Jacob Wilson, managing partner of Crux Commercial Partners, joins Slocomb Reed on the Best Ever Show. In this episode, Jacob discusses what he’s seeing in the lending marketplace, including what lenders are really looking for in buyers, how to position yourself as an attractive buyer to lenders, the importance of liquidity, and more.
Jacob Wilson | Real Estate Background
- Managing Partner | Crux Commercial Partners
- Based in: Tacoma, WA Phoenix, AZ
- Say hi to him at:
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Transcript
Slocomb Reed (01:29.346)
Best Ever listeners. Welcome to the best real estate investing advice ever. Show I'm Slocum Reed. And today we are joined by Jacob Wilson. Jacob is joining us from Phoenix, Arizona. He is the managing partner of Crux commercial partners. He is focused on commercial loan brokering. He's also a commercial real estate investor with around 300 units of multifamily and also industrial and office assets. Jacob, can you tell us a little bit more about your background and what you're currently focused on?
Jacob Wilson (01:59.739)
Yeah, absolutely. So first and foremost, appreciate you having me on the show. Secondly, what am I focused on right now is growing the brokerage. We're in a pretty big ramp up in transition right now and growth mode. And then secondly is making sure all the assets are stable and making sure we have contractors to complete the work needed on each of the units that are currently vacant.
Slocomb Reed (02:32.726)
Gotcha. Is there a lot of vacancy in your portfolio right now?
Jacob Wilson (02:36.447)
No, not really a ton at all. Um, you know, we have it come to here and there, unless it's, you know, there's certain deals that we're currently stabilizing. And in that situation, what we try to do is keep the vacancy as minimal as possible while we're going through and turning those units. And then, you know, we try to create a little bit of vacancy as well to be able to turn those future units.
So there's a little bit of method to the madness and how we do it But it is a constant ongoing Obstacle
Slocomb Reed (03:20.014)
Talking about your loan brokering, Jacob, where do most of your loans or most of your transactions come from?
Jacob Wilson (03:30.715)
Pretty much all of them are referral based. We got a pretty great name in the industry. We always do exactly what we say we're gonna do. So it builds trust with the bankers that we do business with, it builds trust with the real estate agents that we do business with, and all the past clients obviously refer us to their friends and family and everything else.
It literally almost 100% referral based and that's across the whole company. So it's the biggest compliment I think one can get. So it means you're doing a good job.
Slocomb Reed (04:09.014)
Makes a lot of sense. You're focused on the growth of your commercial loan brokerage right now. We're recording at the end of the first quarter of 2024. Looking very big picture, Jacob, but I'm hoping you can correct me here. But we're at a moment in the market cycle where commercial real estate transactions may not necessarily be at an all time low, but there's way less commercial real estate transacting right now. And when you consider what's happened to interest rates the last couple of years, there are not a lot of people looking to refinance unless they have to because of the bridge debt that they went with back.
Back when all pastures were green and everyone was in the threes and maybe the fours of, of 2021 and very early 22. So it's interesting to hear that you are growing or focus on the growth of your brokerage when I would imagine you're experiencing some serious headwinds right now, Jacob, where, where am I wrong here?
Jacob Wilson (05:25.283)
You know, if I look back, you know, just at my transactions individually with along with my team, obviously that supports me historically. We did about 125 to 130 transactions on average and 21 and 22 and then in 23 we did 100 and I think it was 16. So we didn't really actually see that large of a decline from a unit perspective for an individual, you know, loan perspective.
So the units have still been there. And what we're doing is we're taking the team approach that I had and that supported me and we're rolling that out to all the different brokers to allow them to focus primarily on business development and support them better than anyone's ever been supported before from a loan broker perspective. So we're doing things a little bit differently.
We are allowing people to have what really no loan broker has out there and that's a little bit of time to live back in their lives. And no one's missing a beat from a quality perspective because the people we have on our roster are just so phenomenal. You know, if you look up and down, our personnel is unmatched. You know, the level of experience that they have, I always say experience isn't measured in years in the business.
