Ep#50 Apartment financing world during COVID-19 with Anton Mattli

Achieve Wealth Through Value Add Real Estate Investing Podcast

James: Hi audience and listeners this is James Kandasamy from Achieve Wealth through Value at Real Estate Investing podcast. Today I have Anton Mattli from Peak Multifamily who is one of the leading multifamily financing agencies. Anton is a CEO of a big multifamily funding. He graduated from Zurich Business School. He's from Switzerland originally, love Switzerland for the view of it and he has been advising family officers’ high net worth individuals and has done billions and billions of dollars of loans. Anton and I was discussing before this interview started saying it's not fair for lenders to declare how many billions they have done because that can be a lot of money but the experience level and the knowledge and the acumen of the industry matters a lot when you're doing financing. Hey Anton, welcome to the show.

Anton: Yeah. Hi James. Thanks for having me.

James: Absolutely, absolutely. Actually we are having, originally I planned to have a meeting with you to talk about what could happen similar to 2008 crisis because we have been talking about it for past few months, but now we are in the middle of corona virus recession, I would say and we are in the first or second week of this happening. So basically we don't have to predict what the recession can be, but we can predict what are the outcome from this event could be. I think a few months ago you and I have a lot of discussions about how the market would turn, how dangerous is the market right now in terms of operators or sponsors or syndicators buying things because overleveraged, overpriced and all that. What were your thoughts before this Covid19 recession came about and how was your state of mind in terms of how the economy was and how everyone was buying deals and we'll go into the details on Covid19 and what's happening now?

Anton: Sure. As you write on the operator side have seen quite a number of deals that for me personally didn't make sense but I didn't know a deal was financeable from a lender perspective, from a debt service called [02:36unclear] particularly when it's an agency loan, does not necessarily mean that it's a good deal from an equity investor perspective. Even though we were able to finance some of these deals with a number of them I would not have felt comfortable to invest in those deals. There were plenty of deals that still made a lot of sense, so don't get me wrong, it's not all of them, but there were only the number of deals that in my view, didn't make sense over the last two years, only have increased dramatically compared to before. At the same time we have also arranged bridge loans and as you probably know, bridge lenders, they're extremely active. They have taken a major activity uptake over the last few years.

So there was a lot of competition in the bridge lending space, which meant that you were easily able to get 80% of cost for your C class property and sometimes in really tough locations and bridge loans make perfect sense when it's a true value-add deal. When it's not really a value add and it's mostly to do with soft rehab, but you feel that you get the agency loans when you need it and you go with a bridge loan, then I think it was much more problematic. So with that obviously we have seen quite a number of these bridge loans and deals that I believe particularly in the current environment will likely struggle. Because this bridge lenders they are not like the agencies and that came down now with the forbearance offer. Don't expect that from bridge lenders.

James: Yeah, I know. It's crazy. Now I feel so happy. I'm all in [04:41unclear] for the past one and a half year I've moved to [04:45unclear]. So are you saying on the bridge side there is no forbearance or what's happening on the bridge side with the Covid19 crisis right now?

Anton: Well as a general rule, bridge lenders have never been; some of them, the good bridge lenders they have always been willing to make adjustments when they see that a borrower is behind of the original plan, the ones that are really in there as a partner, they have been willing to cooperate and I think those lenders, and they are not really that many among all the bridge lenders that are out there, they will continue during these times to help a borrower to get through that time. But the majority of bridge lenders are not maybe staying, very often it's not their own money so they essentially have orders behind that that they buy into and they have kind of an obligation to fulfil that loan agreement to the letter and their investors demand that they fulfil their obligation as per the loan agreements.

So some of them are very aggressive just by nature and the others have to force from the investors they have the loan funded from do actually go into enforcement or you can call it loss mitigation as the nice term sounds with these loans very forcefully and very quickly. So now maybe the [06:25unclear] is a little bit of a shine of positive light here that they may say, look, yes, we could foreclose right now, but maybe it's not a good time to do the foreclosure now anyhow so let's just go through another couple of months and then see if we want to foreclose. But it's still in my view that just kicked the can down the road for a very brief period of time until they go all way in with their loss mitigation process.

James: But I think it only depends on what's happening in April, right? I mean, we have another 10 more days to go [07:03unclear]. But in general, I am already seeing even in my properties, they are residents who are declaring that they can't pay and this $3000 a door family units. I'm not sure, as you mentioned they're going to use it for rent or is it one time? I'm not sure for how many months is that? But the thing is the delinquency will be higher. So I believe the sponsors or syndicators who are halfway to value add and right now they are not done with the value add. So their value add might be struggling. If it goes below certain level, they're going to be stuck because it's going to be negative and as you mentioned, bridge lenders are or private people. They have the obligation to whoever gave them the money.

