Inside Commercial Financing with Colin Dubel

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Justin Smith: Hi everybody. It’s Justin again, Lee & Associates. I’m excited to bring to you the latest episode with Colin Dubel, he’s a loan broker with HARBORWEST Commercial. He’s going to break down everything you need to know about commercial lending and some of his biggest insights about the refinance market in today’s increasing interest rate environment. What that means to owners. So if you own property and you have a loan coming due, what should you do? What can you do? And what are some alternatives if you’re in a pinch? We delve into bridge lenders and cross collateralization, and we even get a little bit into cost segregation and how to zero out your tax liability. Hope you enjoy.

Justin Smith: Thank you for joining Colin. You’re in the podcast world now.

Colin Dubel: Thanks for inviting me. I love doing podcast. I don’t know about you, but maybe since COVID, I just haven’t done as many of these things as I want to. And I love nerding out about real estate, so I’m excited for this.

Justin Smith: Yeah, I have found it’s an opaque market when you think of, guests and hosting and finding shows and connecting with them and being on ones as part of the book launch. I spent a moment thinking about okay, is there a strategy here? And I found it was, not that straightforward to figure out. Like, who’s all in the space is okay, but just getting in touch with everybody. That part’s not so easy. I’m sure we can all do better.

Colin Dubel: Yeah, definitely.

Justin Smith: But shameless self-promoting brokers are easy to find, so I haven’t had a hard time people finding me to be on the show that part’s easy.

Colin Dubel: When you invited me on, I remembered you had a podcast, but I only listened to one. I listen to the one on the cost segregation. Maybe I don’t know what was that six months ago, something like that. Cause I was just starting to learn about that and was really interested. But you have a lot of episodes under the belt now. I think it was like 50 or 60 episodes. I was nerding out going through each one of them and marking down the ones I want to listen to.

Justin Smith: Yeah, it started just interviewing people for the book. Then I realized this is its own thing. And should it live on? Is there a purpose and who’s it works for and why does it? And is it worth the effort? It’s been a lot of fun to carry on and to figure out like what’s its place in the marketing world and what’s its place within like clients and within our firm and within the country and people in our industry.

Colin Dubel: I think the podcast thing is really interesting for our industry, because you can jump on and listen to a million podcasts from Joe Rogan and more social experiments and everything. But for professional podcasts, you think there would be more and there’s not because I think people think that people don’t care to hear it. That professional podcasts are going to be boring. That it’s not going to be entertaining. I’m listening to the podcasts for entertainment, but at least me personally, and probably a mix of everyone else is I don’t really subscribe to a lot of entertainment podcasts. All the ones that I listen to are educational. Things that are going to be really valuable for me, that I can digest on the car ride, 30 minutes into work or something like that. And I think in professional podcasts, especially in like on our industry, there’s a lot that is misunderstood and there’s a lot that can be easily explained and digested and just nobody makes it because nobody thinks it’s going to be absorbed. So I like getting on these things because I think it’s really helpful for people to listen to a professional podcast get the most out of it. Rather than reading a book or, going to a full blown seminar, downloading a course, in two or three podcasts on different topics, usually take care of it.

Justin Smith: Yeah, let’s say you’re buying a property first time out of state. You’re figuring out the lending side of things. This is something that you can find it and then you can get plugged right into where you need to be? I love it to be able to have that be part of like the learning process.

Justin Smith: So, how long have you been in the game? I remember researcher at CB.

Colin Dubel: It’s funny, I’m actually going to remind you about something that you may not remember until I’m about to remind you. So I’ve been in commercial real estate for over a decade now, going on 13 years. The person who actually led me into commercial real estate was actually you and you don’t remember this. So for any, anybody listening, Justin and I both went to UC Irvine. Justin was four years ahead of me. So as I was coming in as a freshman, you had just graduated.

Colin Dubel: So you were, I guess 23, you were one year out. Justin’s always been a very well connected social guy knows everybody. And I was talking to some of the guys, and they said, ” oh, you’re thinking about commercial real estate. You should talk to Justin.” And you and I met in Irvine at the Irvine Spectrum, and you let me get coffee with you because you were two years into your career. When I was like a junior and I was asking you a million questions about commercial real estate. I had no idea what I wanted to do. I was across the board. Actually, after having coffee with you, you talked it up so much. We met at Javier’s I remember this, the spectrum and you talked it up so much. I was like this guy makes this sound great. This is awesome. That’s when I started getting into the rabbit hole and going into things. So a full circle moment. I just remembered that last night and I was like, I got to talk to Justin about this.