It's measured in the amount of deals that you've gotten done. And our people have touched more files than anyone. And because I don't know another commercial loan brokerage out there that's doing this many units. So we're taking that approach. We're supporting our people to the maximum. And because we're going to have such great support, we're going to have a huge influx of great talent from a brokerage or from a broker perspective so That's what we're doing
Slocomb Reed (07:40.842)
You all are focused on growing right now by acquiring other loan brokerages. Is that what you were saying?
Jacob Wilson (07:50.519)
No, what we're doing is we're actually converting bankers to brokers because they have the experience, they have the know-how of the industry. However, what they haven't done is this before, meaning the broker side of it. And we've come up with a mechanism that allows them to make that leap from corporate America to private world. So and do it without having big valleys associated with it. Because we've done it before, we also are able to provide them with support so that they understand exactly what the roadmap looks like and what the underwriting will look like from institution to institution that they may not know.
They have secured process, or we have processes in place to provide consistency to them and what they can see and what they can expect on a day-to-day basis, which allows them to not have a huge loss in their first year, but really just to smoothly transition into the life that really they long for but haven't had the ability to do because there's so much risk associated with it and bankers really hate risk. So that's what we're doing. And don't get me wrong.
We've had, we brought over people from other institutions as well, but we're not acquiring the businesses. We're bringing people over that really want to be around top talent. They wanna be supported better than they've ever been supported before. And then they also wanna have processes in a bigger company in place so they don't have to run their own business. They can just focus on getting deals.
Slocomb Reed (09:43.21)
It sounds like as a business cruxes, uh, focused on gaining market share, even though we're experiencing a down moment in the market cycle, getting market share by bringing more people, uh, bankers onto your platform to operate as, uh, as loan brokers. That makes sense. Tell us a little more about what you're seeing in the marketplace right now with regards, not just a transactional volume, but to the loans that banks and Fannie and Freddie are making available right now by comparison to what you were seeing last year.
Jacob Wilson (10:24.775)
So really the biggest hindrance in the market is, well, there's two of them. Rates obviously impact the debt service coverage ratios, which then limit the proceeds. But really more than anything else, it's a lack of liquidity within the different institutions is one of the biggest hurdles for us. So we're seeing a lot of lenders that either haven't changed or are on the opposite end where they just don't have any capital left and they have to have reserves on hand that are compensating balances on hand that come with the loan. As far as Freddie and Fannie go, you're not really seeing there's a few additional restrictions associated with it, but we're not seeing real big changes there.
If you look back at 08, 09, really what happened was there's also a big capital crunch within a lot of the community banks and even some of the larger institutions. And there wasn't as many debt funds to pick up the pieces. It was Freddie Fannie, Lifeco, CNBS, those were the primary ways to fund deals during that time outside of the relationships that you'd already built.
Um, so we are seeing a little bit of reversion back to those similar things that have happened in the past, but it's really become a somewhat of a debt fund driven world for the larger deals in the marketplace because they aren't hamstrung by the regulations that the banks are hamstrung by. So they are able to take riskier loans on that have a higher yield for them to offset that risk. Um, so.
It's different, but it's kind of the same thing again, you know, that we saw the last time there was fallout in the market.
Slocomb Reed (12:16.662)
Well, I'm certainly hoping the fallout right now won't equate to what happened in Oh, eight and Oh nine. I'm more of a residential investor anyways, but yeah. So how is, how is that impacting borrowers right now?
Jacob Wilson (12:34.507)
Well, it's impacting them from multiple different ways, but primarily it's rehab deals, construction deals that were underwritten to a four, four and a half percent rate, notes are coming due. Now the loan only supports 60% on what it did before because rates are, you know, 6%, 6.5%, whatever the effective rate for that individual deal is. And now they're facing a large equity injection.
