrowers we know. Our value-add is we know how the cars are built as we mentioned in that tagline. When you’re working on us with a loan, it’s less of a sales tactic and more of an education process. That’s our value-add in the space and because of that, we tend to work well with syndicators. I’d say overall, a value-add or an offering that our group has is that we work well with getting syndicators through the institutional lending process, maybe for their first time. It is a little rigorous. Institutional lending doesn’t line up incredibly well with the syndication side of the business sometimes, which is a bit surprising based on how much volume of deal is syndicated.
I want you to teach us how the car is built. I want us to go through some of those and helping the syndicator to get through the lending process. Where should we start? Let’s talk to the syndicator, maybe they’re looking at deals, maybe they haven’t done syndication yet. They’re experienced in multifamily, but they’re looking to get their first syndication maybe in the next few months. Help us in that process and what do we need to be thinking about or doing?
[bctt tweet=”You should definitely be worried about your interest rate.” via=”no”]
I’ll speak from the debt side a little bit more. We do have an equity platform offering but we actually don’t. That is more of an institutional equity offering for larger deals, whereas syndicators are typically raising the equity themselves and then looking for the debt. The institutional lending world does not love the syndication world in some senses. Some things we want syndicators to be careful of is, never that you want to hide or not disclose anything to a lender but I wouldn’t just up and announce yourself as a syndicator. The reason for that is, a lot of times they view that as this is somebody putting a deal together and getting everybody else’s money put in the deal. Maybe they don’t have any money in the deal. They view that as not having skin in the game. That’s a phrase that a lot of people hear more so than low leverage, high coverage or whatever the deal may be.
Lenders always want a borrower to have skin in the game. We have several clients that go through the deal process with zero equity coming in, having raised all of the equity. We view it very differently because in our opinion, syndicators are typically venturing on a full-time capacity to do this. Their livelihood is based on being a real estate professional and putting these deals together. We find that syndicators truly have the best intentions at heart that they’re trying to provide a passive income to the market, while also creating an opportunity for themselves. Being that it’s their full-time job or even if they’re trying to venture into that as their full-time job, that’s a ton of skin in the game. There’s a ton of pressure to perform. We understand the syndicator’s intentions, their efforts and what the lenders want. We’re trying to make sure that the information gets delivered in a way that lines up with everybody’s interest.
You mentioned, “Don’t announce yourself as a syndicator.” I haven’t heard anybody say that before. That’s interesting but then also just talking about how the syndicator has skin in the game. If he’s doing this full-time, he has skin in the game. I appreciate that but go right ahead.
One thing we get asked a lot of times is how much deal can I afford even as a syndicator, even if you don’t have any equity or hard cash leaving your pocket into the transaction. What size of the deal should I qualify for? Fannie May and Freddie Mac have pretty clear-cut guidelines but we cover a lot of other property types too. I would say that, without holding me to the exact facts here, all institutional lenders have similar requirements. A lot of times they want to see the net worth of the combined loan guarantors. I say loan guarantors, even in a nonrecourse loan, there is a carve-out guarantee. There is a guarantee even though it is nonrecourse unless a carve-out is tripped. They want the combined net worth of those guarantors to equal the loan amount.
If you were doing it by yourself as the only signor, you can look at your personal financial statement and say, “There’s my net worth that’s the loan amount I can apply for.” Therefore, typically that’s backing into what size of the deal I can get and then also the post-close liquidity requirement. We’re writing a blog post on this to help educate the public on what actual requirements are post-close liquidity because it’s very funny. What we’ve been very careful to do is catch people unannounced in calling mostly the production officers at these shops and asking them right off the cuff, what are the requirements? Out of about ten or twelve interviews, we haven’t gotten the same answer yet, even with similar loan purpose.
For somebody that’s never heard of that post-close liquidity, take it down a little bit. What does that mean?