Anton: That's right. Yeah. So if you have already a property that is, let's say a third empty because you planned all your rehab, even if you do rehab, a lot of tenants that you now can attract and so you would have to attract them with very aggressive terms. If you find them and then you still know that at that level that you need to be based on your performance, which the lender wants to essentially base their decision on to release more rehab money for future doors. So then essentially that rehab money sits with the bridge lender, you have not performed as per the loan agreements. So if you want to go ahead further, you need to inject more equity.

James: Yeah. It's basically...

Anton: It's kind of a vicious cycle.

James: Yeah, it's a downward spiral because now I believe on the bridge sites, a lot of loan are based on LTV, loan to value and they're going to assume the values are going to drop. Because now your rent is going to drop [08:54unclear].

Anton: Yeah. It's a combination of loan to value, but as you go through the draw process, it's more driven by some amount of collections that you need to achieve and why and then the dead deals that you need to achieve with that. So it's a little bit of a different measuring sticks. But at the end of the day, it doesn't really matter what you use, it's maybe hard to achieve these points that you need to meet at some point in the timeline, then you property is not performing and so the reality is all these bridge loans they typically have very aggressive timelines to start with. So if you fall behind just by a couple of months, it can become very problematic. When it says after six months we should achieve this and you are essentially behind by two or three months and it continues to go in the same direction as you fall behind once you are at the enrolment then, and so long. So I would say the ones that have enough cash on their own that they can inject as needed, they will be fine. So the ones that suffer the most are the sponsors that just kind of get by with their own personal financials and they don't have the ability to inject a couple of hundred thousand as needed to get the ball rolling at the property.

James: Yeah. But it is tricky, right? Right now, I mean most sponsors can use this Covid19 and burn the equity and get out or they can keep on injecting and try to; because no one knows what's going to happen in the next six months. So it's a gamble. A lot of sponsors or syndicators need to take whoever on the bridge loan if they need to continue injecting more money or give it back to the bridge lender. But right now they have a valid reason. They can say the whole world is collapsing. I'm getting out now.

Anton: Yeah. If you're a syndicator. So you essentially can ask your investors, look, we are in really deep trouble. Do we want to inject more money? Generally I would say what typically should happen is that you do a capital call and if no one wants to do it, then you would have to lend yourself or you come up with the equity yourself. But in most instances it's not equity, but it's more a loan by the partners. But again, that all requires that the channel partners actually have the cash available if we lend to the property and a lot of them I've seen out there they don't have that capacity. So they'll be very interesting. Obviously that always assumes that things really get bad but we don't know yet. Maybe it's a miracle and all that stimulus money somehow entices these tenants to pay the rent.

Obviously I hope for you and for everyone else who operates properties that that's going to happen. But based on history I don't think that that is really going to happen. I think last night I do have Brian on and he was referring to the situation during the hurricanes in Houston and that's a perfect example I would say but you cannot compare with 2008, I think we all agree with that, but certainly what happened with Harvey and the flooding is probably much better comparison. Because everything had to be shut down. It was very localized, but it had to be shut down. As Brian correctly mentioned like the properties across the board suffered with delinquencies. So I would say we will likely see that we just do not know yet how big the percentages by asset class and by location.

I think it will depend a lot on locations obviously places like the Northeast, the greater New York City areas only suffer more. Same thing in Washington State, in Texas we would have to see how bad it is. Obviously we have also the additional element of oil and gas that has laid a massive negative role here for us in Texas, particularly for the property owners in Houston and we don't even have to talk about Midland and Odessa. But even in Houston it's only something that will in addition to Covid19 will have a negative impact on these properties. So it will be very fascinating to see how the performance looks like in the next a few months.

James: Yeah, I'll get a good indication in the next 10 days. But we are already getting our property managers to start probing with tenants and who's having trouble and all that. So we are compiling that, trying to understand and trying to work with them. Some kind of payment plans. That's what Texas apartment association or we call it TAA has given us guidance. But I think a lot of it depends on which sub market you are in. I mean, I know sometimes we use and it depends on and then people think, okay, my property's good but there's a lot more details to it. So whether you have a base manufacturing in that area or not, or whether you are CTO or whenever you invest it's a lot of its service industry or not a service industry is dead right now. Las Vegas, we used to be the best place to invest before two weeks ago, but up until now, the whole Las Vegas is closed down. I'm sure you people don't have money there because they are both more leisure business and gambling, hotel business. So basically there's no money, so within two weeks, things change now. So compared to places where there's a lot of manufacturing happening, this diversity of employment, you can still reduce the rent slightly and then you still get people who can pay because they are still being employed.

Anton: That's right. Yeah. Yeah. And if you're right next to an Amazon logistics center, you're probably good.