Justin Smith: When the student becomes the master now, Colin.

Colin Dubel: So Justin actually got me into commercial real estate, graduated UCI. Then I went to worked for CB Richard Ellis, CBRE. I was a market analyst, I was a research analyst, financial analyst. I did the whole analyst around there. CBRE, most people who listen probably are familiar, but really a full service firm, just like Lee & Associates. So I was able to really just dig in and figure out what I wanted to do. At the time I had no idea. I just knew I wanted to do commercial real estate. Big sexy buildings, potential for income. Okay, let’s figure it out from there. And I really, even within outside of my job, I just talked to everybody. I took everybody out for coffee, property managers, appraisal departments, sales, leasing, and just learned and just absorbed as much as I could outside of my analyst role. I got my resume builder there and then went to the Irvine Company, which listeners aren’t familiar as is a very large developer and real estate owner in California. And got working with the Irvine company for a couple years. Got that on the resume. Those are two very massive companies, very political, very large, very influential, but it just really wasn’t my style. I’m much more of a laptop by the beach kind of guy and all about my freedom. The suit and tie just really weren’t for me anymore. I was actually speaking to someone that I interned for in college at UCI who did commercial mortgages. I was telling him; I love the analyst stuff. I love numbers and everything, but I also like talking to people and why can’t I have both? And he said, “you can come work for me. You know more than what most people starting out would know and I’ll teach you the rest.” I did commercial mortgages at a small company here in, Newport Beach, for two or three years. And then just, 2017, it was just my time to go out on my own. I reached my max potential there. I wanted to start my own company that had, my own core values and build my own legacy. So that started in 2017. I formed my company HARBORWEST Commercial, and then running smooth ever since. So as of right now, we’ve definitely built up, but right now we’re doing about a hundred million in loan volume per year nationwide. And we’re a commercial mortgage brokerage for all commercial asset classes. So office, industrial, retail, multifamily, special purpose. We do a little bit of everything and so I don’t have one particular asset class or state or profile to do. My value is I need to have a solution for everything. If I have a business owner that wants me to refinance his carwash, owner user and he goes, “Hey Colin, I also have this retail strip center in Texas that I need to pull cash out on because I need to apply that toa bridge loan to purchase a retail multi-family in Sacramento.” I need to be able to have solutions for all that. And when you’re dealing with that type of stuff, as you’re well aware it can get really overwhelming if you are scattered across different lenders, different sources. So we provide a service of commercial mortgage brokerage for kind of midlevel investors, entrepreneurs, family offices and we’ve been rolling ever since, and things are going great.

Justin Smith: Yeah, I am one of the ones who I will look at your email to see what rates are doing. What they’re doing in industrial or what they’re doing in different areas. I love that. It’s valuable. I love that. It’s right at the top. It’s top of mind for people and, that’s something that like, I rely on.

Colin Dubel: It is, and people care and all. It’s a whole other conversation just on interest rates. Interest rates are interesting, especially in marketing for banks and brokerages like myself, because that’s what everybody wants to know. When I get a question, whether it’s a new guy or a seasoned investor, what’s the rate. What’s the rate, that’s what people want to know? But the reality is most of the time with when you’re marketing rates. It they’re best case scenario and they’re also guesses. And what I mean by that is there is so much that goes into an interest rate that it is impossible to just blindly quote rates on a website or a marketing piece.

Colin Dubel: So a lot of it can actually be really misleading. So what I’m finding is a lot of folks they’ll call me and say, oh, on this website or this person said interest rates should be about this we’re told. And yours are higher. Why are they higher? And then we have to educate them on all the factors that go into interest rates. And really there’s three, there’s the actual economy and index rate you’re basing it off of which is constantly fluctuating. And then there’s the risk profile of the deal, the riskier the deal the higher your interest rate, and you don’t know anything about the property or the borrower. You can’t really ascertain that. And then the third is how the borrower wants to tailor it. The borrower does have some leverage, over their interest rate as far as bargaining chips for terms. For example, if you’re willing to take a longer or heavier prepayment penalty that can get you some rate discounts and things like that.

Colin Dubel: So what we try to do is educate people that, hey, look, here is the most accurate piece that I can give you to answer your question, which is assuming everything’s fully qualified down the middle and we’ve surveyed the top 25 lenders in the space. So here’s a good idea of where things are at this month. With a little asterisk of, okay, now let’s dig in and it could be worse, but it could also be better. So let’s see.