Post-close liquidity is the liquid assets typically in the form of cash and cash equivalents, stocks or bonds that you will have available after the acquisition is completed. This is very important for syndicators and this is where I was going with don’t announce yourself. Say a syndicator is taking a 20% split of a deal, 80% to the LP, 20% to the GP even if there are partners inside the GP. The 20% partners have to have enough cash leftover to equal what the requirement is and within that Fannie Mae and Freddie Mac small balance loan programs, which Freddie Mac can go up to $7.5 million. Fannie is expanded between $5 million, I’m sticking to $5 million. A lot of deal syndicators are looking at $5 million to $7.5 million in loan amount. That’s nine months of your loan payments or nine months of your debt service after you close. What we get a lot from syndicators and what we’re trying to have them not announce is that’s after your money goes into purchase the property and serve as the down payment.
What we don’t want syndicators to do is tell the lender, “I’m not putting any cash into the deal. Everything on the balance sheet will be left after.” That goes back to the lender starts asking questions, what do you mean you’re not going to cash one of the deal? There’s not skin in the game. It’s not to say that your deal can’t get done because one thing that’s unique about the capital markets including Fannie and Freddie is they perceive it as a risk. How do we compensate for risk in the investing world? We require a higher return. Your interest rate might be affected, your spread and things like that. To calculate your post-close liquidity and where you need to be careful is, it’s truly what you legally own as part of the ownership entity. The 20% to the syndicators, you need to account for, the lender is going to look at 20% of that down payment coming out of your pocket.
We need to make sure that you have the liquidity leftover to serve those nine months of loan payments for Fannie Mae and Freddie Mac. For several other lenders, life insurance companies and several of the balance sheet groups we talked about, they want 10% of the loan amount which is traditionally higher than nine months of debt service. Fannie Mae and Freddie Mac in their conventional programs also want 10% of the loan amount. That’s a little bit more stringent requirement. Going back to helping coach syndicators on how much deal I can afford even outside of the multifamily world, you need to be looking at this. Our net worth for our combined signors or guarantors equals the loan amount and then we have this post-close liquidity requirement. After what technically based on an org chart legally, what our down payment percentage should be, do we have cash leftover after that to cover?
I haven’t had many people talking about post-close liquidity. I appreciate you going into that. Let’s help the audience who is trying to figure all this out and be as prepared as possible. They understand some of the financial requirements before they go into this deal or also maybe what not to say. Saying that I’m a syndicator. How else can they be more prepared? I want them to be very educated about these types of loans and which one they need. What are some other issues that you see when new syndicators come to you looking for a loan? What are some problems that are common that they have?
[bctt tweet=”Have a business plan but don’t feel stuck to it.” via=”no”]
This will not be a shameless plug but I truly love and believe in our industry. I believe that brokers, especially for syndicators, are an incredibly useful tool. I think that brokers and syndicators work incredibly well together. One issue we see is syndicators will over shop the market. You start trying to get all of these different options and you can almost give yourself analysis paralysis. “Should I go with this bank direct, this broker got me this quote for this agency? I went direct over here and got another quote for this loan program over here.” Having a broker and a true professional broker that’s a finance professional that has the experience, will help weed out a lot of the white noise and boil down to, “Give me your business plan in the full spectrum.” We can more or less weed out a lot of the loan programs that you should not be talking to or considering, based on different parameters or metrics that might not fit well with your business plan and then over shopping the market.
The insurance world is very similar. We all roll up to a very few amount of true capital sources, writing the checks. Even in the CMBS world, there are a lot of providers but at the end of the day, the capital markets are providing that pricing. When you over shop a deal and brokers start running into each other in the market, you can run into problems that way. I would say trying to dial into finding an advisor, a broker who you trust that can help you weed out a lot of the loan programs. Stick with that one so that you don’t over shop the market. We had a client we had been working on with a deal. He wanted a second opinion and went direct to a lender, ultimately it was great. Our quotes came back a little better. I say everyone rolls up in the same place. We were better than the direct lender on a deal based on the group we had chosen to go through. What happened is this borrower was ready to move forward, when we went to request everything from the agency that it was actually a Fannie Mae loan.
