GI18: Financing Multifamily Properties via Fannie Mae and Freddie Mac with Anton Mattli


Welcome to the Global Investors Podcast, a
show that focuses on helping foreign investors enter the lucrative US real estate market.
Host, Charles Carrillo, combined decades of real estate investing experience with a professional
background in international banking to interview experts in all areas of US real estate investing.
Now here’s your host, Charles Carrillo. Welcome to another episode of Global Investors
Podcast. I’m your host, Charles Carrillo. Today we have Anton Mattli. Anton is a CEO
and co-founder of PEAK Multifamily Funding, which focuses on financing and refinancing
multifamily properties and has decades of experience in commercial and investment banking,
private equity and commercial real estate. He graduated from the Zurich Business School,
has worked with major financial institutions in New York, Tokyo, Hong Kong and Zurich,
and has overseen several billion dollars in financing for commercial real estate, aircraft’s,
transport vessels throughout the world. Over the last 15 years, Anton has been advising
family offices, high net worth individuals as well as private investment funds facilitating
their direct investments in commercial real estate across both Europe and the United States.
So thank you very much for being on the show. Yeah, thanks for having me, Charles. And so we met at a Rod Khleif event a few
months back and we had dinner and you were one of the speakers and, it was a fantastic
presentation. And, I briefly touched on your professional background. Can you explain a
little bit more about your previous careers prior to co-founding PEAK multifamily? Sure. Would love to. So, I’m from Switzerland
originally, started out in financed, worked, with, what is known today, UBS in Switzerland
briefly and then in the US, New York and Tokyo in Hong Kong. As you already mentioned. Then
we sold the division to a British bank called Standard Chartered Bank. And, that’s, Paul
asked me to move to Hong Kong and we called essentially all of Asia out of Hong Kong.
And after that, I left banking and started helping a family offices and high net worth
individuals with investments, direct investments, and a significant portion of that cause in
commercial real estate. As we moved into that segment, we realized very quickly that we
like multifamily better than all [inaudible] classes, because you have the ability to really
make changes to a property very quickly. We’re in multifamily, which you just cannot do it
with officer’s industrial spaces and retail, half these long term tenants, leases in place.
So there is nothing wrong with these older asset classes. It’s just that it’s that you
do not really have the ability to change property that quickly, if you see an opportunity, and
that’s I would say is probably the most attractive element of multifamily, then you see a property
that has some problems, you can step in and immediately take action and improve the cash
flow for the property, which then obviously has a positive impact on the valuation. You
just cannot do that as quickly with, other asset types. Obviously you have some like
mobile home parks. It’s kind of similar or be parks or similar. But all the [inaudible]
classes I mentioned or just the, or a little bit slower when it comes to making changes
to what property. Yeah. Yeah, of course. Now your company PEAK
Multifamily, you’re a nationwide, a facilitator of loans from multifamily. Yes. You’re based in Texas. So I imagine you have
a good percentage of your business comes from Texas, but what other areas of the country,
States, markets are you seeing a lot of business from currently? Yes. As you said, like we have still quite
a bit of volume in Texas. It may make up a third of all what we do. In the past it was
probably higher than that. Texas is one of the most landlord friendly States. It has
a lot of so-called class C and B properties that are suitable for private investors to
step in and do these value-adds work activities as I mentioned earlier. So Texas has been
historically one of the most attractive markets as valuations increased in West I’ve looked
in on a market. And that we would say there is a tendency to always look in markets where
obviously there is a lot of employment growth, population growth, plus also landlord friendliness.
And some of the States that currently pop up on a regular basis, is a chore chart, particularly
Atlanta. It’s a very active market. Florida has become very active in though, frankly
speaking, some of the valuations in Florida are noware really steep and in some instances
even exceed what we have seen in Texas. And in some modern markets, Colorado has been
a very good market. But there again, the valuations have moved up quite a bit and we saw now is
an auto market where we have seen a lot of activity there again, because everyone moves
in some of these markets, we see the valuations going up there significantly too and there
are a number of smaller markets like in, in Ohio you have somelike Columbus, Cleveland
these are markets where a lot of investors are active in and then you have falls. So
some markets in the South like Nashville, generally Tennessee, Alabama that you’ll see
quite a bit of activity on the East coast. I would say we have seen a lot in the Carolina,
Virginia, even though devaluations also in achieving and tend to be higher, but the result
is a lot of activity down. Yeah. Maybe see less obviously or these markets
like Californiain particular as well as New York city a New York State where investors
tend to move out of these markets and then invest in some of the markets that have mentioned.