James: Correct. Correct. Correct. Absolutely. Absolutely. I am still getting rent right now, up to now for the past two, three days, I'm still getting rents for April, so that's a good sign but ours is all automated. It's all virtual. So probably they already set up, the ACH is all coming online, but we'll know more in the next 5 to 10 days, where it's very interesting times. But as I say, I mean last time, everybody was doing very well because the market was doing very well. Right now no sub market location becomes very important and the good thing is whoever has this agency load, I think they have many ways to weather this; either take the forbearance or just ride it through because your loan is there. But guys with short term loan, this is very, very tricky right now and you talked about the bridge loans and all that. Do you see the same issue with loans on credit union, the banks, small banks and all that? Do you think they still have issues similar to bridge loan guys?

Anton: No. I mean, what we have seen was actually so far has been very positive where particularly these small credit unions and banks have been very cooperative in finding solutions better rates for barons. And that seen before it started. Why it's almost like, okay, we understand, we are reaching a now a tough period of time and that you're willing to either modify it along to stretch it out to lower the right. So they feel very at least a good number of them that we have heard back from, from various borrowers have had a very good experience there.

James: Got it, got it. So are they being managed by a FHK well? The small banks and credit unions?

Anton: No, it's all balance sheet based. So these are really the easy loans to long straddle which unite the loans and then secured the heist then too, they are in the same boat as I would say all the other loans that are out there. I'm talking the ones that typically it's more the small loans somewhere in the $300,000 to maybe 2 million, 3 million range. So not really the large lumps, they are some exceptions there but they are loans that are not a significant burden on their balance sheets and it's much better for them to work out these existing lumps that they have on the balance sheet that are on the basis of still that we sound them just going through a hard time but they are willing to work it out with the borrowers. So that's really for the ones that are on balance sheets and the ones that really have had success, the borrowers or the ones that have already very good established relationships with these banks. So they know the owners or the branch manager and that brings us back to that relationship. Now is more important than ever. Whether you do a new loan now or whether you already have an existing loan, the way you will have managed your relationships, whether it's your tenants, whether it's your property management company, whether it's your lender. Now that all comes back to you but if you treated them badly, they will remember if he treated them well, they are more willing to work with you.

James: Yeah. And just for the audience, I mean, if you guys read my book, Passive Investing in Commercial Real Estate, I did very, very specifically mentioned that bridge loans may not be the best loan during the market peak. I'm not sure how many people read my book, but I did mention it there and that was written like two years ago. As I say, I stopped doing it just for my peace of mind and I want to make sure that I protect my investors’ money as much as possible than doing these flips at the end of the cycle and giving them; taking large risk and trying to do a flip at the end. I rather go on a much better, safer bet with the better finance strategy. So when was this triggered to you? I know we are talking about; I think we are like two weeks into this crisis right now. But this happens so quickly. When did you feel like, okay, we are in trouble right now because you and I spoke and we had like 12 different reasons why the market can go bad. We have Brexit, I don't know if we have 12 things. I can't remember what the exact things. We had so many things we laid out what could go wrong, but I believe this is completely out of the norm. A medical health issue, a virus infection that's causing everybody to stay at home. I mean, is that right? When did you start to think that, oh my God, this could be the next recession?

Anton: Yeah, I mean, we have seen already pressure in the system for a while, where we have seen that already [21:06unclear] was an issue and in the banking system we have seen it already last fall and we have seen it in January and February. Just because of the all whole world view that we have reached a point where everyone is getting more concerned. But it was still possible with the fad essentially doing all these liquidity measures in the past, as soon as there was the slightest view that there might be a little bit of a slowdown. So they were able to essentially put as much liquidity into the market as they needed to. Now, I would say the current situation and where we are now on the lending side really has started just about two weeks ago. It's not that it really built up. Obviously everyone was watching what was happening in China and then slowly in Europe. And as it was building up in Europe, suddenly the clouds came out. But you may recall at that point the treasuries dropped significantly. The fed already dropped the rates once and that actually resulted in some of the best time to borrow and to refinance. So that we had maybe a period of two weeks, maybe three weeks. But I think it was just around two weeks. Then we were able to get essentially 10 year and 12 year loans at close to 3%.

I know someone that was not arranged through us, but I know someone who bought the rate that was below 3%, I think it was 2.94 or something like that and that lasted really just for a brief period of time until two weeks ago and everyone realized we have a problem and that problem really just was shown again in the market that there was no liquidity. And the fed will stay in coming out with their one and a half trillion injection where they said we are going to buy as much treasuries as we need and we are going to buy commercial papers and that still didn't do anything to the market. And then so the spreads started to do tighten on the agency loans at that point and then we were up into the mid two, three, 3% in Olin rates. And then this weekend and the lamps, as you may recall last weekend, that we, the fed announced that they are now buying also agency NBS for as much as it is needed.