There were multiple people registered on this deal and they said, “Hit the pause button. You guys go figure out who has control of this deal. We’ll give you an application then and get your final answer.” All that did was cost the bar an extra couple two or three days because we had to go back, get our exclusive agreement from them. We took it to Fannie Mae to show them that we control the deal and then they picked the deal up. Finding a good fit for you as a broker that serves an advisor, that you trust and then having them help you as opposed to just over shopping the market, a lot of value-adds. I tell a lot of people, “Equity and putting the deal together is more than a full-time job.” If you can have somebody take the debts out of the deal off of your plate, that’s a huge value-add. It will make you much more effective and efficient in the marketplace.
You mentioned briefly about a business plan. Can you elaborate on how our business plan might change the type of debt that we would get?
I coach a lot of our clients on, you should definitely be worried about your interest rate. It is part of the consideration. It’s third or fourth on the list of things we should be concerned about when we’re going into a new loan. The number one thing we want to worry about is what’s your business plan? What is your hold period? When do you need your return capital? Institutional lending for the most part has a stauncher prepayment penalty than maybe banks and credit unions do. That can come in the form of yield maintenance or defeasance.
Defeasance, explain that. What is that? I know a lot of people are like, “Defeasance, what the world is that?”
Defeasance and yield maintenance are very similar. They have small technical difficulties. Yield maintenance is the acceleration of the net present value of all of the future interest payments. They use the nearest treasury rate as the discount rate. I was a Finance and Real Estate major. I’m a little financial calculator. I can type in net present value, my discount rate and all the future cashflows. It’s the acceleration of all your future interest payments and if you’re two years into a ten-year loan that’s going to be brutal. Defeasance is slightly different in that. You have to buy treasuries that will actually then replace your interest payments to the investor. Once you close the loan, the people that bought the cashflows from your loan continue to get paid for the life of the loan.
There is a technical difference but they’re both about the same. As you can imagine, if you’re two years into a ten-year loan and need to make all the rest of your interest payments, when you go to do something in the short-term, that’s going to be incredibly high for a prepayment penalty. If it’s a short-term value-add or light value-add that you think you can flip out of the property in our first few years on, we need to understand that on the front end. Maybe it’s a bank loan because of that due to lower prepayment penalties or more prepayment flexibility. Maybe it’s a bridge loan or maybe instead of going after a ten-year fixed rate, we’ll go after a five-year fixed rate with the same loan program just because the prepayment penalty will be much less.
You went into the business plan the whole time and obviously you need to know when you need a return capital, go ahead.
I would think, is it a value-add property? How heavy is your rental the majority of the time and permanent style loans? Loans that were underwriting to their current stabilized level, expecting them to hold there and doing a long-term fixed rate. A lot of times we get asked, “Can we add our cap X dollars into this loan amount?” The answer is typically no. There are some circumstances where we can go a little above the purchase price if the appraisal supports it. If you’re planning a heavy value-add, even if the deal is already cashflowing and you’re saying, “We’re going to go and put in $10,000 a unit and up these rents well,” that may be a perfectly viable business plan but that’s going to dictate what loan you’re going to want to go into on the front. Is it a stabilized hold? Is it a value-add? Is that value-add light rental, is it heavy rental? Is it more of a management play? When do you need to return your capital? When are you telling your investors, “I’ll get you your money back?” All items, we need to understand on the front end and dictate which loan program you should be doing it too.
[bctt tweet=”Garner business through education.” via=”no”]
At least helping us think about when we’re underwriting some properties. I hear a lot of people obviously getting like ten-year debt. We don’t know what the market’s going to do. You don’t want to get stuck trying to sell or needing to sell and can’t. If I need to sell or if I’d tried to sell three years into a ten-year loan and I had the defeasance or something like that, I was going to have to pay, that could be a deal breaker as well.