Justin Smith: For my single family loan broker I ask him, what’s the rate going to be like?” It stings, but I have to ask, and I now ask just for fun because that’s what people want to know.

Colin Dubel: Residential mortgage lending is its own beast. So not to put it down, but it’s its own complexity. But residential is much more streamlined than commercial. In commercial, these are always investment properties. So they are much more risk based pricing and you don’t know what the risk is until you get into the details of the deal. I think that’s what people are used to is just finding rates online for when they did their home refinance and just going my credit score is 800, what’s my rate? So the education piece is really important. So we have a whole section on our website. We really try to build out our website to be educational, to be a guide because I think a lot of mortgage brokerages, they don’t educate the clients. They want to keep it some big veil where they hold all the secrets and everything. That’s not how you do business. People want to feel comfortable, and they want to understand what they’re getting into. They want to understand the basics. They want to learn it at their own pace. And then have you help them guide the rest and feel comfortable before they work with you. If you’ve never checked into our website, it has all kinds of resources.

Justin Smith: I appreciate that you get it right. You don’t cover information. It’s all about how much value can you bring them. And then, enough value in education can then build that comfort level, build the rapport and build a bridge.

Colin Dubel: Yeah, because anything that I do in my job as far as, the meat of what we do, anybody can learn it over time. It’s taken me a decade and I’m still learning, but my point is anything that we do can be looked up. So why not give it to the client for free, explain to them so they feel comfortable. My value is then extended into relationships, meaning who I know and how I can leverage that relationship and then my experience. So when you go through a deal, every deal has a problem even the cleanest deal. Something always comes up. So my values really in educating the client, the relationships that we’ve built with lenders over the years and the leverage that we have over them to negotiate terms and to solve problems. And then to guide the client through the process. If any issues come up, be able to effectively deal with them to get things done correctly and smoothly for her client.

Justin Smith: So you and I worked on 10 deals or so in the last year together with clients that we have together. Then things got bumpy in the market. I feel like we did not have the bad experience that many people have had out there. So with the great repricing of this summer 2022. What would you say the past couple of months, how did we transition markets? What is today’s market in relation to yesterday’s market?

Colin Dubel: Yeah, good question. Interest rates are up is the general idea. That affects things a lot more than just, oh, we have higher prices and higher payments. At least the way that I look at things because every lender uses different benchmarks, but the ones that we use most commonly are going to be the prime rate for owner user commercial, real estate finance and short term lending variable loans and then benchmark as the 10 year treasury for investment properties. So the 10 year treasury is as of today of this recording, is at 3.35% and jumped 15 dips over the weekend and that’s over 2% higher, 2%. 200 basis points than it was 12 months ago. And most of that’s been in the last six months, as things really started to change. So deals that we were quoting at, 3.75% are now at 5.5% today. That has the normal effects that everybody would imagine. Rates are up so your payments are up. So you second guess if you’re going to, do that deal or purchase that property or what your cashflow is going to look like at the end of the day and all the normal stuff. But where people are not thinking of, and this would probably be the one takeaway I would want listeners to know about what’s going on. Is that interest rates also affect underwriting, which affects equity and down payment? So, when a lender goes to underwrite a commercial property and determine what the maximum loan on that property is, whether it’s a purchase or a refinance. They’re going to go through a couple different tests, but the main test they’re going to have is underwriting the cash flow to see what loan amount it’s going to get to based on what they’re looking at. So the pieces to that are going to be net operating income, which will be similar to the investors that they may hit it for some reserves or vacancy. They’re going to always have a little bit more conservative and different NOI than the investor. The amortization, the debt coverage ratio, which is your “buffer zone” over the mortgage payment, which can vary a little bit. And then the interest rate. So, let’s say we were six months ago, we were underwriting to a 3.75% interest rate. And if you did that calculation, the lender would say, “Hey, your maximum loan amount looks to be about 65%. That’s what we’d be willing to offer.” You underwrite to a 5.5% rate, that increases your mortgage payment. And if you have to have the same debt coverage ratio, that’s going to lower the loan amount that you qualify for. So my point to that is that with higher interest rates deals that were at 65% loans six months ago are now at 55% loans today.