So it’s kind of took the call, the broach of low King land lord friendly States with
better yields than what you would get in, in some of these high costs and high price
markets like California. Great. Yeah. With you being so well versed
with interest rates and where we are now in coming up to the last quarter of 2019 and
we have an election next year, where do you see over the next 12 months in regards to
interest rates and lending availability, your funds where it’s been in the past several
years after the downturn. And where do you see for the next 12 months of interest rates
and just the ability for financing for multifamily? Yeah. so difficult question, why everyone
wants to know the answer. Unfortunately, no one has a crystal ball. I think, well, three,
likely are going to see in my view, and again I might be completely wrong, but I think we
only have a cloud all rise on with the trade war, with global economies struggling with
Europe and Asia on major economies being in a negative interest rate territory which in
my view will likely also force the United States to be more aggressive when it comes
to interest rate cuts. So in the short term, I think there is a good chance as the global
economy including the United States and may slow down further that mean you can see kind
of push towards lower interest rates which also has an impact on the 10 year treasury
in particular. I think, we have seen quite a bit of a drop over the last year. It’s maybe
volatile at 1.4, 6%, and then chunked up two, the one nineties, within less than a month.
So it’s a, it’s a highly volatile environment, but all roll, I would say the interest rate
levels that are important for multifamily investing and auto commercial leader States,
which is really that 10 year treasury apart from short term financing, which is usually
liable and prime rate I would say there is a good chance that we will see these, the
same low rates and potentially lower. However, I would say the risk appetite and the risk
of worse increases with lenders particularly we have seen it with Fannie and Freddie, even
though for 10 year treasury maybe lower equal or lower than it is today, that might be a
possibility that the lenders are actually increasing their spread. So we may not see
a benefit on the ball ring and that’s a borer of a lower rates or significantly lower rates
because the risk margin that is added to the treasury rate is increasing. Now for most investors that are going to be
passive, that are listening or for any type of investor, that is direct investment. And
I imagine that the majority of what you’re doing for PEAK is going to be Fannie and Freddie
Mac. Can you explain what that is? And these are going to be for loans that are $1 million
plus for the loan amount. Yes, that’s right. It’s only worth a good
amount of agency loans Fannie and Freddie. These entities were really great already back
in the 1930s, late thirties with the great depression, essentially had to liquidity crisis
and you had all these banks that essentially versus adding on loans mostly residential
loans back then. Where obviously they needed the RescueBank and that’s where these agencies
[inaudible] they are not truly governments entities, but more government sponsored entities.
So they are not really formally guaranteed by the U S government but there is an implicit
guaranteed are these attached to them, which allows them to essentially fund that lower
cost and then someone in the private markets will be able to do right. So the purpose today,
obviously besides the single family side where they are, the major players, everyone knows
on the multifamily side, the Bernal really they den market share was relatively small
in the early to mid 2000s because the so called CMBS market, which is a private collateral
mortgage bank security market was really active and very aggressive for multifamily properties.
