The Private Equity Real Estate Podcast – Show 6

Summary
On this week’s show, we have Elliot Treitel joining us. Elliot is an SVP at Meridian Captial who has over two decades of experience as a mortgage broker working with commercial debt. Elliot gives us his take on the current lending landscape during COVID-19 as well as some excellent general information regarding commercial debt.

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If anyone would like to connect with Elliot, his contact info is here:
Elliot Treitel
Meridian Capital Group, LLC
517 U.S. Highway One South
Suite 4000
Iselin, New Jersey 08830
Direct Dial: (732) 301-3210
Main No.: (732) 301-3200
Fax No.: (732) 301-3299
Mobile No.: (917) 733-7017
etreitel@meridiancapital.com

Announcer:
You’re listening to the Private Equity Real Estate Podcast brought to you by First National Realty Partners, where investors learn from private equity experts and insiders. We share our own real world experiences, so you can know exactly what it takes to be highly successful at investing in passive commercial real estate opportunities.

Nick Cucci:
Hey everybody, welcome to another episode of the Private Equity Real Estate Podcast. It’s brought to you as always by First National Realty Partners. This is the ultimate resource for passive real estate investors. I’m your host, Nick Cucci. And today on our show, we have Elliot Treitel a senior vice president at Meridian Capital Group. Elliott is a mortgage broker with over two decades of experience and has transacted several billion dollars worth of deals. Thanks so much for being with us Elliot. How you doing?

Elliot Treitel:
I’m doing great. Thanks for having me, Nick.

Nick Cucci:
Yeah, absolutely. Where you calling in from today?

Elliot Treitel:
I’m actually in my office in Iselin, New Jersey.

Nick Cucci:
Nice. Trying to deal with the sweltering summer heat that we have going on in New Jersey right now?

Elliot Treitel:
As long as I stay inside. I’m good.

Nick Cucci:
Yeah, exactly. So our listeners have not met you before. I’m hoping you can tell us a little bit about your background and how you found yourself in the mortgage industry.

Elliot Treitel:
Graduated college and went to Deloitte and Touche, have an accounting background and after a few jobs in accounting and some back office and other firms, I eventually got to Meridian Capital, not even as a mortgage broker. I got to Meridian Capital to help … They were transitioning into New Jersey and I worked for a company in New Jersey that they were taking over and I helped with the transition. And a few years down the road, they made me a mortgage broker and thank God they did.

Nick Cucci:
And that was 21 years ago.

Elliot Treitel:
I started with Meridian 21 years ago. Yes.

Nick Cucci:
So you have been through some cycles, you have seen some ups and downs throughout your career?

Elliot Treitel:
Absolutely.

Nick Cucci:
Where we are right now, it’s July 2020, late July 2020 that we’re taping this. We are still in the midst of the COVID-19 pandemic. And I’m curious from where you sit, dealing with debt and working as a mortgage broker. What can you tell us about the ups and downs that you’ve seen so far and maybe what we can expect? Maybe you can tell us what you’ve seen in the last few months and what we can expect potentially in the future.

Elliot Treitel:
So in the last few months, it’s an interesting dynamic because rates are very low.

Nick Cucci:
Yeah.

Elliot Treitel:
But on the other hand, to get the money out of lenders today is not so easy.

Nick Cucci:
Right.

Elliot Treitel:
They’re being very conservative and their underwriting criteria has changed and it changes weekly almost of what they’re willing to do and not willing to do. So that dynamic presents a lot of uncertainty. When you go to the market, you don’t necessarily know exactly what you’re getting, and that does provide some hesitation with someone coming into the market. But on the other hand, rates are low, like I said.

Nick Cucci:
Right.

Elliot Treitel:
Today to come into the market and you can get these low rates with some structure, with some interest only with other deal terms that make your deal doable. As long as you can really deal with some of the belt and suspenders that lenders are requiring today, your deal can still work and it can still work very well for that matter.

Nick Cucci:
So you mentioned that underwriting is changing almost weekly at this point. What sort of changes are you seeing?

Elliot Treitel:
It started obviously back in March with the pandemic.

Nick Cucci:
Yeah.

Elliot Treitel:
First, you have a lot of lenders just not even be in the market. They just totally held back and they’ve all come back slowly in their own ways. It started with COVID debt reserve. Some lenders took nine months of principal interest, some 12, some longer. Some took principal interest and taxes. And it got very expensive. You’re buying a deal for, let’s say $10 million and you had to put up another 500,000 or more of an interest reserve and it started slow, but even deals that were nicked out, that were midway. They also got hit with these new requirements.