Colin Dubel: So the one takeaway I would say for investors is to build in and prepare for higher down payments. These higher interest rates, especially if they keep climbing are going to lead to higher down payment requirements and I think more importantly on your refinances. So if you’re somebody that did a five year fixed loan at 3.75% five years ago in 2017, and your loan’s coming due later this year. Had interest only payments, you haven’t paid down the loan principle at all your loan coming to and you still have to pay off that let’s say $4 million balance. But when it qualified for 4 million, five years ago, it’s only going to qualify for 3.2 million today. So now your loans due, you have an $800,000 gap that you may or may not be able to come up with. I think reevaluating your portfolio and seeing what loans are coming due, where you’re at, what things are looking like and evaluating that portfolio is very important right now.

Colin Dubel: If you pay down the loan, you’re getting a great interest rate, you have other properties, you’re not too worried about it. You’ll probably be okay. But for guys that don’t have a lot of other properties in their portfolio and d don’t have a lot of cash sitting around in the bank to pay it down, you might be in a little bit of trouble. You might need to reevaluate and bring in a small equity partner to pick up the gap. We may need to plan on early refinancing and cross collateralizing with some other properties or negotiating with the lender or doing a bridge loan. Everything’s going to be very situational but what you don’t want is your loan to come due and just assume that, oh, I got a 4 million loan five years ago. People think that oh my property’s only appreciated, especially with inflation. My LTVs going to be lower, so why wouldn’t I qualify? Which has a point, I guess I can see that. You assume my LTVs lower; we’ll get the deal done but the cashflow and the underwriting is the piece that people miss. So I want to hammer that in is that if you’re listening, you have loans that are coming due take a look at your portfolio and have somebody, whether it’s me another mortgage broker, your current lender, look at the deal and prepare early because you’re probably not going to get that same loan amount that you need to pay off.

Justin Smith: Yeah, it’s amazing how many different ways, just assuming you can keep things going, have gone along the wayside under your current assumptions.

Colin Dubel: I’m in the thick of this right now where I’m having clients come back to me and new clients and everything that I just mentioned are strategies that we’ve just implemented. One guy, his loan was already past due. The lender’s going crazy. We had to get a bridge loan for him just to buy him some time because the loan amount couldn’t get there. We’re working right now on a refinance where we’re going to keep it with the same lender, but we’re going to cross collateralize it with another property that he has to bring the combined underwriting where it needs to be and his loans due in a couple months. There’s a lot of different strategies. It’s very situational so just be prepared.

Justin Smith: I’ve only been through one big cycle, but I remember, the 2008, 2009, 2010. You had to stroke a check just to refinance. And so who had to do that? How much and what was that going to bring back to the market? And that was my first time like figuring out, catching the falling knife and what that means and what it looks like. And when are you then confident to recognize capitulation and to pounce on it. And this is from a brokerage perspective at that time. So that was an interesting first journey to at least see that and be more aware of it this go around of what’s our version of that now.

Colin Dubel: It’s really interesting too. I’m kind of where you’re at when the 2008 hit, I was just getting into the industry. I’ve just now seen the full cycle. So being able to look at this and predict what’s going on and see it in real time. Unfortunately, I think this is going to create a lot of opportunity. I think most people can agree because a perfect situation like this is that refinance is going to come up for certain properties, certain investors, they’re not going to have the wherewithal to get it done. They’re going to have to let the property go, that’s a trend, it’s going to happen to a lot of people. I think it’s going to create a lot of acquisition opportunities for guys that are stacking some cash getting ready to go.

Justin Smith: So if you imagine another interest rate increase or two. Or everybody’s, continues to place your bets on how many we think we’ll see. That is interesting to think of another percentage point and how that would increase things or how much more that would affect people. If your 65 turns into 55 turns into 45.

Colin Dubel: Yeah, you can read up as much as I do, and I keep track of everything going on. But as of today, we’re, in this early September. The next Fed meetings in a couple weeks on the 21st and what we’ve been told and what we expect is another 50 basis point increase the federal funds rate. Inflation, from the last report has leveled a little bit, but it’s still very high. They’re just going to keep increasing interest rates until inflation gets fully under control. Nobody has the crystal ball. We don’t know how much or how long, but it’s not going down, that’s for sure. So we’re just preparing for more and more drastic interest rates and situations. So just getting everything prepared for our clients is really all you can do.

Justin Smith: Tell me the pros and cons when you go to cross collateralize and you pull more assets into your refinance situation. How’s that changed kind of the good and the bad of doing that in terms of you as the borrower and your How’s that change things? ability to buy and sell more property. This is a selfish question, by the way, I really would like to know more about this.