But as 2007 to 2008-9 came around and the whole markets collapsed. The CMBS market essentially
disappeared and the agencies stepped in big time. And over the last roughly 10 years,
they have picked up a significant portion of the multifamily side. And so now they have
become essentially the major players when it comes to financing multifamily properties. Is it true, I’ve heard before that only 1%
of Fannie and Freddie loans during the downturn when in foreclosure, is that correct? Yes. That’s a roughly speaking. It’s correct
in [inaudible] teams smaller than that depending on the sub class. So the default rate was
extremely low because of the underwriting of the way these steels were run the rectum
already back then compared to CMBS loans that had a much more aggressive underwriting to
them I would say todays, CMBS loans or underwritten really similar to do the agency long, sometimes
a little bit more aggressive, but still very similar back then in 2008, it was common to
see CMBS loans that, that allowed to be on the written too to pro forma income. And obviously
they got burned there big time. Never asked agencies already had pretty strict underwriting
requirements. Alright. So that’s, that was one of the reasons why by the agencies aren’t
really suffering these losses. That doesn’t mean that the owners of the properties have
losses. Obviously you have to, it’s a bad service call Roche and you have to leverage
merchant of 20-25% that the Fannie and Freddie were enjoing. So that’s why the actual default
rate was not nearly as big. Also pre 2007, they essentially finance properties that really
felt comfortable with so, and sponsors they comfortable with a sorts of your role. A portfolio
was just very sound. And last thing I want to get into just before
you, you hear so much on the privatization of Fannie and Freddie and they put Trump in
the title of the article and then you have people, you know, it goes one way or the other
way politically. What would really happen my for hedge funds would make out, but what’s
really would be end results to a real estate investor if they were privatized. Yeah. Always leave me. Still do not know what
direction it’s going to go. A thing, my personal belief is what they were to say privatization
ultimately is going to look like the rule will be some mandates that the government
will put on whoever is taking over. And well, I believe it’s only when it comes to to affordability
these types of fraud purchasable will has to reclaim and to be financed even if it’s
even if it’s privatized, so that whoever takes over does not have the freedom to just shut
down whatever segment they want. But that the has the mandates do cover particularly
the affordability affordable properties and that do not just talk about tax credit properties,
just properties that tend to be more affordable to lower income households. And that’s naturally
coworkers a lot of the B and C class properties. And so I think particularly in that B & C
class base, the godless of how exactly that privatization is going to look like my believers,
that there will be very supportive of that segments going forward. Whereas possibly when
it comes to the class say, and luxury markets, they may not be willing to be as supportive.
We just don’t know. But then it comes through the affordable side of things. The, you should
be safe regardless of how it all ultimately is going to look like. When it comes to the
actual well you’ll mean the markets. Obviously that is a little bit trickier to answer. As
long as explain plenty of liquidity and demand for these type of full loans in the market,
I think we will no times to issue as we have it today. It’s only privatization would you
say [inaudible] could easily be done because there will be enough [inaudible] in the market.
The big question is what’s going to happen? if the economy turns and there is no more
appetite to finance these type of loans and I suspect that’s the worst case scenario is
going to happen. We may see, again, the government’s stepping in to rescue whoever was privatized
before. So ultimately I think housing is such a core elements to our economy. That private
deception not and way over the economy is in five years, 10 years from now, the US government
will always that been as necessary to make sure that there is enough housing stock available. Right. So with anything with the government
and nothing really changes. So no matter who’s in who’s in. So the focus that we were, we
have with a lot of, with our listeners is global investing and for passive investors
we also have some investors that are foreign that want to invest directly. And since your
firm works a lot with agency debt, with larger apartment complexes, what would be first steps
if you had a foreign investor they came into, that was said, we’re buying, you know, plus
million dollar complex. What are the first steps to get them in the right direction before
they even start putting offers on properties? Yes. so I’d think we probably have to make
a distinction between someone who would just invest passively with a US sponsor versus
someone who is abroad and decides to invest directly into U S real estate by himself or
with a couple of partners that all from abroad. In the latter case when someone is investing
directly in a property without just being a passive in West or I would say reach out
to lawyers that are burst in that type of cross border investing as well as CPAs that
all were well versed in that type of activity both in your home country as well as in United
States because you want to understand the consequences of what your investment is going
to have from a tax perspective, from a legal perspective, from a reporting perspective.
So yes always leads, the reason why someone wants to invest is diversification and potentially
cash flow abbreviation, safety from the home market and so on. That is all well understood.
But if you do not really understand the underlying legal and tax ramification, you may actually
lose out whatever looked great initially. If you’ll miss certain elements, you actually
may not have a great deal and you’ll potentially lose money. So it’s really important that
you truly understand well, the ramifications of sending money to U S and start investing. For direct investor, what are the normal,
what are the additional lender requirements? So as I understand it, for U S investors with
agency debt, it’s usually 25% down payment, 10% to show is liquidity cash liquidity for
one of the sponsors so that kind of as a reserve, what would be in addition to that for a foreign
investor? So maybe they just have a US entity, they don’t have an SSN social security number,
or they might just have the ITN and then the EIN number with your LLC, what else would
you require or your lender require the bank you’re putting into them. So the down payment requirement is really
not different, right? It all depends, essentially whether the property supports the long term
a cash flow perspective. And it can be as low as 20% whether it is US or a foreign investor.
But you mentioned 25. I would say in most markets today, you probably have to expect
that it’s more around 25 rather than 20%. When it comes to the lender requirement it
depends whether you go with a bank. Banks are more flexible in a lot of interests, but
again, when we specifically talk about agencies there have a doubling of the requirements.