So now obviously the hope was there that they would provide the contents to the market that was so much liquidity that they are willing to put into the market that no investor in these NBS should be concerned and that that would stabilize at least the multifamily market. Always leave a half note to say that they will buy all the commercial mortgage backed securities like hospitality or retail based NDS. But it still did not help when it came to the agency side. And I would say that was probably the biggest surprise so then that deal ended on Sunday and then on Monday the agency spreads actually went up by 75 to 100 basis points. So, even though they announced it that they will buy us many agency mortgage backed securities as the market needs to get the liquidity in the market, obviously they didn't believe it and spreads moved up even further and we all still in the same situation today.

So if you wanted to get into new agency loan today with the new Fannie loan, ten year Fannie loan, your rate will be at four and a half percent for a large Fannie loan that passed some form of, as we call it, permission-based, like with affordability elements to it. If there was no affordability element to it, you're probably closer to 5%; and that's coming up from just three weeks ago when we were at the low threes. That's all grim because the markets, there are no buyers out there, so no one is able to price right now. Obviously the hope that that will be sorted out and I think as market participants see how the impact on multifamily is going to be in April or May it will calm down because then they understand how big that impact is and are able to determine where the priority should be, but until then, it's essentially there is an old one that is buying. That puts Fannie and Freddie in a very difficult position because obviously they are obligated to buy that loan from a lender that originates that loan and then they need to securitize it and sell it. They do not want to keep it on their book.

Even if they keep it on their book, they still have half the credit risk transfer buyers that they are going to so they're good. Fannie score has always been that they will find and Freddie too that they find other risk participants and in order to find them, the loans need to be priced so that these risks, participants are willing to buy whatever share of risks that they are participating in and right now, no one is willing to take that risk.

James: I know it is crazy. I mean where we are looking at to do deals or to refinance should wait a few more weeks or because, I don't know, a few more weeks or months or what do you [27:43unclear]?

Anton: Yes. I think for refi is in my view is easier. Why? Because you are not really under immediate pressure unless you're really in a very difficult financial situation. But then it's probably the last thing to consider refinancing now. I would wait on the refinancing side until the market has calmed down. Why would you want to now deal with an interest rate that is four and a half to 5% when the 10 year treasury holders are under 1%. If the market calms down, there is a reasonable expectation that the spread narrows again and that you're back down. Maybe not to the three and a half, but maybe in 4% or four and a quarter. It is such an uncertain time, but in my view it just doesn't make sense to campaign and apply for refinancing.

Also the other point is since your future collections are still taken into consideration. If you apply today, a lender may underwrite your T12 up to March and everything looks great and as April and May and June come in and if the drop is pretty significant, that will impact your loan proceeds at that point too. So not only have you applied for a loan potentially at a very high rate but now with the loan proceeds are getting customers. There is so much uncertainty that in my view just doesn't make sense right at this point unless it's an absolute emergency to do so. When it comes to acquisitions I mean it needs to be a blazing deal in my view to even consider an acquisition. Because you have the same situation. How you negotiate with a seller? What clauses can you put into a contract in terms of occupancy and in terms of collections that a seller would feel comfortable with, but you are also comfortable with? Because that's really what you should do, in my view, if you go under a new contract, you should say that the occupants who need to be at certain level and the collections need to be at a certain level. And if not, then it's going to be through a re-trade.

If you don't have that, then I think the risk is just too high. And on the other side with the loan, it's essentially the same thing. So yes, you can apply for that loan, but unless you have these clauses in that PSA, you'll run the risk that you go in for a higher price. You should reprice the seller, but you cannot. But the loan amount is still being cut. So my recommendation is if you find that deal the first step is we need to get these clauses with the seller and the PSA. And if you have these clauses the way out, then you need to decide whether it's worthwhile to spend, let's say 20,000 in loan application fees and all that that you may lose. But that's ultimately the session that depends on that you feel that deal is so good. So I wouldn't say don't do it, but have these clauses in that PSA that allows you to re-trade with the seller that essentially then reflects the lower loan proceeds that you would likely get the occupancy and collection slow.

James: Got it. Got it. Got it. Yeah, and also, I think it's a very tricky situation. You want to raise money but I'm sure if you find a deal, which is screaming good and you fear an experienced operator, you probably can raise the money. But it's just so uncertain right now and I don't know whether you probably already know this, I heard Fannie Mae right now is asking everyone to put like 12 months principle and taxes and insurance into escrow, I guess, right?

Anton: Yes. Up to 18 month. It depends on the tier, if you're on tier two; it's up to 18 months. It's massive. At least I say it's cap that 10% of the loan amount, it's a massive amount. So obviously what does that mean? Now you need to raise more money. So you've likely also, I would say there haven't really lowered the LTV or increased that service, Coleridge recline that may come too but I would say it's more on a deal by deal basis anyhow now but let's assumes they are still in place that you still get can get these maximum leverage and the same service coverage. Just the fact that you have full these escrow that you need to build is a on top of the higher interest rate deal, which means that you need to get the lower price from the seller, there is just no way around.

