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w mu - o s n e co b u y 2011www.multi-housingnews.com February 2011
Aligning Owners And Renters in Fractured Condos
D.C. Metro: What’s Next?
Fundamentals from the Market’s Peak Return
How to Divert Construction Waste From the Landfill
Demographic Changes That Will Rock the Apartment Market
6 February 2011 | Multi-Housing News
Q&Aexecutive insight
Doing Boutique-Style DealsMortgage Equicap’s Daniel Hilpert discusses changes to the mortgage industry
Mortgage Equicap is a boutique commercial mort-gage broker and advisor, providing clients with as-set positioning and capital structure strategies. Ac-cording to Managing Director Daniel Hilpert, the value proposition of the firm is its ability to help clients maneuver through changing markets to re-alize the greatest value of their real estate interests.
Mortgage Equicap received MHN’s 2010 Excel-lence Award for Best Transaction. At that time, the firm had closed in excess of $200 million for construc-tion financing since the beginning of the credit crisis.
The winning deal involved a prominent devel-oper who engaged the firm to arrange $16 million in construction financing for a boutique condomin-ium on New York’s Upper East Side. The immedi-ate challenge was to convince a lender that there was a market for large condominium units and that the loan amount should not be based on the
project’s rental fallback. The loan submission was initially turned down by most lenders, but the firm succeeded in convincing two local banks to provide the financing. As the credit markets continued to deteriorate, however, both lenders grew concerned about the risk of participating with another institu-tion. If one of the lenders were to be shut down by the FDIC, the developer would not be able to use the entire loan facility and complete the project.
When one of the lenders eventually decided to pass due to counterparty risk, Mortgage Equicap had to convince a third lender whose limit was higher than those of previous lenders, but still not enough to provide the developer with the requested lever-age. Because this third lender couldn’t provide the entire loan amount due to the institution’s lending limit, Mortgage Equicap had to arrange preferred equity on top of the first mortgage loan. After ob-
taining credit approval from both funding sources, the firm had to negotiate loan documents, the op-erating agreement and the inter-creditor agreement between the two capital providers. MHN’s Editor-in-Chief Diana Mosher met with Hilpert to discuss where the market is headed and changes to the mortgage brokerage industry since the recession.
Congratulations on winning the 2010 Excellence Award. What transactions are you working on now?We recently arranged a $13,500,000, five-year, fixed-rate mortgage for a portfolio of apartment buildings in Brooklyn. The owner wanted to con-solidate several loans into one blanket mortgage at the most competitive rate and at the same time have the ability to draw additional proceeds (cash-out) on an as-needed basis. [We arranged] a 4.5
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www.multi-housingnews.com | February 2011 7
percent, fixed-rate, non-recourse mortgage with a 30-year amortization schedule. In order to give the borrower the requested flexibility, we negotiated a five-year A note to refinance the existing debt and a five-year B note structured as an interest-only line of credit. The B note can be drawn at the borrow-er’s discretion and paid off at any time without pen-alty. I’m very proud of this transaction because we packed everything you can imagine into one deal with a big bow around it.
The new facility will give the borrower the flex-ibility to draw additional funds over time, but also significantly improve cash flow due to the lower rate and the interest-only component of the B note.
How is a boutique firm different?When somebody comes to me and wants to refi-nance a building, the first thing we do is the full underwriting that a bank would do. We check vi-olations, incomes and expenses, real estate taxes, certificate of occupancy, mechanical systems. This may sound logical to you, but most brokers don’t do that. A guy in my office runs through all the viola-tions. Then we have a meeting with the client. We ask: “I see tenant 5B has submitted 20 complaints about hot water. What’s going on? Do you have any deferred maintenance?” We run through a very de-tailed checklist. That’s number one. Number two is that we show our clients two underwritings—how we would like to present it and exactly how the bank does it.
If somebody comes to us and says the real estate taxes are $100,000 a year, we have to know exactly how to value the real estate taxes properly. Then we go back to the client and say, “Look, your real es-tate taxes are 10 percent of Effective Gross Income. There is something going on here. Have you filed RPIE statements? The city will most likely bump you up.” This matters because if the lender hires a smart appraiser, that appraiser will tell the bank that the real estate taxes are light, will double them up and he’ll lose $1 million in valuation. And this could be a problem down the road. You think you can get $5 million when you refinance, but then the appraisal comes back with higher real estate taxes.
You’ve done a lot of work with broken condos. What’s the scope of your program?It’s a national program, but we’ve been more suc-cessful in the New York area because the real estate market in New York has recovered—well, that de-pends on the asset class—but, it’s less problematic than other areas. The New York market is more
over-leveraged, but the general supply and demand fundamentals are strong. In the rest of the country it’s a different picture. I’m making a bit of a gen-eralization, but often in New York these fractured condos are easier to get done because you’re rent-ing, and the city has a very strong rental market.