Nick Cucci:
Oh, wow.

Elliot Treitel:
Yeah. So you had deals that you thought … You had a great deal starting in February and then March, April lenders said, “We’re going to apply our new rules to preexisting deals.” That made it that much harder to work through and a lot of deals, a number of deals died because of that. Borrowers were not willing to put up that much additional escrow for the interest reserves.

Nick Cucci:
And let me ask you real quick. Well now what type of deals? Of the deals that were dying, did you see specific types of deals that were dying? Was it retail deals? Was it multifamily deals or was it all deal specific based on the numbers and what they had locked up?

Elliot Treitel:
It was more deal specific, but going back to a generality, sure you had hotel and retail deals, which in the beginning of March, April, those were just shot down and those never got off the ground.

Nick Cucci:
Yeah.

Elliot Treitel:
Multifamily plowed through, and it’s still everybody’s favorite child.

Nick Cucci:
Yep.

Elliot Treitel:
Self storage that plowed through. What’s really come about is industrial.

Nick Cucci:
Oh, interesting.

Elliot Treitel:
Because of all the first responders things and you have Amazon and just warehouses and industrial became very, very a wanted asset class.

Nick Cucci:
Well, that’s super interesting to me. And I’m curious, do you think, the Amazon culture that we’ve been living in. Do you think that this pandemic has just almost created a quickening for people to figure out supply chains and this new normal of the kind of the digitization?

Elliot Treitel:
It definitely has been Nick, you hear from lenders all the time. Like I said, multifamily might be the favorite child forever, but certainly in a vacuum in those three, four months when there was a need for supply and there was a need and there was a such a demand for it. And where was it coming from? Everybody thought out of the box and said, “Well, maybe I should move my resources out of, let’s say multifamily or hotel or even office, and look at more industrial deals.” And lately, there has been a lot more industrial deals getting done.

Nick Cucci:
I’ve been noticing the trend and it makes perfect sense that during this crisis that would just kind of help to usher in the speed at which industrial is quickly becoming an even more valuable acquisition. So of the deals that did not die, that you were still able to usher through, what did you have to do to help navigate that? How were you able to pass them through now that there’s these new restrictions on them and they’re maybe not as good of a deal anymore?

Elliot Treitel:
So I had a group of a package of a bunch of deals, a bunch of properties. And it started off with proceeds of, let’s say X, and two, three weeks down the road X went to 95% of what we thought we were getting because of COVID.

Nick Cucci:
Yeah.

Elliot Treitel:
And then I further got hit on some of those 10 deals because some of them had commercial. Just regular stores or bodegas. And three months ago, when everybody wasn’t … I’m not paying, I’m not paying. Lenders immediately default is that commercials are basically a zero.

Nick Cucci:
Right.

Elliot Treitel:
So certain deals even got hit again, like a double hit. Those deals fell apart because then they didn’t make sense anymore. The double hit just killed a lot of deals. So some deals died because on day one, when the interest reserve was implemented, that got too high. So your net proceeds were just affected by too much. And even if the net proceeds did make sense, if it got further reduced on loan amount because of commercial or the way underwriting was going, those deals died. There really wasn’t a creative aspect at that point, Nick. It was more understanding what the lenders wanted and delivering it to them. But at the same time delivering a message to your clients that you’re still getting a great deal in terms of interest rate and interest only, and other things. If your proceeds still work, you should do the deal because you got to dance with devil you know.

Nick Cucci:
Sure.

Elliot Treitel:
And as much as things changed during the last three, four months during deals, not necessarily sure what’s going to be three months from now, or four months from now.

Nick Cucci:
Before we talk about the future, I’m curious of the people that did get into deals with these new restrictions on the debt that they were structuring. Do you think they got into the deals with the idea that, okay, we’re going to have to deal with this type of structure for the short term, and then we’ll quickly be able to refinance or restructure that debt, once things kind of normalize?

Elliot Treitel:
I don’t think so many deals went from a permanent structure to a bridge type structure, short term structure.

Nick Cucci:
Yeah.

Elliot Treitel:
I don’t think that that was the case over the last three, four months. In this type of situation, I think more deals died.

Nick Cucci:
Yeah.