So it's either A, pony up the cash if they have it be fine an equity investor or see exit that deal and Those deals you're seeing at the market here and there and the good news is there's so much capital on the sidelines that I don't Think we're gonna see what we saw last time because they're except for maybe an office Large scale large box office anyways, so you know, there's so much money on the sidelines that we don't have that lack of buyer pool that's out there. Once it hits a certain level of pricing, there's plenty of buyers to buy those assets that are well qualified for the loans at the lower loan amounts. So I really don't think this is an 08, 09 moment except for probably in the one caveat of, you know, large box office.
Slocomb Reed (14:00.106)
And it sounds like for those owners who have to refinance right now, there are fewer lender options available to them. And some of them are going to be at higher interest rates because they're treating it like a higher risk, a higher risk debt asset anyways.
Jacob Wilson (14:21.435)
So it depends, is always the answer. Right? There's, for, you know, if we're talking about office specifically, if it's an owner user, all the, all the, they're, pretty much every lender wants an owner user deal. Right? It's how big is the, can the owner user actually go into the whole space and eat up? Do they, is that not making a need for them? Why do banks want the owner user deals?
Because it comes with the deposits, right? You get all the transactions, you get the deposits, you get the merchant services, you get all the different, you know, bells and whistles that goes along with it, which makes it a more economical deal for those institutions to take on. Plus, you can underwrite to the owner user, which then is a different method than from an investment perspective, and it allows you to really gauge the quality of the repayment source. So with those deals, we're seeing some of the best pricing out there. I mean, we just quoted one at like a 135 over the treasury this week. So we're seeing some really, really quality deals that are still for those big box offices. With that said, that's not all of them. For owner users.
Now for investors, yeah, it's a little bit more of a blood bath in a lot more questions than historically because there's not as much infill as there once was. So it's market driven, it's current tenant mix driven, it's lease expiration date driven, it's vacancy, market vacancy rate driven. I mean, there's a lot of different drivers that allow the lenders to pull back the curtain even more than just face value of is this big box office or not that then allow for good decision making and some mitigations to happen.
Jacob Wilson (16:24.315)
Did I answer your question? I feel like I kind of did. Now I'm looking back and I don't know what I did. Ha ha ha.
Slocomb Reed (16:29.974)
No, that's good.
Jacob, let's transition the conversation here. We have the freedom as podcasters with the best of our podcasts of assuming that we have a sophisticated audience because we actually do. So we can assume, Jacob, right now that that our listeners are familiar with the situation that people who got bridged at a couple years ago have found themselves in, that doubling interest rates have constrained DSCRs, which means the amount of capital that you can borrow is less, capital injection, all of the things. Talk to me, Jacob, and to our listeners. I'm an apartment owner operator.
So, so primarily apartments, one office building. Uh, thankfully it's, it's boutique and, um, there's plenty of high demand. I'm going to, I'm, I'm on the main drag in a nice walkable, uh, historic neighborhood within Cincinnati, Ohio. But, I'm out there looking for deals right now. And I'm wondering what my debt is going to look like. I can get into specifics of an example for you, but what are the kinds of things that I should expect right now? And what are the things that I can be doing to prepare myself or my loan package for you, the broker, to make me look as complete telling a borrower as possible?
Jacob Wilson (18:24.56)
So what can you expect? You can expect that... let me see here... So obviously there's not as many lenders doing as aggressive a lending as before. So what you can expect is some similarities to how the deal was underwritten, but also a little bit more scrutiny on the underwriting of the deal. So, you know, you need to be able to be wise enough to understand the hurdles associated with the deal and how to mitigate those hurdles.
And you need to work with someone who's gonna help support and guide you along that way, whether it's me, whether it's someone else, it doesn't really matter. Even if you got a great relationship with a banker, that's okay too. But more scrutiny is probably the biggest thing I would say because the lenders don't have as much capital to lend, they're gonna be more stringent on how they lend it out. So that's number one.
Number two is liquidity. Liquidity is always keen, you know. So the more cash you have on hand, the easier the underwriting is gonna be because you can navigate things better than those without capital. You're gonna have more thresholds, for example, on multifamily. There's a lot of lenders that have put into place, you know, minimum historical DSCR rather than just underwriting it to a performer DSCR. Now don't get me wrong, there's still some out there that will just underwrite it to a performer DSCR, but there's been a little bit of a shift there. So more hurdles, more navigating, more explanations, and you need to be on your stuff.
