“When you have free money, people do stupid things. When you have free money for 11 years, people do really stupid things.” So sayeth billionaire, Stan Druckenmiller. 

Now that interest rates are rising and there is no more free money and combined with tightening lending standards, it is becoming more difficult for developers to secure financing for new projects or to refinance existing loans. 

And with $500+ billion of CRE loans coming to maturity in the months to mid-2024, you’re going to see a lot of distress in the market. 

One solution to this problem is bridge loans, which are short-term loans designed to help developers cover financing gaps. However, these loans can be expensive and may not always provide the best terms for sponsors.  

Plus, in most cases they will wipe out existing limited partner equity. 

Preferred equity is another option, allowing developers to inject additional capital into a project in exchange for a share of the profits – sometimes substantially all of the profits that would have otherwise gone to the sponsor. This can be a more attractive option for sponsors who are unable to secure traditional financing, because they at least retain something out of the deal while continuing to earn (albeit smaller) fees but it will likely result in the dilution (if not complete elimination) of existing limited partners' equity stakes. 

Rescue capital is another form of financing that can help distressed owners. This type of capital typically comes in the form of equity or debt and is used to help stabilize a struggling project or to prevent foreclosure.  Same here though for LP’s – rescue capital can be expensive for GP’s and will probably result in the dilution at best or complete elimination of LPs' equity stakes, at worst. 

My Real Estate Reality Show guest today, Creighton Bildstein, principal at PlattPointe Capital, shares why he believes the commercial real estate market is facing significant challenges due to rising interest rates and tightening lending standards.  

He predicts that opportunities for investors will arise as distressed assets become available for purchase, similar to previous market downturns. 

See why Creighton sees light on the horizon and learn how you can capitalize on the current drawdown in commercial real estate.

This episode of The Real Estate Reality Show at GowerCrowd, is available on YouTube here https://www.youtube.com/gowercrowd?sub_confirmation=1 and here on the GowerCrowd website https://gowercrowd.com/podcast

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

Bull markets are driven by greed. Bear markets are driven by fear, and it is peak fear right now.

In the latest episode of The Real Estate Reality Show, my guest, Max Sharkansky, principal at Trion Properties discusses why fear is making it difficult to find liquidity or to transact in the current market despite solid fundamentals (in multifamily) such as increasing rents and occupancy.

Here are some highlights from Max:

• Driving this fear is the perception that interest rates hikes have a significant impact on CRE values but while rates go up and cap rates typically follow, they do not rise on a one-to-one basis.
• Fear-driven behavior is creating stagnation in the market, affecting future growth and investment and bringing distress to some owners and sellers – opportunities for others.
• With the rate hike cycle potentially coming to an end with the first signs of easing inflation, equity is likely to re-enter the market by the end of 2023, possibly triggered by a rate cut, triggering a resurgence in investment activity and a more stable market environment.
• While obtaining equity has become more challenging, debt has improved due to Fannie Mae and Freddie Mac's Treasury-based loans allowing for attractive leverage opportunities, which could provide a much-needed boost to investors looking for reliable returns.

There are lucrative distressed opportunities in the market, such as value-add multifamily properties from sellers hit by rising interest rates, and from ground-up developments in need of exits because their permanent financing assumptions did not account for increased cost of debt.

Max shares his informed perspective on where we’re heading in the next 12-24 months, and how sponsors can “be greedy when others are fearful.”

This episode of The Real Estate Reality Show at GowerCrowd, is available on YouTube here https://www.youtube.com/gowercrowd?sub_confirmation=1 and here on the GowerCrowd website https://gowercrowd.com/podcast

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

Commercial real estate sponsors who took out floating rate loans are in trouble.

Rates have over doubled since their lows throwing many loans into technical defaults even if the borrower is keeping them current and their lenders aren’t (yet) marking them to market.

What this means is that many sponsors, especially those new to the real estate game (i.e. who entered during the bull run of the last 11 years), if they have not done so yet, are likely to stop distributions to their investors and will be searching for ways to save their deals from going back to the bank in foreclosure.

In a market downturn, like we have today, there are two types of sponsor: Those that underwrote conservatively, took on low debt, and were happy with lower projected returns because they knew their numbers were robust enough to weather the next, inevitable downturn.  These sponsors will clean up during this downturn, buying distressed assets at significant discounts.

And then there were those who promised sky-high IRR’s just to attract investors, maximized the debt they took on so they could juice returns, used unrealistic rent increase assumptions, and underestimated the real impact of maintenance and tax costs in their proformas (amongst other things).  These sponsors are toast.

And there are also two types of bank: those that are pragmatic and urgently seeking ways to clear their books of these potentially toxic loans before values fall any further and borrowers start going into actual default on loans, and those more confident the market will right itself and so are prepared to extend loans under more favorable terms with borrowers, kicking the can down the road.