One other thing is, have a business plan but don’t feel stuck to it. We have a lot of clients and especially recent years that they set out with a long-term hold business plan but the market got hot in the past years. We saw scenarios where, they could sell and generate such an incredible return that it didn’t make sense to continue to hold, just because they were in a long-term loan. Make sure that although you have a business plan and you picked the loan best suited for what you thought it was going to be, always build what I call trap doors. Typical trap doors and long-term loans, are they assumable?
If I go to sell this, can a buyer come in and take over this loan? That’s a trap door that you wouldn’t have to pay off the prepayment penalty if you look to sell your property. You would just need the buyer to come in and take your loan but you would also need to consider, “If my loan is only 65% or 70% of the purchase price, they’re coming in and they’re expecting 75% or 80% of loan amount or they can’t get any more loan. Maybe my price has to come down a little but I’m still seeing this great gain.” Having trap doors with loan assumptions being one of the biggest ones is super helpful. Build your trap doors.
That’s something you would be working with us on, I’m sure. Thinking about if we said, “Scott it’s going to be a five-year hold period, this is where we felt like we need to be. You’re going to help us think through that exit and how to be most prepared for that exit.”
They say in business, look at the end or look at the breakup when you get started. That’s definitely something we want to consider throughout the whole process. What’s the business plan? What are our potential exits and trying to help decide how this go best?
Anything else as far as the audience who is getting started? Maybe they’re fixing to call you and it’s their first time talking to somebody in your shoes, talking about a loan or what they need. What’s going to help them to stand out above everybody that’s calling you, trying to get into this business or getting a loan?
I would say, do as much research as you can independently on how best to underwrite a deal. We are more than happy to help coach clients through how to underwrite a deal and give them best practices. We can’t have every client and every person in the world out there just forwarding us OMs, “Does this still work?” The clients that we take seriously, even if we disagree with some of their underwritings but it looks like they come to us. They’ve looked at the historicals, they come to us with a budget and they have reasons for how they’ve underwritten it and why. If you’ve given a shot at how to best underwrite it, we’ll give you great feedback on where we disagree, why and maybe sometimes we’re wrong. It’s funny, lenders and debt guys don’t think like equity you guys a lot of time.
Our pro forma, a broker’s pro forma and a lender’s pro forma is never how they do expect the property they actually operate. When people call me to help them with the pro forma, I’ve been in the business long enough to where I can help them with through how this deal operate. My underwriting and a lender’s underwriting, it’s a mix of how is this deal going to perform and what’s the worst-case scenario for this deal? How this deal would operate if the lender had to take over is how they look at it. Realistic underwriting and coming to us with some effort put into the underwriting is where we get excited and start to take folks seriously.
What’s the hardest part for a syndicator to get a loan? What’s the most difficult part that you’ve seen or maybe the place that they failed the most in getting a debt for their property?
We’ve been very fortunate. In 2017, we were a 100% close rate on deals on our application and in 2018 we only had one deal that didn’t close that went under wrap. That was because of a seller’s title issue that was no fault of the lender or the borrower. The earnest money was returned. It’s something out of everyone’s control. If we’re going to start a deal, we’re very thorough on the front end because we hate re-trades. We are re-traded very infrequently. When a lender re-trades a client of ours and we’re involved, they will know about it for the rest of their career. We try to wear off those things on the front end. If we’re taking on a deal, we don’t typically see a lot of failures. There’s a lot of handholding. The number of forms and the proper documentation of those forms, the way things need to pre-presented are probably the most difficult. That’s where firms like ours shines.
Other brokerage groups out there shine that are great at it. We call our service a white glove service offering. We want as little touch from the lender to the borrower as possible. If you sign up a loan and there are 100 phone calls that have to take place in between that application and the closing, we try to take 96 of those calls for you. We try to fill out the forms because we know how to properly fill out the forms. We have you review and execute. I would say setting yourself up for success is finding a partner that knows the system and serves as a true advisor as opposed to maybe someone that’s transactional, gets you a term sheet and then says, “We got you a term sheet, I’ll get paid at closing,” and then wishes you the best of the luck with the lender. That’s not somebody you’re going to want to work with again.