Slocomb Reed (20:11.506)
That's about as optimistic an answer as I would expect in late March of 2024, Jacob, if you can sense the sarcasm in my voice. More hurdles, more stringent lenders, especially given that they have limited funds available to be lent.
Do you, um, do you lend in Ohio and Kentucky?
Jacob Wilson (20:46.583)
We've done deals all over. I've definitely done deals out there, multiple of them. Our bread and butter's in the Pacific Northwest, but we got one guy on hand that all he does is research lenders all day every day. That's just, and he comes from a bank. So, I mean, this isn't just some Joe Schmo off the street that's, or some guy offshore researching. These guys, we look up every deed recorded in an area that is any associated with the subject property that we are looking at.
Slocomb Reed (21:20.514)
Jacob, it sounds like you have as much experience with Cincinnati as the vast majority of people who want to invest in apartments here. Let's go with that. There are a lot of people out there looking to get into apartments in markets like Cincinnati, Ohio, because for the Midwest, we're a major metro area. We do have...
We have positive population growth. We're still seeing on the whole rent increases as opposed to decreases. A lot of things that like the Southwest and Southeast have been experiencing, especially metros. Some of the metros, not so much in Florida, but like Dallas, Phoenix, the negative rent growth, the crazy amounts of supply that are coming on market here soon, those are not issues that we experience here. So a lot of people wanna get into it into apartments right now in places like Cincinnati. So let's say, and a general partnership is looking to take down a...
Very simple math here, a 100 unit apartment complex in the greater Cincinnati area for $10 million. Purely hypothetical, $100,000 a door is a number we all got accustomed to a few years ago. They have a value add business plan. There's a little bit of vacancy. They're going to have to increase rents to get up to market. They are going to struggle with the one and a quarter DSCR day one based on the day one financials but it pro forma is much better than that after they've gotten through year one or year two.
They, this ownership group is, let's say that they're based out of the San Francisco Bay area. No one in the general partnership is local to Cincinnati, but they do have some experience with smaller multifamily, including successful exits of properties, under 20 units, let's say.
Based on what I'm describing right now, Jacob, what advice do you have for this hypothetical general partnership looking to buy this hypothetical 100 unit property in my market?
Jacob Wilson (24:00.023)
What advice do I have for him?
Slocomb Reed (24:02.186)
Yes. And what expectations would you set with them? I'm not asking about like specific loan terms, but, um, but, but what advice and expectations would you have for someone? We're talking about acquisitions here, not a refi out of a bridge loan kind of situation.
Jacob Wilson (24:19.175)
So my advice for everyone right now is to expect rates to stay the same for the foreseeable future. So that would be my big, you know, so underwrite it to where we're at, not where you hope it will go. That would be my biggest piece of advice for them. And then also make sure you got great management, you know, because management is key in an area that you're not from historically.
So make sure you do really extensive research on who you're going to pick because I too own in the Midwest and I've had it go both ways and I've endured the success of the great ones and I've endured the pain of the bad ones. So Those are the biggest two pieces of advice I would give to them From a debt perspective and say the majority of the quotes that they'll probably get are probably going to be on a variable rate deal for that size of a loan in that location, I would guess that they're probably going to be at a SOFR plus 325 to SOFR plus 500 Which is probably going to be a little bit higher than they anticipated originally and underwrote it to. The exit would probably be Underwritten to a six and a half, I would guess on a 30 year AM at a 125 DSCR but and that's how the Current loan should be underwritten as it stands today, meaning on a 6.5, 30 or M125 at stabilization.
Slocomb Reed (26:01.878)
When you say at stabilization, do you mean that those are the expectations or that the DSCR expectations should be based on after they've had the opportunity to execute on their business plan? Are you seeing, um, opportunities for, uh, interest only payments for, for one or two years upfront for value add investors who have a, uh, a revenue hump to get over?