Elliot Treitel:
People just said, “You know what? I don’t want to be in this market. I’d rather not.” Some said, “Okay, I’ll stay in the market. As long as I got something for it.” A reduction in price from the seller. That did come up a lot, but more common over the last three, four months where deals were put on ice. The buyer and especially purchases, the buyer and seller they talk with each other and it was agreed that let’s wait this out. Let’s wait a few months. Let’s see how lenders come back to the market. As you know, a big item today is rent collections.

Nick Cucci:
Yeah.

Elliot Treitel:
How collections are, and things are being revisited now.

Nick Cucci:
Interesting. And now, let’s touch on the future a little bit. It seems in March we all thought that this thing would be a few weeks, a few months and we’re out and it looks like we’re not out of the woods for, who knows? Who knows? I’m not even going to speculate how long we may potentially be in this thing, but what do you think the future could potentially look like as we sort of adjust to life with this pandemic for a little while?

Elliot Treitel:
So back in 9/11, when the markets all crashed then as well, it took a good few years to really dig out of that. And I think the difference here is that we’re going through it and there are enough lenders still in the market that are trying to make deals happen still, even if it is with the reserves and other underwriting criteria that could negatively impact the deal. That doesn’t necessarily kill the deal. It could still happen. It’s a big difference between now and what happened almost 10 years ago.

Nick Cucci:
And you mentioned 9/11. I remember the market just shutting down for that period of time, but you know the story far better than I do. I don’t know that lenders just kind of shut down and is that what happened at 9/11? That’s the difference between 9/11 and this pandemic?

Elliot Treitel:
To me, that’s the biggest difference. Like I said, that 9/11, there was just a total reboot and you had to wait it out and you babysat a lot of your deals and a lot of your loans until things started coming back and people then jumped back into the market. Here and as much as some deals were put on ice because of buyer, seller mainly on purchases, at least you still have some lenders that stayed in the market, even from beginning of March during this pandemic. So they found ways to generate business and there still are. And even today, Nick. I got a lender that’s out there today. Just came out today with phenomenal rates and phenomenal interest only if you want it. It’s a local New Jersey lender, for example. So people are adjusting faster to come back into the market. Definitely in March and April, it’s slowed down a lot.

Nick Cucci:
Quite a bit. Yeah.

Elliot Treitel:
But it’s come back a lot faster now than it did 10 years ago.

Nick Cucci:
That must give you on the debt side of things. It must give you a lot of confidence moving forward.

Elliot Treitel:
Oh, absolutely. Absolutely.

Nick Cucci:
Yeah.

Elliot Treitel:
So another example, if I may.

Nick Cucci:
Yeah, yeah. Please.

Elliot Treitel:
Also, today I got a call from a CMBS, a Wall Street lender where a lot of retail, and shopping centers and larger deals are done. And they’ve been out of the market for the last three, four months because of the pandemic. And I got a call today that they want to come back into the market at maximum 70% leverage instead of 75 and rates may be a drop higher, but the Wall Street market does deals that a bank necessarily will not do.

Nick Cucci:
Right.

Elliot Treitel:
So as a broker, and even as for the investors out there, that’s very important that there’s more choices, so that you can have your deal back on track, hopefully. So these were very positive pieces of information that I just actually got today.

Nick Cucci:
And that’s fantastic. March 15th, just about all of those options kind of came off the table.

Elliot Treitel:
Correct.

Nick Cucci:
And now we’re seeing them end of July 2020 start to come back slowly but surely it feels like.

Elliot Treitel:
Yes. In different ways and shapes and forms, they’re all starting to come back. They really are. It’s great.

Nick Cucci:
I really appreciate your thoughts just the general COVID-19 environment. Is there anything else you think the listeners should know about the COVID-19 financial landscape before we move along?

Elliot Treitel:
I mean, I mentioned before about there’s COVID interests, debt reserves and there’s different underwriting criteria, that hasn’t changed yet. And that’s something that everybody has to understand, whether it’s multifamily or retail or office or industrial. That’s still being underwritten and looked at by all lenders.

Nick Cucci:
And is that something we can quickly dig into or is that a separate podcast altogether?

Elliot Treitel:
No, we can quickly dig into it.

Nick Cucci:
Yeah, maybe just like a quick overview. So the listeners can understand what is.

Elliot Treitel:
So most lenders today are requiring up to 12 months interest and principal reserve.