Let’s say, for example, that you have 30 units in Brooklyn. Ten condos got sold—just enough to
make the condo plan effective. The developer is renting the remaining 20 and warehousing the units until the condo market returns. The rental market is very strong, so the main risk a lender has now is that one day the developer won’t control the condo association anymore. We’re more than two years into the downturn and we’ve seen fractured condos; lenders are getting comfortable with that product
Edward J. RatinoffManaging DirectorHead of [email protected]
Alex SaundersManaging [email protected]
Stephen A. SciosciaSenior Vice [email protected]
Los Angeles, CA New York, NY
Abbas KanjiVice [email protected]
Udi KoreVice [email protected]
Phoenix Realty Group (PRG) is a national real estate investment firm focused on the acquisition of multifamily properties primarily
in the Southern California and the New York Tri-State markets. PRG is actively seeking investment opportunities for 2011.
Phoenix Realty Group has acquired the following properties in the second half of 2010, totaling more than $250 million and 2,100 units:
East Orange 548 Units
East Orange, NJPurchase Price, $26.8 MM
Crystal View 402 Units
Garden Grove, CAPurchase Price, $53 MM
Sunridge Pines247 Units
Alta Loma, CAPurchase Price, $48 MM
Arlington 176 Units
Riverside, CAPurchase Price, $11.1 MM
Cielo Vista120 Units
Fontana, CAPurchase Price, $11.7 MM
Evergreen 128 Units
Riverside, CAPurchase Price, $8.7 MM
Beacon Hill256 Units
Dobbs Ferry, NYWest 49th Street253 Units
New York, NYPurchase Price, $65.6 MM Purchase Price, $28.6 MM
www.phoenixrg.com
BUILDING VALUE
8 February 2011 | Multi-Housing News
type. The rest of the country is a little more difficult. Also, many of these deals tend to be smaller loans—often below $5 million. When you’re dealing in the space below $5 million you have to work with local lenders. Coming out of New York it’s very difficult to service a tertiary market … anywhere else in the country. It’s easier to do the bigger loans—$10 mil-lion and up—and these are in the big gateway cities that can be serviced out of a New York office where you talk to national lenders.
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Does Mortgage Equicap get a lot of its business through word-of-mouth? Yes. In fact, I don’t have any sales guys. Some of my competitors have an entire floor devoted to sales. I don’t believe in that. Of course, everybody thinks they have the best business model. I really believe in quality and that is, again, something everybody says, but for me, the quality comes with selecting your clients and spending time with your clients. Both sales and underwriting is handled by a sea-
soned professional who has broad skills. Because we are a boutique firm, all clients communicate with me. My back-office supplies me with the underwrit-ing and due diligence, but it’s all invisible to the client, so everything runs through me, which means I decide which clients I take on.
How have things changed in your business since the downturn?What has changed in the last two years is that lend-ers are more careful in their underwriting. Apprais-ers are more cautious and it takes longer to close a transaction. Why? Because of fiduciary responsibil-ity. Everybody has bad loans. Most of these banks made mistakes. And their shareholders don’t want them to make mistakes anymore. There’s more ac-countability in the banking community.
My job is to understand how the industry has changed and give my clients the best possible ser-vice. I tell a client, “Listen, I’m not going to say anything to the bank, but your taxes are under-assessed. And if the loan officer doesn’t see it, the appraiser might.” We know most of the third parties that are being engaged by lenders to do appraisals and engineer’s reports, and we can give our clients a heads up on cap rates, valuation and repair/escrow requirements that might result out of an inspection. In a way, we are micro-managing the entire process. That’s a whole different level of service now.
The mortgage brokerage [industry], unfortunately, has a very bad reputation. The barriers to entry are too low. I think people should not just be licensed properly but that there should [also] be higher licens-ing requirements. I’m 100 percent sure that if you increase the licensing requirements for my industry you would get better quality [brokers]. Right now there are essentially no barriers to entry. Most peo-ple aren’t even licensed. Everybody can be a mort-gage broker, and that is a huge problem.
The media is talking about residential loans that went bad and everybody’s angry at residen-tial mortgage brokers, but I think they should also start looking to what commercial mortgage brokers do. On top of that, some of these firms charge huge fees for really just making one phone call. Your average broker takes the loan submis-sion from the client and makes one phone call, and the lender does all the work. Not only is the client running the risk that his deal is not properly presented, but lenders also pay less attention to incomplete submissions. MHN
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