Colin Dubel: I think when you cross collateralize something, it’s probably going to be, I want to say last resort. If there are other solutions to it, then, to get the job done, you want to do that and hopefully cross collateralization would kind of a last resort because in a lot of cases, it does get the job done. It’ll bring down the LTV. It brings more collateral to the lender. Usually helps meet underwriting requirements if the other property is cash flowing really well. And that’s the whole job at the end of the day is to get the deal done.

Colin Dubel: But when you cross collateralize something, it’s tying up another piece of real estate and they’re interconnected. So you lose your flexibility. My goal for my clients is not just to get them the best deal, but also connect them with most reliable lender and to give them the most freedom and flexibility possible and just really get them set up. And when you cross collaterally something, you lose that flexibility. And on top of that, that’s assuming that the other property doesn’t have financing on it. It may have 10 year financing on it with a five year prepayment penalty or other conditions attached to it that you’re messing up, it could cost you to do it. The other thing is it’s not offered or accepted by a lot of lenders. The cross collateralization thing is a little more common with more regional and community banks but other types of lenders, it’s not a normal thing.

Colin Dubel: You sell an asset out of a bucket that’s been cross collateralized? You can, but usually when lenders that do cross collateralization of portfolios, they’re going to have release provisions. So, you’ll be able to get it out, but they’re going to basically re-underwrite and say, “okay, if we got rid of this, where does the LTV lie? Where does the cash flow lie? So let’s say you had a property cross collateralized for three years. Pay down the loan, increase the NOI on the portfolio or the property and now you get rid of one property. You’re within the guidelines that the lender wants. They’ll allow you to release it. You have a little additional paperwork to fill out, usually a little fee, but it’s not the end of the world. It just needs to make sense for the lender. So just back to my point, it’s a solution that I think a lot of people don’t think of but probably not the most preferable. Hopefully there’s other roundabouts.

Justin Smith: Yeah, tell me how often are bridge lenders, if you’re doing a hundred deals in a year. How much of what you work on in a year has a bridge lender component to it?

Colin Dubel: Gosh, I wish I had it with me. I actually did like an end of year kind of analysis for 2021 for last year. If I had to put a percentage on it, I would say probably 25% of the deals that we’re doing are bridge loans. So I’ve thought about that, and I think a lot of it is situational because when you’re a mortgage brokerage, we’re problem solvers. You come to us because something is more complex. You need to get a deal done where most other people can’t do it. Let’s say you have a multi-family property with Wells Fargo for the last 10 years, they can easily call their Wells Fargo rep and get another multi-family loan. It may not be the best loan out there. It may not be the best interest rate or the best terms, but it does the deal. It does good enough. But with bridge financing, when you’re doing a bridge loan, that means you’re stretching in some way. That means you’re stretching on cash flow. You’re stretching on a time horizon. You’re doing something that requires outside of the box thinking. As a mortgage broker-

Justin Smith: Renovations, you might be stretching there.

Colin Dubel: Exactly. Renovations to stabilize. It’s something that the bank’s not going to be able to do where they can’t pick up the phone to call any random bank to get a stabilized, clean quote. So as a mortgage broker, I tend to do a lot more bridge loans than if I had a counterpart at that Wells Fargo or something like that. So yeah, about 25% and I think that’s going to increase. I’m really focused on a couple different things at this point in time, just to pivot with the market. And just going back to kind of predictions on where things are going to go and what’s going to happen. I think people are going to need bridge loans a lot more, and I think that’s going to be a more. Common solution then cross collateralization or pay down or bringing in a partner. If you have a deficiency, you have a gap there bringing in a 10, 15% partner to own a part not a lot of people are going to be cool with that. I like to own my own properties. Paying down $800,000, I don’t want to do that either. Tying up another property, I don’t want to do that. So bridge loans for a lot of people, especially if it’s a short term they think they can sell it. They just need to buy a little bit of time. Bridge loans, I think are going to be even heavier of a percentage for us over the next year or two, as we see more opportunities come up, more foreclosures, more people in trouble. We already have a pretty strong bridge program at least for our investors, but I’m really focusing on getting some preferred terms and kind of specialized programs lined up ahead of time. So that’s one of probably the two or three things I’m really focused on right now, actually that you mentioned it is getting our own kind of proprietary bridge loan program set up where I’m not funding, it will be funded by another source. But to get preferred terms for special situations for my clients that dealing the states that we go to the size range, the asset classes and use our relationship, to do that. That’s one of the things we’re focusing on.

Justin Smith: There’s going to be a lot of people in a pinch and it’s a pinch hitter. What’s good and bad of bridge lending? Going that route rates are higher. The time horizon has some other rigidity to it on occasion. What’s the good, the bad and the ugly there?