Nick Cucci:
Mm-hmm (affirmative)

Elliot Treitel:
That’s the generic answer to what most banks are doing. Some are doing nine, sometimes six, very few only do … If you have an interest only loan, let’s say for a year, there’s a lender out there that will only take the interest only payments. And they won’t take the principal for 6 months or 12 months.

Nick Cucci:
Yeah.

Elliot Treitel:
Some use the interest, let’s say to take a 12 month interest reserve, some use that reserve for 12 months, the payments and they make your payments. So you don’t have to pay. So it’s all over the place, even Fannie Mae’s out there. And they’re taking on some loans, 18 months of interest and principle, which is obviously a big hit.

Nick Cucci:
Yeah.

Elliot Treitel:
So you have to expect that on your loans, except for low leverage loans, 55, maybe 65% the most. Then maybe you have an argument that you don’t need an interest or a debt service reserve. Then there’s the underwriting criteria. What a lot of lenders are doing, some of them are doubling the vacancy rate that they’ve underwritten on the multifamily. Some on commercial are not even considering that income. Some are using a 10% vacancy on commercial.

Nick Cucci:
Right.

Elliot Treitel:
So you have to be prepared for those two major differences out there on all asset types, all deal types.

Nick Cucci:
Yeah. That’s going to change your numbers exponentially as you’re trying to move forward.

Elliot Treitel:
It is. It definitely is. But as long as you know this upfront, you can work through it.

Nick Cucci:
Yeah, absolutely. And I think that’s a really good way to look at it.

Elliot Treitel:
Yep.

Nick Cucci:
All right. So let’s dig into some more general questions. I know you’ve done a ton of deals, but if there was a deal that was, and maybe it’s not the hardest deal you’ve ever had to work through to bring to the closing table, but one that was a tough one where you had to get creative. What would you say that was?

Elliot Treitel:
So, like I said, it’s not necessarily … It wasn’t the most complicated deals, but to bring it to the finish line was complicated. So it was a purchase. It was a purchase of I think a multifamily deal in New Jersey. This had to be 10 years ago, something like that. And it wasn’t a large purchase, maybe seven, eight million dollars, something of a good size. And there was an environmental issue and I’ve been through many deals over my career and this environmental issue was not going away soon.

Nick Cucci:
Okay.

Elliot Treitel:
So how do you bridge that gap to a lender to say, “Lend this money to a new buyer, but there’s still a major environmental issue.” Most of those deals, don’t happen. There are some that happened and this is one of them. Basically the seller was willing to put up an escrow, almost $500,000 escrow to close the deal. On all the deals I’ve done, all these escrows to close deals, whether it’s environmental or documentation, anytime type of escrow comes from a buyer, comes from my client. That’s why I represent the buyer.

Nick Cucci:
Yeah.

Elliot Treitel:
I didn’t represent the seller. I was able to stick my head in a little bit on the legal side and through his attorney and get in touch with them. And they agreed that they were motivated to sell the property. And it was unbelievable that even … And as much as the seller was willing to put up the 500,000, the bank was willing to accept it.

Nick Cucci:
So and this 500,000 was to guarantee the cleanup that was necessary at this property.

Elliot Treitel:
Correct. I’ve done escrows of 25, 50, 100,000 even. All different amounts, but 500,000 was way over and beyond any escrow I’ve ever done.

Nick Cucci:
Now, 10 years later, was that deal a win-win? Was it worth it for the seller to put up a half a million to make sure that, that got through? Or was there something else at the property?

Elliot Treitel:
Well, the seller longterm moved through that property and just was motivated to move on to others. From the buyer’s perspective, even though it wasn’t their money. It did take a long time to get through that issue, even to the extent, I think they had a five year term and it took basically the whole five years to get through the environmental issue. So they need to get through it in order either to refinance it or sell that property. I think they ended up selling it. So they had to do the work because they wanted to sell the property.

Nick Cucci:
Yeah.

Elliot Treitel:
Otherwise, you don’t know what the next lender is going to even accept it or not. So it definitely took its toll on the buyer, but in the long run it needed to be done. And they were willing to do it.

Nick Cucci:
Now, when you were working with a buyer who’s trying to figure out the right vehicle for the debt, as they’re looking at a purchase. How do you advise them? How do you determine the right type of debt to use?