Was there a way that you have improved your business that we could apply to ours?
This is part of how we’re looking to improve our business. We have been extremely successful in growing organically with no marketing effort historically. This syndication market is a grassroots effort. It’s done by a lot of the podcasters, coaches and folks giving great information out there. We’ve tried to find these outlets to educate people through. I would say that garnering business through education and that applies to syndicators. If you’re not out asking your investors for money and showing them because you’ll get this return but educating them as to, here’s how this deal will take place and here’s how your return will be generated, we’ve found that promoting business through education and educational marketing is starting to pay dividends. That’s why we’re excited to be speaking with you because you have such a great platform and a tremendous number of followers. Part of us wanting to come on here was try to impart some of the knowledge that I’ve been blessed to get just from my background, to help educate the market as a whole.
I appreciate it as well. What’s the number one thing that’s contributed to your success?
I think about this a lot because I’m like, “What am I going to say if I get that question asked?” Unfortunately, I have a boring answer. It’s been a lot of hard work. I had a coach in high school that would always start our practices at 5:30 or 6:00 in the morning. He said, “You’re practicing while your opponents are sleeping. You’re out there outworking the next guy.” In real estate and transactional businesses in general, a lot of times if you’re willing to outwork somebody else it will typically pay off in your benefit. I wish that wasn’t in my advice because it sounds boring and everybody shouldn’t be hitting happy hour, but once we finish this up, I’m going to get back to work for a couple of hours and see if we can serve our clients.
I can relate. It may not be like some big fancy answer, but it’s the truth. You’ve got to be willing to put in more hours than anybody else. It makes so much sense. How do you like to give back?
We have a couple of philanthropies. We actually have a client whose daughter has this very unique handicap or terminal disease, if you will. He’s got a great a nonprofit and we are sponsoring a large gala for that. In terms of just trying to educate the community and being a part of some of the local charities, my wife is a social worker. She’s a social worker at our hospital system here. She was formerly at a hospice program. No shortage of charities or ways for her to let me realize that giving back and being part of the community is incredibly important.
Scott, you’ve provided great value to our audience. I know in many things that I’ve heard before, I heard people say on the show anyway and it’s great. How they can learn more and get in touch with you?
We are happy to us to discuss anything deal-wise with anybody. I’m happy to help you with some of the pre-flight deals, what deals work and get you through that institutional lending process for the first time. If you have any questions, feel free to reach out at any time. Our website is www.AlineCapital.com and then we’ve got our phone number on there, which is (864) 729-3990. Our email is on the website as well. Feel free to reach out anytime. I tell people that, there is no such thing as a dumb question. It’s the question you already knew the answer to and ask anyway, but if you don’t know the answer, we work with a lot of newcomers and a lot of beginners. We’re happy to help anybody.
Thank you so much, Scott, for putting that out there and offering that to the audience. I hope the audience will join us again. I hope you’re sharing the show and join us on the Facebook group, The Real Estate Syndication Show so we can all learn and grow from experts like Scott. Go to Life Bridge Capital, connect with me and we will talk to each of you.
Thanks so much.
- Scott Williams
- Aline Capital, LLC
- The Real Estate Syndication Show – Facebook group
About Scott Williams
Scott Williams is the Managing Director of commercial real estate debt and Equity at Aline Capital, LLC based in Greenville, SC.
He works with a lot of real estate syndicators across multiple property types with some emphasis in multifamily just due to the market activity in that sector, although we are very bullish on several property types.
He has a deep credit background having underwritten and closed over $2B in a credit capacity. This credit experience makes them extremely effective at working with syndicators. They say, “working with them is like buying a car from a mechanic – not a car salesman”.