James: Yeah. Yeah. I think Fannie is just saying we are actually out of the market, but if you can meet this, we maybe come back. Let me just basically break it down.

Anton: Yes, that's right. Yes. Yes. So actually that's always the conventional Freddie side and Fannie on the Freddie SPL side. I mean there has nothing being communicated officially, but there are solely some rumours that Freddie may stop any new origination for a certain period of time just to see their things all settled. So it will be again, the next few weeks will be extremely fascinating to watch how the market participants will from tenants to operators to lenders respond and right now we just do not know, but it's already extremely difficult even to get an agency loan into place that makes sense. But also would say it's really dangerous if someone still seek quotes from brokers and lenders that come in at the three and a half percent, because I guess they often threaten you or just to get the borrowers into the door knowing that it will be re-traded. That is another thing that borrowers really need to be acutely aware of. Do not trust any quote until you have it validated and validated, ask the broker, ask the lender multiple times, is that still valid?

Again, what we said just a couple of days ago is already outdated. It's important to be really on top of it and know what the current situation looks like. So maybe just to go quickly back to the forbearance discussion. Obviously it's a very attractive program. It's good news when you have agency loans, but I still would caution to use that forbearance and just would, because you can. Both Fannie and Freddie obviously they have implemented it. It came down from FHA, so it was not really Fannie and Freddie that wanted to do it, but it's essentially a government driven decision that it's necessary and I think it's the right thing to do and it's a very good backstop for all the operators. However, if you operate the property in a good fashion or take it if you have owned the property already for a year or two years you should have enough operating reserves to get through a month or two without having already to suffer so much with let's say a 20% or even 30% collection loss that we needed to go back to the lender and ask for forbearance.

Now could you do it? I would say you probably could, but generally speaking I would say you really should only go back when you see that you are getting close to the 1.01105 of that service cover and essentially make a case, look, it's all bad at my property. I have a collection drop for 40% or whatever it is, I need your help. But if let's say the drop is 10% or even 15%, even 20% and you go right now to Fannie and Freddie they may agree to it, but I think it will be a negative Mark with them down the road when you go for a new loan that they feel that you really haven't attempted to work out the solution on your own first before you lend to them. So I will just to be a little bit careful there in how quickly you want to pull that trigger.

James: Yeah. Yeah. And also forbearance is not free. You have to make sure you don't even meet the person for 90 days or whatever time that you're getting that forbearance.

Anton: Yeah. That's actually an interesting part. So with Fanny, it's actually not just the 90 days. If you have that forbearance, so you're allowed essentially you have that 90 days and then you can pay it back over a stretch off twelve months without any late fees and interest charge on it. Now, Fannie has communicated that you are not allowed to extend the 90 days of forbearance, which is obvious, but also that you're not allowed to be late until you bring the loan current, which includes that 12 month of repayment period if you choose to scratch it out for the 12 months. Now, Freddy so far only refer to the 90 days. I suspect that they just forgot to mention that by the way, you need to bring it current. So I have seen it on Facebook and in some other places where people say, well, Freddy is easier because you only need to have 90 days. The eviction is halted and then you can do it again.

I suspect Freddy will probably also come out and announce that you need to bring the loan current and only then are you allowed to run your evictions again. So in other words if you want to or if you need to go back to normal that your property allows to do action, the property manager, you essentially do pay after these 90 days, then if you do not and you want to stretch out for an another three month or all the way up to 12 months, you essentially have potentially 15 months at your property. They cannot do any of evictions at all.

James: How do they track whether you're doing evictions or not?

Anton: I don't know how they...

James: There's no way to?

Anton: Well always a way that they can, I'm pretty sure that they all have access to the local court system and validate that you have not filed any evictions.

James: Got it. Great. Yeah, but somehow it may trigger bad [39:49unclear] if you go and not follow the agreement [39:53unclear]?

Anton: That's a good question.

James: You can only say you violated our agreement, so...

Anton: Maybe it's not triggering the bad [40:02unclear] but don't go back to Fannie or Freddie if you didn't follow these rules to the dot.

James: Okay. Got it. Got it. So it's just so crazy. So I mean are you already seeing that a sponsors and syndicators are getting bridge letters for people on bridge? I mean it's still very early right now to say?

Anton: No, we haven't seen anything, what we have seen is that the number of bridge lenders walked away from their loans at the last moment, I mean there are several bridge loans that we know of. Lucky for us it was none that we were arranging, but I know of a number of a sponsors that had bridge loan commitments in place that are supposed to close within a week to two weeks and the bridge lender said sorry we cannot fund. So these are situations that have happened already. It's more that lenders essentially have pulled out, but we haven't heard anything yet on existing loans that are in place by then. It's really too early. We need to see how April comes in and I would say probably takes until May until things get really bad, if a property has a massive loss of collections.