Colin Dubel: So with bridge lending, the thing to remember is these are meant to be short term loans. They are meant to be a means to an end and that’s it. You’re not keeping this loan for five, 10 years. These are not long term loans. So the most obvious cons are going to be they’re a little more expensive. They’re going to be higher on interest rate. They’re going to be higher on fees. Again, rate covers risk, whether that’s a bank loan or a bridge loan. And so if you need a bridge loan, it’s because your deal’s riskier for one reason or another. So the rate will cover that risk. So you’re going to be paying higher interest rate. You’re going to be paying higher fees. But it’s going to get the job done. Bridge loans are going to get you out of the pinch, which at the end of the day, I would much rather pay a higher interest rate and receive lower cash flow than have my property foreclosed on me. Or if it’s a purchase, lose a lucrative opportunity. Whereas, if we’re talking about a purchase, if I want to buy a property for 5 million and the bank says, “I can only give you two.” Rents are way under market. This property needs a lot of renovation. Do you know this property in a year could be worth, seven or eight with 500 grand in renovations? Are you kidding me? Bridge loans save deals, but they also create opportunities. So if it’s just on an acquisition, a lot of times you think of it as a steppingstone, then it makes more sense. You don’t think of it as your permanent loan. You say I’m using this financing to achieve this result. And at the end of the day, yeah, I’m paying a higher interest rate, but it’s well worth the amount of value I’m going to create in the property by utilizing this leverage. So, it’s just that a steppingstone.

Colin Dubel: So cons, high interest rate, higher fees, but most bridge lenders we try to level that out with interest only. So we don’t require principal and interest. It’s going to be interest only, which helps out a little bit to even out the cash flow. A lot of times you can even do a pay rate, which means that you may pay 5% interest, only payments but your real interest rate is let’s say 7.5% and that Delta of 2.5% is tacked onto the balance due when you go to pay the bridge lender off. So we try to help mitigate the higher rate in payment through interest only pay rate, couple other strategies to really balance it out and make it really make sense for investors.

Colin Dubel: So in the pros, again, you’re going to get a deal you may not have gotten before or save a property that otherwise would’ve been foreclosed. You’re going to close a lot quicker, much shorter time horizon. You’re going to get higher leverage than what the banks are going to qualify you for on a cashflow basis and you’re going to get a lot more flexibility. For a perfect example, we just did a retail strip center and we needed to close quickly. Any bank would have a 60 day time horizon and they would want estoppels and SMDAs for most of the tenants. The bridge loan that we did close in two weeks, no appraisal, no estoppels, no SMDAs and they were able to get him 65% leverage when it was only qualifying for 45% leverage. So means to an end.

Justin Smith: 1031 exchange timelines, it can help you in a pinch, right?

Colin Dubel: Yes.

Justin Smith: And it can help you in a pinch when you are competing against all cash buyers. Those were some of the things that we worked on together where that helped. It seems like a tool that can help in a lot of different ways.

Colin Dubel: Exactly.

Justin Smith: My bush league question of the day is that debt yields and dealing with banks. Are you much about the world of debt yields and what they require and negotiating them? Could you gimme a little 101 on that?

Colin Dubel: So when a lender looks at what’s the maximum loan amount, you’re going to be able to get, the type of financing they’re going to be able to offer. There’s a couple different metrics. The most common that a lender’s going to have that is very apparent is an LTV ratio, loan to value. So 70% of the value, 60% of the value, they’re going to have a maximum based on their comfort level. The second is going to be a debt coverage ratio, DSCR, debt service coverage ratio. That is going to be basically your buffer zone over the mortgage payment. So let’s say, for every dollar of mortgage payment the lender’s going to want to see a $1.25 of cash flow. So 25% buffer of cash flow, to go over the minimum there. The debt yield is going to be the lenders yield on the debt. So the NOI, the net operating income divided by the loan amount. So, it tells them basically what their return is on the loan itself. If that’s what they sold the property for, and also lets them figure out, okay, based on this NOI, how long is it going to take to recoup the money if we kept the property? If we have 12% debt yield, is it going to take eight years if we kept the property. What could we sell it for? So, it’s probably the third metric that lenders are going to use to determine their loan amount. I would actually argue that it’s probably the least used, however. So we do work with lenders that require minimum debt yields, but most lenders are going to be focused on that coverage ratio. And it’s across the board so every lender, even beyond those three, a lot of lenders have stress testing and sometimes they don’t even make sense. Their interest rate’s going to be 5%, but they stress test it at 7%. And it’s like why, we have a 10 year fixed rate. It’s never going to be a variable. It’s never going to be 7%.” Oh, that’s just the policy.” And even if it’s silly, if they’re the lender with the best deal, you just got to go with it even if it doesn’t make sense. So those are the three kinds of most common metrics, but even beyond that, lenders sometimes have their own odd stress testing. Half of my job is really tracking all that and knowing what lenders are going to require, and where they’re going to be at on this.