Elliot Treitel:
With experience, somebody brings me a deal. In my head, I already can identify where two or three lenders that should do the deal. If it’s a retail deal and I know it’s a client that only wants non-recourse and odds are, it’s not going to be a bank. It’s going to be a Wall Street lender or some other non bank lender. Say it’s a multifamily deal, depending on where it is and what type of leverage he wants, what type of deal. I do have a good knowledge of what the banks want over the years. So I do target when a deal comes in, where I think a deal should go, doesn’t work every time, but it does work most of the time.

Elliot Treitel:
It’s really having that knowledge of the market, of the specific lenders, of what they want so that when somebody calls me about a deal, as quickly as possible, I can target a lender and it really moves. When a lender knows they have a real shot at it, they look at it that much closer. And from the buyer’s perspective or from the borrower, they also appreciate getting quick feedback. So they know that this lenders that interested, they also might be willing to move on a couple of demands that they had to make the deal happen. So I think it’s just really having that market knowledge after all these years. You just know what lenders want and you know where a deal should go.

Nick Cucci:
That makes perfect sense. Somebody brings you a deal and just using your experience, you can kind of understand, okay, this would be the best sort of structure for you. And I’m sure there’s a couple qualifying questions that you’ll ask them about what they’re looking for that will then lead you to exactly who they should potentially use.

Elliot Treitel:
Of course.

Nick Cucci:
And that kind of leads us into getting creative, when you’re getting creative with these loan structures is there anything that you find yourself using periodically to help your clients out that’s more advantageous to your clients?

Elliot Treitel:
Yes. And I’m actually in the middle of one right now where a client’s buying a building and he wanted to get an 80% loan today, which during COVID is very difficult. And I found a lender that agreed to give 80% loan to value as long as it is appraises at 75% of the appraised value.

Nick Cucci:
Okay.

Elliot Treitel:
So that’s something I’m not offering on every deal because the lender does want to offer on every deal, but on the right client and the right deal, right size deal. I was able to get the client to agree to move the deal through me and start the deal. There might have been other offers out there, maybe a lower rate, maybe more interest only. But at the end of the day, I listened to the client. I know what he wanted. Again, it’s that having that market understanding of what these lenders want, what they’re willing to do. It was a needle in a haystack, Nick. I found one lender that was willing to do this.

Nick Cucci:
But it was able to fit and work inside of your client’s strategy?

Elliot Treitel:
Exactly. And it won me the deal.

Nick Cucci:
That’s great.

Elliot Treitel:
You can be persistent and listen, and that’s very important. But at the end of the day, having that knowledge of the market is exponentially worth more than just getting volumes of deals and then not knowing what to do with them.

Nick Cucci:
Regarding different asset classes, take us through and understand some of the major differences in debt for the asset classes that you work in.

Elliot Treitel:
So putting COVID aside.

Nick Cucci:
Right.

Elliot Treitel:
That definitely affects it even further. But in general, like I said before, multifamily, self storage, those asset classes have always been everybody’s favorite. Everybody needs a place to live. So multifamily, self storage. It’s like a multifamily building without the headaches.

Nick Cucci:
Right.

Elliot Treitel:
So lenders really like that as well. And you’ll get the most favorable terms on those deals, 75, 80% leverage, lots of interest only. More easy to structure through it or around it, as opposed to let’s say retail and office, which is more complicated to the extent it’s got higher end leases and how long do they go for, and what’s the strength of that tenant. When someone has a place to live and they have to pay a 1,000 or $2,000 a month, it’s a lot easier than somebody paying $10,000 a month and then they’re in an office building in Manhattan.

Nick Cucci:
Right.

Elliot Treitel:
So it’s less of a risk. And because of that, your terms are different. You’re not going to necessarily get 80% on those deals on office retail or the like. You’ll get up to 75, you’ll have a higher minimum debt service ratio. Let’s say on multifamily and self storage, it could be 120, 125 and on self store … And sorry, I’m sorry. On the retail and office could be 125, 130.

Nick Cucci:
Yeah.

Elliot Treitel:
So you’re automatically starting off at a different place where, you know your loan amounts are going to be different. Your terms will be different. Another main difference between let’s say those two assets or those two different baskets, multifamily and self storage, et cetera. It’s a lot easier to find a non-recourse loan through banks, through Wall Street, through agencies, through anybody. Retail and office, everybody wants non-recourse and when you go to the banks out there, they’re not geared up for that.

Nick Cucci:
Okay.