James: Based on your experience, because you have gone through 2008 and you have been in the industry for a very long time. Let's say right now Covid19 is gone within one month, so everybody start going to work, what will the impact be as we move forward to the financial market? Because that's a big shock happened in the financial market. There are a lot of people, who didn't have income for one or two months, is there a downward spiral or are we a good back again, the sun shines and everything goes back to normal. Where do you see it? What would happen?

Anton: I wish I had a crystal ball, but I think the harder we land over the next few months. I think the quicker the upturn is going to be, but I still feel that they probably will take 18 months to two years until we are truly stabilized. I know some feel that everything will jump back up again right afterwards. I think the damage to consumer confidence will still be a lingering around for quite some time. Yes, there is that pent up demand for some items, but places will still suffer particularly the small businesses, some of them really are suffering tremendously and some of them are not able to come back and also I think a lot of the service employees, restaurants will be very slow in hiring. It also the reason to keep wages lower so it's the impact I think on the GDP or we probably go through obviously little jump up very quickly, again, form from a deep drop, but this year it definitely will be negative in my view but Goldman Sachs talks about roughly 3.8% for the year after a 25% drop.

I think Morgan Stanley in talks about a 30% drop, who knows? But I think when you look back on 2008, also when you look back into the savings and loan crisis I haven't been around for the actual savings and loan crisis in the past but I was when I first started out in New York in banking, I was involved with a lot of the workouts of loans that went through in the early nineties that were caused during the savings and loan crisis in the 80's. So it still took several years to get out of that. And as we have seen in 2008 it took a long time to get back running. Yes, it was a very different situation then, but here the shock, in my view, is so much faster and also it's at the global level, the global economy is suffering so much and a lot of the US companies are dependent on global rate too. So everything just will take much longer to recover. That's my personal view and again, I think it probably will take two years, 18 months to two years just to fully stabilize.

James: Got it. Got it. So yeah, that's a lot of discussion about, H=hey, this is going to be a sharp V. So we go down very quickly we're going to come back and everything is normal. Even the government saying our economy's going to be roaring back again and everybody go back, it's normal again, but what you're saying is in terms of recovery, a lot of us businesses, global trade, yes, impacted, maybe the hiring would be slowed down because the profit has been lost I guess. They want to be careful, I guess. But for example, let's say a restaurant has been closed down for two months, so the third month they open again, back to business again. So do you think that will be slower in terms of hiring as well? I mean, because they're back in business. I mean they probably have two months of rent that they didn't pay.

Anton: So it won't be very interesting to see how the human behavior is going to be at that point. So particularly the first six months to nine months. So you have seen that if all the governors at federal level to say now we all clear, obviously the virus is still lingering. So I think people will still practice a little bit more of that social distancing. Everyone is a little bit more careful. Personally I feel air travel will probably not pick up nearly as fast. Why? Because everyone feels why should I want to be in that airplane with other people next to me, I cannot really walk away. Also I think launch events will have a much harder time to come back. It's really hard to tell but I just feel based on all the downturns we have gone through. Very often people say, well it comes back fast and I think the initial recovery undoubtedly will be extremely strong. I think there is no doubt about that because we are essentially shut down to a large extent so it has to come back drastically. But really come back to the confidence level, where we were before I think it will take much longer.

James: So you're talking about consumer confidence?

Anton: Yes, yes and business confidence.

James: Got it, got it, got it. Yeah, I mean I read somewhere that consumer confidence is the most important indicator for any economy or any crash or any recovery. If that comes up, everything comes up; if that goes down, everything goes down no matter what you do that consumer confidence in terms of probably spending money and doing events and taking flights and so. So for example, let's look at class A, B and C renter’s base plus B and C is a lot of service industry. People are on pay check, pay check. I don't know I'm just thinking this quickly, they may be okay. So about third month, fourth month we are back in business. I mean, unless they are wage is lower than say impacted them but if their wage is the same they probably have that wage coming back to them again. Maybe they are scared. Maybe they want to go to a lower rental amount. Maybe, I do not know. But I think still the impact to the flights and to the big companies it's going to be more because now this is a global trade. So could that be the A-class renters are more impacted compared to B and C in the long run? I'm not sure. I'm just thinking this quickly. It depends on how fast it comes back and what is the wage they are getting and how confident they are buying.