Justin Smith: Yeah, that’s helpful. I was talking with a small institution that’s buying multi-tenant industrial parks across the country, and he was griping about how he would negotiate debt yields. I was just thinking about how often that can change or maybe I’m crossing one of the lessons I’ve learned in there, because I would think like debt service coverage ratios, maybe there’s a little like variation. But I can’t imagine it changes a whole lot if you’ve got two or three lenders on the line that are all willing to do a similar deal and one can tweak your coverage ratio to be the winner of the beauty pageant. I wasn’t sure if that was another thing that is on the list of things you could horse trade or negotiate.

Colin Dubel: It is. You’re right to some degree. I would say negotiating a debt yield requirement. We’re going to have about the same amount of success as negotiating a debt coverage ratio reduction. So I would say, and all these are negotiable. If you were looking at a lender’s website or something like that there’s going to be guidelines, but everything is negotiable. I would say that on both of those it can be tweaked or negotiated slightly, but usually we don’t see a whole lot of movement. Lender may go from 8% debt yield to 7.5% debt yield or a 125 debt coverage to a 120, but it has to meet guidelines and it has to make sense.

Colin Dubel: So there has to be some mitigating factor there, even if it’s soft to be able to go in and say that. We’ve done it many times before, to squeeze out loan dollars where we ask the credit officer, “Hey, look, here’s our loan package. We really need a certain debt yield or a certain debt coverage to get this loan amount to where it needs to be for the refinance or purchase. Here’s what we got, we’re willing to do this. We can bring over half a million in deposits. We have three recourse guarantors.” And really build a case to be able to earn that exception. So they are made, but you got to ask, and you got to know right way to present it and you got to know who to ask. And sometimes it even comes down to a favor, a lot of with mortgage brokerage, this is very relationship based. A lot of the times it’s, I’ve had exceptions made that I will be completely honest, made no sense. Like I should not have gotten them. I did not have enough meat on the bone. I did not have enough bargaining chips. It was a skinny deal, but I was able to get things done. I brought them 10 million in loan volume this year, or known them for 10 years, like able to get these exceptions, done. So, it can be done but everything is situational.

Justin Smith: That’s part of working with the pro. That makes a difference. I was so happy when I learned that you knew the single tenant net space. That’s when I was in the pinch, trying to figure out how to help someone and do a good job, helping connect them with the right person. So that was one where, I’m so thankful that in my mind before that moment the mortgage brokerage business, I was thinking about local and users. And I wasn’t really thinking about out of state and single tenant net lease. That was a stretch of my own imagination. That was a great journey that we went on. And that was interesting to think of how you can be set up to be a solution for people, for any of their issues or challenges that they have in the commercial space. That was a great one where we’re going from industrial into like a basket of a handful of different variety of single tenant net leases across different states. You were able to know who’s the player for which one and which state and which asset class and bridge lender. And have that all be something all under one umbrella that you can manage, and you can know the moving pieces and you can help hedge different moving pieces of it. So that was something I’m very thankful for and where you opened my eyes as to what is possible in your world or how you can be a resource for clients.