Elliot Treitel:
They want you to sweat it out and have a piece of it. As opposed to Wall Street lenders, because they do a loan and they sell it to the bond market. They only do non-recourse loans, but you’re in that box and you’re in that world and whatever the requirements are on those loans, heavy reserves and heavier underwriting. You got to accept that to get the non-recourse. So those are some major differences I’d say between some of those higher asset classes that we all try to get into.

Nick Cucci:
[crosstalk 00:27:00]

Elliot Treitel:
I’m sorry.

Nick Cucci:
Oh, go ahead.

Elliot Treitel:
No, they have like a development deal and a construction loan, totally different type of way of doing deals. I’ve had clients over the years that say, “I want to buy a piece of land and develop it.” And from banks, I’ve always been successful doing what I call a 50/50 deal. You put up 50% of the money as a borrower and for your land and I’ll get you the other 50%. And sometimes I can do a little more, but that’s usually … It’s better than, when a client expects to hear, you’re not going to get me anything. I’m going to get you 50%. They’re pretty happy with that. And I’ve done that more than a few times over the years. You get your hard costs, you get a 100% of your hard costs, but it’s a different deal. So every type of asset class is going to have its own structure.

Nick Cucci:
That’s great. And the 50/50 deal is new to me. So that’s something that I’m going to check into and learn a little bit more about.

Elliot Treitel:
I don’t know if I made it up, but I’ve coined that term.

Nick Cucci:
Hey, if you’ve coined it, you’re hearing it here first folks. The 50/50 deal by Elliot Treitel. Now, how about refinancing? The options inside of those asset classes, is refinancing similar across the board, or are you going to deal with-

Elliot Treitel:
It is different. Lenders start off by saying, “Okay, you bought this building and when did you buy it? And did you have it for a number of years and is it seasoned?” Only then will they consider larger cash outs then smaller cash outs. As opposed to a purchase where every bank sees fresh equity coming into the deal, they’ll say, “Okay, fresh equity. We get it. We’ll give you a 75% loan.” On refinances, a lot of the … Most of the sweet spot today is a 70% LTV loan.

Nick Cucci:
Yep.

Elliot Treitel:
So lenders are looking at it saying, “We’ll give you a cash out, but we’re not actually going to cash you all the way out.” If you bought a building 10 years ago, what’s stopping you from getting a full cash out. It’s 10 years later, they might’ve invested in the deal and refinance it once or twice already. Still, lenders today, Nick are being hesitant and more careful, even if all the indications are you should get a full cash out. They’re still finding ways to be a little conservative and hold back that cash out. So purchases are definitely easier to get what you want because of the fresh equity coming in.

Nick Cucci:
One last question for you. Is there anything about commercial debt that most people would not consider, but it’s something that you deal with all the time?

Elliot Treitel:
The answer is yes. And the answer is, I think the prepaying penalty is the biggest scare that people have, even though you may not need it because you may not prepay it and you may not sell it. You need the prepayment penalty, but I still see that as being something from 20 years ago to today. That’s definitely the biggest hurdle that people have. And what do I mean? With local bank, local banks are geared up for a sliding scale penalty, five, four, three, two, one. Let’s say, on a five year deal, 10 year deal, five, five, four, four, three, three, two, two, one, one.

Elliot Treitel:
That’s a deal that a bank would do, a multifamily deal, even a commercial deal. If you fit your deal to their box, you still would get a sliding scale deal. Any deals with Wall Streets or even the agency deals. They’re mainly 10 year executions, where the prepayment penalty is a yield maintenance. And those two words are still very scary to investors.

Nick Cucci:
Yep.

Elliot Treitel:
They lose control and you’re relying on the market and the rates. And they don’t want to give that up. Even today Nick, where rates are so low and the odds are over the next few years, interest rates will be going up. And when interest rates go up, your yield maintenance penalty goes down.

Nick Cucci:
Okay.

Elliot Treitel:
So it could be better even than a sliding scale penalty at a certain point. I still have seen … My clients have just, even though the better deals could be with yield maintenance by up to half a point even. Most borrowers would still say, “I’m not doing a yield maintenance deal.”

Nick Cucci:
When your clients are getting scared of that, how do you advise them there?

Elliot Treitel:
So to me, I think there’s three factors, let’s say today, why you would do a yield maintenance deal. One is, you believe rates are going up, which we touched upon just a minute ago.

Nick Cucci:
Yep.