Anton: It think when you look at most people that live in any class properties they have really decent jobs and always leave some of these jobs are now being lost or at least they are in a furlough, so they are not getting paid right now. So they can collect their unemployment; and I would say if they cannot afford it then the A class, they may move down to the B class. So that's where I would see people that struggle in these shops do not get back that I need to move down into B. I just do not see that someone who is in an A class will be willing to go into a C class property. So I would say they would probably rather move somewhere else than into a C class property. I feel kind of the same for the people that live in B class properties that moving into a C class property is for them in my view, is also kind of the last resort. Now the big question is how the residential market will evolve. We haven't even talked about that, will there be a massive dropping in prices in the short term, because no one now in some markets can even see properties.

James: Are they getting forbearance as well, the single family houses?

Anton: I think when you are a residential and not active at all in in the single family space but my understanding is if it's your own primary residence, you get forbearance you can apply for forbearance too but not for less than property. But I think I'm more wondering how it would work for someone who is in the B class property would they have an opportunity potentially then buy a property and if still not able to buy your single family home. Whether they will be able to rent a single family home instead. I just do not feel, and again, some people say that doing the last downturn, a lot of people move down from A to B and from B to C, it's hard to track. I do know that really believe anyone has been able to properly track that, but based, at least on what I have seen during that time, there was not really much movement. There was a lot of moves from A to B because of that pricing point, but it's still a decent quality property. When you are used to an A class property, but they have not really seen much coming from a B class to a C class. But again, I'm not an expert in this light there may be economist out there that have studied this.

I just feel that these movements are really happening. Now when it comes to the service employees I agree with you. Once they start back up, they need to employees right away. There is no doubt about that and that thing that's really in my view is kind of that positive flight for C class properties at the end of the tunnel. Once the shutdown is over and restaurants are able to operate again and stores are able to operate and all the other service type related business including hotels they have a job again.

James: Provided they don't have a negative wage growth, I guess which could happen as well. Businesses may be covering this, but this is, I mean, within two miles, if I'm an operator, if I'm a restaurant, I will hire back the same people. I mean I have two options, either pay them the same amount before they leave or I pay them slightly lower. I just don't hire, that's the option [53:36unclear].

Anton: So there the question again is how many restaurants are able to reopen. So we just don't know if it's just for another month or two month, I would say the majority are able to cover the loss and go back to normal afterwards or go back to business. But a lot of them I think will without some form of a bailout, wherever that comes from will probably not be able to reopen. So that's fair. That question comes in. It's there all sort of pressure, at least in the short term on wages that whoever is in the service business now does not have as much choices as they've had pre-Covid19.

James: What about the construction loan? What's happening in that space? I mean people with construction that is ongoing right now. From what I understand, the construction loan is also a loan where if the value of the building that you're constructing drops, they may ask whoever the developer is to put in more money right now, could they be in trouble as well?

Anton: Yeah. They haven't really seen that yet. It probably depends on what phase you're in, in that construction loan. If you're in the early phases or just started the earth movements or started with going vertical and you're still in year last to start your lease up, I don't really see that that impacts it that much. If you're already doing your lease up period span, I think you need to go back to your lender and find out how you can extend that loan. You'll see, usually you may have to do three years, two and a half to three years of the construction before you go into perm and you may not need another six month to complete that lease up, but if you're early or right in doing the construction I would say it shouldn't be such a big issue because when you consider the leverage for most of these loans is relatively low anyhow. Value at your 60, 65 of cost, maybe 60, 65 to value if it's a more an established sponsor. So the leverage is not really in most senses, it's not that high to start with. So I don't think that these lenders will be holding back. I'm more concerned about, again, the harm on the construction lenders that are out there too.

James: [56:31unclear]

Anton: Yes. So where you are in your eight, nine, 10% construction loans, so these players I'm more concerned about.

James: Is there a chance for the construction loan guys to say, okay, I'm not funding anymore because they go on draws based on the progress of construction. Is there a chance they said, okay, we are done. We are no more funding you; we are out, even though they have signed the commitment because they probably don't have the money. I mean it’s all come from some pool of money?

Anton: Yeah. I would say you have that risk. The law to the player I would say the less likely it is. I would say if you have a strong bank, a bank will continue to do lends, if you have a life insurance company that has provided that, they're likely will continue to lend and have the access to the funds but if it's a private lender then that would be probably more concerned that they are able to continue to fund the draws.

James: Yeah. That's interesting because I think in 2008 that's what happened. A lot of construction projects. Everything stopped because everybody ran out of money.

Anton: I mean, it could happen, we do not know but at least so far we haven't seen it where they have come to a complete halt. And again, the private space I do not know, but suddenly the institutional space hasn't come to complete halt yet.

James: Got it. So the other thing that I want to just give some education to the listeners is how a loan can be made from non-recourse to recourse. And I know since we talk offline in the past crash or you had that one of the function that you are familiar with or you are doing is like lenders are trying to figure out how to make deals from non-recourse to recourse. What are the potential ways that that can happen? I mean, we know we talk about this [58:48unclear] agency loans.