Colin Dubel: Thanks. The net lease thing is really interesting. We’ve done a lot more of those in the last couple years then we’ve ever done. It’s always been an asset class. We’ve always done those deal pre-Covid but, post-Covid what we saw, when everybody had their portfolios, their retirements, their brokerage accounts. And in 2021, COVID hit and then everybody got this giant increase in their portfolios. The guys that had 300 grand in Tesla stock, and then all of a sudden, they have $2 million in Tesla stock. We had a lot of those guys go, “Hey, I just made $1,000,007. I want to take it out. I want to go and invest it in real estate.” And we did. I was talking to my buddy about this the other day and having guys that aren’t really real estate investors, they know they want to get into real estate. They understand appreciation. They understand depreciation of tax benefits. They understand the value there, but, established tech guys or, lawyers or whatever it was doctors, and they don’t have time to be real estate investors. They just want to put it in real estate, but not have to worry about it. Triple net leases are really interesting because they’re completely hands off. It’s very easy to understand, it’s one lease, one number, tenant takes care of everything. You get a check in the mail. So you don’t have to understand anything really. This just allowed you to invest in real estate still. So my point is that it’s always been around, but literally in the past two years, I think I did more triple net deals than anything because of the volume and attraction. And we’ve seen cap rates on those go down incredibly. Triple net deals that were six and a half caps are now five cap and they’re just really popular. But secondly are the lenders for these triple net buildings are interesting because they’re really spread across the board. These were usually reserved for smaller local banks and credit unions. Now that it’s become a national asset class, there are specialty programs that have come up. And so if you try to go out of state, one of the biggest problems with getting loans out of state especially if they’re smaller, is that a lot of times they’re best for the local guys, local banks and credit unions, but they don’t like out of state borrowers. So they don’t want a California borrower coming into Arkansas to get their Taco Bell. They want their Arkansas guy.

Justin Smith: They may have a mandate that won’t allow them to. So they could only lend to their community.

Colin Dubel: So what we had was this huge volume of people buying triple net deals out of nowhere. And there was a disconnect because there weren’t enough lenders to service it or to know what to do. I would say last year, right now, we’re September 22, I would say about a year and a half ago, I started meeting with a lot of people, hit the phones, flew out to a couple areas and really solidified relationships with nationwide, triple net lenders that can lend to any state, any borrower. So my Arizona guy going to buy in Chicago or my California guy going to buy in Florida, it didn’t matter. Geography where you’re located didn’t matter. It all comes down to the tenant and the numbers. I think triple net financing is a whole other podcast, eBook type thing. So we don’t have to get into the thick of it, but it definitely has its. intricacies.

Justin Smith: Yeah, that was fantastic to have that be an area where we could collaborate. I think we’ll wrap it up. Is there any parting advice? I mean your biggest one. I think I took out of this was know your lease maturity date, and if it’s up soon you got to be proactive about that and start thinking through what you’re going to do. And if it’s one year out is when it should prompt action. Or what would you say people should be looking for when they’re looking at their loan and they’re saying, oh man, this is something I need to take action on?

Colin Dubel: So, I think the key takeaways for this chat for financing in today’s market is just be overly prepared. So whether it’s a property you want to acquire or whether it’s a property you need to refinance, be overly prepared, be overly conservative, cause that’s going to save your butt. Take a look at your portfolio, go through your loans, figure out when your loan due dates are. If you have a fixed rate, if they’re going to be going variable to what they’re going to be variable to. If you have pre penalties. Have someone like me or your another mortgage broker or a lender that you trust, underwrite the deal to see, okay in today’s market where’s the loan amount, probably going to lie. And depending on what that is and what the dates are, you’ll need to pivot. Prepare for a pay down, prepare for a bridge loan, start talking, preparing partners need that. So just be prepared on your refinances.

Justin Smith: For acquisitions, I would say underwrite, higher down payments. So again, every property is unique as to what down payment is going to be required. It’s mostly cash flow and risk. So have someone like me analyze the property, but the days of 25% down, 30% down are no longer here. You’re going to need be prepared for higher down payments. So that means stacking cash. That means start talking to colleagues, family, and start bringing in partners. There’s going to be opportunities that are coming up, so you want to be ready. So stack your cash, have a list of guys of, Tommy’s willing to bring in half a million. Timmy’s willing to bring in 300 grand. Get a list of guys together so when these opportunities come up, you’re stacked with cash, you’re ready to go and you can pivot to really any situation. You’re on my list. I hope the industry has lived up to the hype of whatever I told you at Javier’s at two years into the business. I would hype it up even more now, knowing what I know now.

Justin Smith: If it means anything to you man, happier than ever, the business is great. I’ve reached a point where I can select my engagements. A lot of the tips that you gave me years ago that led to this, where we can have mass marketing and really be selective on our engagements and have the full freedom. And I’m very happy and very excited for the future. Thank you, Colin. It’s Colin Dubel, HARBORWEST. Appreciate your time today.

Colin Dubel: All right, man. Catch you on the next deal.

Justin Smith: I want to thank you for joining me on this episode. And if you liked what you heard, please drop me a note at jbsmith@leeirvine.com or text me (949)400-4786 and let me know if there’s any follow up you would like. If you have any guests or anyone, you’d like to hear interviewed or see on the show, let me know. I’m always looking for new exciting guests and look forward to connecting with you. Thank you.