Jacob Wilson (26:29.847)
Absolutely. We do those deals all day every day. Yeah, I mean, what deal is on sale with the performer? That's a multifamily deal these days, you know, so I mean, it's either a really low cap that those non-performer deals are being sold at and usually too low or trying to be too low and pretty that way. So creates a situation where you have very limited loan amount compared to the value, so limited loan value. Or they generally perform a deal.
So we're doing a ton of those deals right now. And some of them are on fixed rate debt from day one, and they have a two-year interest only period. And then some of them are on a variable rate deal from day one that then they have on variable until they are stabilized and it's taken out by a mini-perm.
Slocomb Reed (27:32.042)
You referenced the importance of high quality local management. Absolutely, 100% agree. I'm speaking generally when it comes to the execution of the business plan and the overall performance of the assets, of the ownership group upfront upon acquisition. How much does it matter what management company they're going to go with? And is there any value in bringing a local operator into the ownership group or giving the property manager they choose an equity stake, an equity interest in the deal with regards to the loan terms, the lenders and the loan terms that'll be available to them on acquisition.
Jacob Wilson (28:34.147)
Not really. Generally, the way that it's looked at is what are the credentials of the managing party. So who are you going to use? They want to understand the game plan associated with it. And then also, they'll typically do some sort of vetting on that. So whether that's pulling up their website and looking at their other properties or sometimes it's just, hey, give me a short little bio of who you're going to use. And
That doesn't really necessarily, while it may be something on their loan document form that they do internally, does it really make a substantial difference? Not generally, because it's a guess on their part too. They aren't opening up the books of those property managers to validate who they are. Unless they are a guarantor on the loan, in that situation it changes things a little bit. But generally, that's not what we're seeing.
Sometimes we do, actually, but not generally.
Slocomb Reed (30:10.698)
So Jacob, we've bounced around the conversation of commercial lending several ways in this episode. I want to bring this to a bit of a conclusion and then we'll transition the episode. When it comes to what is important for commercial borrowers right now, thinking about acquisitions at least equally weighted to refinancing deals right now. Very important for borrowers, buyers to have liquidity. As always, the lenders will be focused on the debt service coverage ratio. Both day one and pro forma after the opportunity to execute on a business plan. It's important to select a tried and true proven experience local property manager.
What other things should commercial real estate buyers right now be focused on with regards to their borrowability?
Jacob Wilson (31:35.096)
That's a tough one because you nailed down so many of them or we nailed down so many of them. I Mean those are the big ones, you know, I Would say that Cash is king and pick your partner's wise, you know, that's the other one
Slocomb Reed (31:39.07)
Yeah. I mean, liquidity, DSCR, local management. Is there anything else? Is that the big three?
Jacob Wilson (31:58.151)
Do your due diligence. Always get a sewer scope. You know, it's important.
Slocomb Reed (32:03.818)
Oh yeah, oh yeah, I'm a major proponent of the sewer scopes. I'm dealing with clay pipes and root balls as we speak.
Jacob Wilson (32:14.659)
And inspect what you expect, right? So just because you got property managers doesn't mean there's nothing to do. There's a million things to do. Everyone likes to talk and act like, commercial real estate ownership is a passive thing, but let's not be naive. It is a very active thing that you have to be all over all the time. Otherwise you're going to lose money and also be taken advantage of.
So, manage the managers really effectively.
Slocomb Reed (32:54.35)
That is excellent advice. On that note, Jacob, what is your best ever advice?
Jacob Wilson (33:01.927)
Best ever advice is hire a broker, a loan broker, of course. Go to cruxcre.com and find one of us and talk to us about your loan. That's my best ever advice.
Slocomb Reed (33:17.162)
Last question, Jacob where can people will reach out to you?
Jacob Wilson (33:20.776)
They can email me at jacob at cruxcre.com or they can call me on my cell phone, it's on our website. Yeah.
Slocomb Reed (33:33.898)
Awesome. Those links are in the show notes. Jacob. Thank you. Best ever listeners. Thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend. You know, we can't value to through our conversation today. Thank you and have a best ever day.