Anton: So obviously I think most of your lessons that for now have that [58:54unclear] which essentially means that if you cause fraud or gross negligence, then that loan can turn into a personal recourse and one of the examples for this kind of obvious when it comes to the property operations, when it comes to gross negligence can be that you are not maintaining the insurance. That can be, even if you forget about it, that's gross negligence. So even if it's unintentional, it's still gross negligence. If you do not verify that the insurance meets all the agency requirements, particularly when you might change the insurance from one to the other and the somehow you feel, oh, I get a better rate and then suddenly you get that better premium, but you may not meet all the requirements of the loan insurance requirements. So these are kind of the obvious things like this now will all be [1:00:10unclear].

James: But usually the agency have the specialized insurance department to verify all insurance requirements met whenever we change the insurance provider?

Anton: Well, yes they should. It's essentially the service server is supposed to track this but it's still up to you to verify that you would actually need these requirements. You cannot say well the service from that lender didn't save me anything so I'm fine, that's not the way it works. It's really important that with an insurance change, always leave if you'll get the approval from the insurance person that the lender or whoever they are hiring and gives the green light and it's a different story, but that's not as you are in a loan, that's not necessarily happening, I'm not talking about when you apply for the loan, but more down the road when you make changes to that insurance.

James: Yeah. Yeah. I mean, my experience has been like they are very, I mean, even I've made changes to my insurance and the insurance department is so particularly they go into every line item, they make sure we are reading it. So there could be some of those lenders, which is not doing a detailed job, I guess.

Anton: Yes, that's why and it really varies from lender to lender how detailed they are now. What a lot of people do not realize and that's something that we have to discussed offline is that your representation and your order, guarantor representations when you apply for that loan are also part of that bad boy car found. So what that means is that if you or any of your guarantors make a representation when you apply for that loan, that can ruled as inaccurate. And I'm not talking about, oh, I put in a value for a property that I felt was a million and it's only 900,000 or 800,000. I'm talking about a gross misrepresentation of your financial strength, of your experience but particularly your financial strength that can be triggering that bad boy carve out and we have seen that in the past.

You need to understand why particularly when it comes to Fannie, what a lot of people do not know is that each Fannie lender has a loss share agreement with Fannie. So they take a loss. If Fannie takes a loss, they take a loss too. And though they have that first loss arrangement. So they have an interest of loss mitigation. And obviously if the property somehow will not pay back the loan plus all the accrued charges they need to look through all the solutions. Then one of the items is that they will have a in house or external lawyers look at all the representations that were made pre-application to approve that loan or aside from all the documentation that was submitted throughout the loan being in place.

So it's very important that you trust your partners that they are or not lying. We have seen it a lot, a lot of people claim that they are accredited investors and they are participating in deals that are a 506 deals and because we don't need to verify that you are an accredited investor with these 506 deal offerings but then they suddenly then pop up and do their own or attempt to do their own syndication and then you suddenly realize, well you are not really an accredited investor.

James: But that's not really a loan thing, that's more of a system guideline?

Anton: No, that's not a loan thing. I completely agree. But that is just an example of another thing to read, most people they are so desperate to get into deals, particularly on the GP side, so many times they are stretching the truth or into deals that they are sometimes stretching the truth of what the true situation. So it's really important to ensure that all the partners and guarantors that you have on board, that they are not grossly misrepresenting their situations. Whether it's experience, financial strength, that everything on the REO schedule is really true. No one is really verifying this.

James: Oh yeah, no one read that in detail.

Anton: No one is looking at tax returns. So there is solely a risk that someone can inflate their balance sheet and their experience tremendously without being verified.

James: Got it. Alright Anton, why don't you let our audience and listeners know how to get hold of you?

Anton: Yeah, sure. So my email address is [e-mail] and that's probably the easiest to reach May also then when you're on Facebook or LinkedIn, just type in my name and then I will pop up. It's a pretty unusual name, so you should find me there and I would say that's the easiest to reach me.

James: Awesome. Thanks for coming on the show. I think this is a really, really timely show in terms of discussing the loans and all that. So sometimes when nothing happens, when we talk about how risky bridge loans are, nobody really cares. No passive way to look at what a sponsor is taking loan; they just look at the numbers and did that. But keep in mind, I did write it in my book like two years ago. So if you have read it, I mean, there's a lot of resources out there as well. You would have been warned about it, there is nothing wrong is just market risk, sometimes you make a lot of money doing bridge loans as well, but it just depends on the market cycle and the sponsor and the syndicator, how strong they are as well. I mean, there's a lot of sponsor who's going to write this bridge lending uncertainty as well, fine. But just for anybody to be aware of, I guess. Thank you very much Anton.

Anton: Yep. Thank you James.