With over $500 billion of bank/thrift originated CRE loans coming to maturity deadlines in the 12-months or so to mid-2024, the days of reckoning are upon the commercial real estate industry.

Even sponsors who took on short term, fixed rate loans are going to hit solvency walls and start losing assets to their lenders in foreclosure or find themselves forced to sell at substantial discounts to their (and their investors’) expectations.

If you want to be on the right side of this equation, listen in to my conversation with Cody Charfauros, Principal/MD at Slatt Capital a debt and equity shop.

Cody shares his own personal experience of the impact of dramatically increased debt costs and dives deep into market dynamics, giving you a roadmap for what to expect in the months ahead.

This episode of The Real Estate Reality Show at GowerCrowd, is available on YouTube here https://www.youtube.com/gowercrowd?sub_confirmation=1 and here on the GowerCrowd website https://gowercrowd.com/podcast

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

There are three simple rules to success when investing in real estate today, Wait, Pass, and Sprint.

There is a vast portfolio of heavily discounted distressed commercial real estate deals under the surface, hidden from view and moving towards making their debut on the market on heavily discounted terms either through foreclosure, note sale, rescue capital, or litigation.

Inexperienced sponsors who have built large portfolios quickly in the last few years are panicking, figuring out how to save their assets, wondering what to say to their investors, and thankful they charged excessive fees earlier on because they’re going to need them to cover legal fees if they don’t handle investor relations effectively, right now.

Seasoned professionals, however, are sitting pretty.

They have cash and they are waiting, patiently, for the inevitable surge of off-market distressed assets.  

That’s Part One to success in a distressed real estate market: The Wait.

Deals are coming to market but truly professional sponsors are watching as other, less experienced buyers, have been and continue to make unrealistic assumptions to justify their purchases: overly ambitious rent growth projections, aggressive exit cap rates to juice returns, unrealistically short projected deal timelines (to pump up IRR projections).

That’s Part Two: Pass on deals that are being overbid on and acquired by amateurs.

And that brings us to Part Three: The Sprint.

When there is a deal that makes sense and you have the chance to buy a heavily discounted distressed deal, you’re going to need to move with blistering speed on due diligence, underwriting, and capitalization to give a seller, desperate to be relieved of their misery, certainty of close and to win the deal from other aggressive, professional buyers.

Brad Ahrens, President of Concord Development Partners, and I discuss these three aspects of successful distressed deal investing in the latest episode of The Real Estate Reality Show, available on YouTube here: https://www.youtube.com/gowercrowd?sub_confirmation=1 on all podcast channels, and via the (free) GowerCrowd newsletter, here: https://gowercrowd.com/subscribe 

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In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

When a real estate deal goes bad as many are doing now, should limited partners have the right of first refusal to invest rescue capital on the same terms as anything the sponsor can bring in to save the deal?

My podcast guest today, attorney Mark Roderick, calls it ‘pre-emptive rights’ and, as you will hear, he explains it can make the best of a bad situation.

But what does that look like in reality?

Here’s the script:

***

Email #1: From Sponsor to Limited Partners (Investors):

Subject Line: We’re stopping distributions and need more money from you

Sorry investors, we screwed up because we [select from the following]

1. Didn’t manage the property aggressively enough to account for a downturn.
2. Underwrote debt levels to eternally low interest rates on variable rate terms and now can’t afford the doubling of our debt costs.
3. Our original loan is maturing, the value of the property has gone down, debt costs have skyrocketed, rent growth is not what we assumed in our proforma, and the bank will only lend us 60% of our original loan amount.
4. Cap rates are now nearing 6% not the 4% we projected.
5. Thought this time was different.

In sum, we need you to pony up more equity so we can avoid losing the property to the bank.

***

Email #2: From Sponsor to Rescue Capital fund (pref equity, mezz debt, whatever)

Subject Line: Have we got a deal for you!

Our offering docs allow us to bring in additional capital under any terms. Our bank will only lend us 60% of the original loan amount so we need to shore up the difference. Can you help us.

***

Email #3: From Rescue Fund to Sponsor

Subject Line: We’re in!

Sure. We’ll come in with the 40% you need. We want second position behind the bank (ahead of your existing LPs) and if you miss proforma targets or fail to pay us on time, we’’ll remove you as GP and wipe out your LPs’ equity.

***

Email #4: From Sponsor to Investors

Subject Line: Great news! We’ve found some rescue capital.

You get first right of refusal on the terms we just got to protect your investment.

Terms are that your new capital will come in ahead of your old [or dilute it out completely], and if we screw up again, you get to remove us as GP.