Elliot Treitel:
Two and three, let’s say, you say to yourself, “You’re not going to sell this thing. It’s going to stay in my family forever. Or my partners are never going to sell. So we’re going to keep it.” So two things come up, if I want to keep it, but let’s say someone makes me a crazy offer in a year from now, how do I sell it? The penalty is going to be too big. So number one, all these loans are typically assumable. The buyer can step into your shoes, but the next question follows immediately. Okay, great. But let’s say the difference between my purchase price and the loan amount is too big. The buyer wants some more money. Most of these times you sell it. These lenders allow a second mortgage from themselves.

Nick Cucci:
Okay.

Elliot Treitel:
So you can bridge that gap. So to try to alleviate the fear of yield maintenance because rates going up, loans are suitable. You can get a second mortgage. Sometimes that works, but a lot of times it still doesn’t. It’s not enough to put people over the top and I respect borrowers for not doing it. I just had a deal just now, I had a $22 million offer on a package of properties under three percent for 10 years, yield maintenance, prepayment penalty. Five years interest only. I had a bank that offered me $19 million, three million less. A three percent rate, so the rate was higher by 10, 15 basis points, let’s say. Only one year of interest only. The borrower decided to take the bank deal.

Nick Cucci:
Wow. Yeah.

Elliot Treitel:
He left three million dollars on the table.

Nick Cucci:
Wow.

Elliot Treitel:
That’s the extent of what I’m still seeing today versus 20 years ago, that has not changed. To get people over that hump is very difficult.

Nick Cucci:
That’s such a great piece of information. And this entire interview Elliot, thank you. This has been really good insights and really appreciate your thoughts on all things COVID-19, right now. As we try to navigate this landscape, everyone who’s in the real estate game together. I have three quick questions before you go. These are fun ones. What was your first real job?

Elliot Treitel:
My first real job out of college, I was an accounting major and I got a job for Deloitte and Touche. Back then it was one of the big six, it was called, I think they’re down to four, but I was an auditor. And I basically audited the real estate companies, which kind of self directed myself into other jobs involving real estate and leading me up to being a mortgage broker. So I understand the real estate world and it set me up for life.

Nick Cucci:
There you go. What’s your favorite food?

Elliot Treitel:
My favorite fruit is a good piece of cake.

Nick Cucci:
Oh, yeah. You can’t go wrong. Sure.

Elliot Treitel:
It’s very basic. I know some people are going to have steak and pizza. The most basic of food to me if it’s done that well, it’s just so good.

Nick Cucci:
But what kind of cake is the question?

Elliot Treitel:
What kind of cake? So again, going with the simplistic approach, like just a good piece of marble cake or pound cake. Just something that good to me is better than any good steak.

Nick Cucci:
I like that. If you could travel anywhere in the world tomorrow, where would you go?

Elliot Treitel:
Where would I go? So I’ve been to Europe, but I’ve only been to Ukraine or Poland and those countries. I haven’t been to France or England or any I guess the Western side of Europe.

Nick Cucci:
Yeah.

Elliot Treitel:
That would be somewhere I’d love to go. There’s just so much culture and history there. They say a picture’s worth a thousand word, it’s not. I think you have to go to places like that.

Nick Cucci:
I fully agree with you there.

Elliot Treitel:
Yep.

Nick Cucci:
Well, hopefully as soon as the COVID-19 pandemic calms down, you can jump on a plane and get there.

Elliot Treitel:
Sounds like a plan.

Nick Cucci:
All right. Well, hey. Well, thanks for jumping on the show, Elliot. We appreciate your time. And if anyone needs a fantastic mortgage broker for their next commercial real estate investment, we certainly recommend reaching out to Elliot and the team at Meridian Capital. We’ll have Elliot’s info in the show notes. So thank you everyone for listening to the Private Equity Real Estate Podcast, if you like what you’re hearing, please leave a review, subscribe and share this show. If there’s anything you would like to hear us discuss, shoot me an email. My mail is in the show notes. The show is brought to you by First National Realty Partners, one of the top syndicates of private institutional quality commercial real estate in the country.

Nick Cucci:
If you’re interested in learning more about FNRP or would like to get access to our private offerings, please click the link in the show notes or visit FNRPusa.com. Remember that this show is for educational purposes only, and should not be considered a solicitation to purchase securities or be construed as tax legal investment or accounting advice. Thanks again for listening everyone, we will see you next week.

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