Please accept these terms or someone else gets them.

Oh, and by the way, the Rescue Capital wants all or nothing so we need unanimous agreement from all Investors or we go with the Rescue Capital.

***

Is this an ‘offer’ or a ‘threat’?

Or is the dialogue different somehow?

At the end of the day, does having pre-emptive rights (right of first refusal) really mean anything?

Tune in to hear my conversation with Mark Roderick as we flesh out the pros and cons of pre-emptive rights in a deal gone south.

Stay informed and make better decisions by learning from top experts in the field. Join the discussion in the comments and subscribe to GowerCrowd on Youtube or head to GowerCrowd.com to ensure you’ve got a full picture of the commercial real estate landscape.

Teach yourself how to find distressed investment opportunities by subscribing to the GowerCrowd newsletter at https://gowercrowd.com/subscribe

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

Have you lost a real estate deal because debt costs skyrocketed and the banks stopped financing your construction project? 

Eric Brody, my guest today has but he has pulled himself up by his bootstraps and now helps others out of similar, sticky situations. 

His new venture, ANAX, provides much-needed capital to distressed real estate projects in various stages of completion. 

He shares his personal story of being at the wrong end of a distressed development deal, the lessons he learned, and how it inspired him to set up a rescue capital venture for other developers in a similar situation. 

We discuss the current state of distress in the marketplace and how developers and investors can navigate these challenges and Eric unwraps how lessons learned from painful experience are the foundations for success going forward. 

Eric doesn’t accept individual investors (his venture is fully funded), but if you’re looking at other rescue funds to invest in, tune in to hear Eric’s war story for context on what rescue capital is and how it thinks and does.

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

In this first guest episode of Series 5 of the GowerCrowd.com podcast, The Real Estate Reality Show, you're going to be meeting with David Saxe. David has lived through prior real estate downturns at major institutional commercial real estate companies.

He discusses how distress is filtering its way into the CRE investing world and we look at the impact of rising interest rates on cap rates, asset values, and how this is leading to an increased flow of distressed opportunities across all asset classes.

David shares his insights into how sophisticated sponsors mitigate risk in their underwriting and in their operations, and he also discusses how less experienced players get complacent during good times in a way that can lead to critical failures when times turn bad.

You'll hear how assumable loans appear to be artificially propping up asset values in some cases, and you'll also learn about the risks and benefits associated with bridge loans.

***

In this brand new podcast series at GowerCrowd, The Real Estate Reality Show, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Subscribe to our YouTube channel here: https://www.youtube.com/gowercrowd?sub_confirmation=1

At GowerCrowd, we take a realistic view of commercial real estate investing, providing pragmatic insights for passive investors who are looking for sponsors they can trust and distressed real estate opportunities they can invest in.

You’ll find no quick fixes or easy money ideas here, no sales pitches, big egos or hype.

Real estate investing for passive (accredited) investors is turning messy with vast swathes of loan maturities approaching which is going to send many sponsors into default causing their investors to lose capital.

While this is nothing to be celebrated, it will also bring in a period of wealth transfer and opportunistic investments.

We’re here to guide you by looking at the harsh reality of real estate investing, examining the risks and the rewards in conversations with some of the world’s top experts so you can make informed decisions.

You’ll learn how to build your wealth while protecting your capital investing as a limited partner in commercial real estate investments, even and especially during an economic downturn.

Each week we add new episodes that provide you with access to the foremost specialists in commercial real estate investing with a focus on discounted distressed real estate and the associated market dynamics.

We provide interviews and explainer videos that dive deep into the trends driving today's real estate industry, how the economy impacts returns, how to access and invest in distressed real estate deals, and how to protect your capital by mitigating downside risks.

There’s no doubt that it is a very challenging time right now for the average investor.

With the impact of COVID still being felt and the era of record low interest rates behind us, commercial real estate is experiencing severe headwinds.

This creates financial distress for many CRE owners who did not include contingencies in their original business plans and who now face dramatically increased debt costs, increased construction and maintenance costs due to inflation, and reduced revenues from rents as the economy slows down.

• Is the commercial real estate world on the cusp of a major correction?
• Is it 2007 or 1989 all over again?
• Will passive investors (limited partners) who have invested in syndications (through crowdfunding or otherwise) see losses they had not predicted? 
• How can you access discounted real estate opportunities this time around that were only available to a select few during prior downturns?

Let us help you prepare your real estate portfolio no matter what the future holds, whether it be business as usual for real estate investors or a period of wealth transfer where those less prudent during the good times, lose their assets to those who have sat on the sidelines, patiently waiting for a correction.

Be among the first to know of discounted investment opportunities as the market cycle plays out by subscribing to the GowerCrowd newsletter here.

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