So if you have, let’s say a loan that for US by your just as a simple example of $1
million loan, your net worth requirement would be 1 million. So you as well as your partners
in the deal that guarantee it if you’re a foreign investor, that would be double. So
you would need 2 million and net worth. And when it comes to post-closing liquidity, it’s
the same principle for a U S and West. That will be 10% or more of the loan amount or
in this case 100,000. And if it’s a foreign investor or a group of foreign investors,
then it will be 200 thousands of meaning 20%. So that’s essentially that the two main requirements
you do not really have to set up you personally an LLC strictly from a lender perspective,
but you still have to decide with your lawyers and your CPA how that structure should look
specifically. Typically, it still don’t obviously to an LLC as the actual borrowing entity,
but that’s not necessarily yield as the asked in West or you might be the guarantor, right?
So the actual structure build Lowery, depending on what your legal and tax are going to, to
tell you. But from a lender perspective that’s really your double and they drove them double
post-closing liquidity or the tool key requirements. What do you also need is to have a lawyer
or a CPA that this is the service agent that do United States. Obviously you are not present.
So you need to have an address with a lawyer or a CPA. And that’s essentially it, that’s
a minimum requirement. They need a co-signer? They do not need a co-signer as long as the
lender is satisfied with all the information that is being provided rught, obviously they
comes to the bank statements typically, it’s a little bit hard to verify. then it’s comes
to order net worth, particularly when it comes to business net worth, it sometimes it’s hard
to really verify that net worth is really there. We have had situations where a foreign
investor had to provide an appraisal, from the home country, then that was also translated
into English. Right? So it, it all depends, but ultimately it’s only doable to do it without
any cosigner. In reality, though, very often you’ll have still the US representative that
is the least part of the deal to facilitate it? Right, so in theory it’s possible in practice
doesn’t really happen. That’d be often. In most sentences or foreign investors have trusted
party in the United States. That takes care of the day to day activities like asset management
and all the legal and tax requirements. Yeah. Does that post-closing liquidity need
to be in the United States in one form or another? Or can it be in their home country? It can be in their home country. It’s a depending
on the [inaudible] they will require that some funds are in the United States. It’s
a, it’s flexible, so it’s, it’s smelled that black or white the decision that is being
made. But very often a lender will require that there is a U S bank account in place
and sometimes that will also require that some form of liquidity is within the United
States that the decision for how much that should be depends largely on the comfort level
that the lender has about the property itself, the leverage as well as the buyer. And I imagine the whole team that they have
on the ground and involved in the whole project as so, So suddenly channel is speaking, right. If
someone comes to the U S from abroad and wants to invest, has no track record, would say
a lender, whether it’s a bank or an agency will solely be more conservative. And it could
well be that even though technically into property would qualify for just a 20% down
payment, that it may require a high or down payment just to feel comfortable with someone
who just started out from nowhere in the United States, right? So ultimately a lender, well,
regardless of what the rules are, a lender still needs to be comfortable that the whole
team, including were represents that invest in the U S as well as the property management
company, 10 per floor. Right now if for, that’s all for direct investing.
And we mentioned we touched on earlier about the passive investors. So if I’m a syndicator
and I’m accepting funds from a foreign based passive investor, okay, they’d be a limited
partner LP on the deal. What is the easiest way to verify, and I’ve heard this from a
attorneys before that I’ve said to have them set up their own LLC in the United States
and have them set up a bank account. And if the bank approves them for account, it pretty
much covers the KYC or know your customer, which avoids, especially in this error. Our
global economy with, you might be taking money from you don’t know who you are. So how do
you, how would a syndicator protect themselves in that situation? Yes. I would say it will be very, very of
any funds that come from abroad directly into the sponsors operating account or accounts
even into title escrow, whatever it is, because you are essentially as a sponsor, we would
have to full hundred percent obligation to determine whether that money is clean right?
Now in reality even if you spend a tremendous amount of time doing that, you still cannot
be 100% sure and the metro safe guards to not to completely remove fear obligation to
do that, but at least give you a much higher level of calm for days to sure that they send
the money from a US bank account, whether it’s a personal U S bank account or an LLC
account, it’s not really irrelevant that that point right? Could be a foreign investor that
has a US bank account in his, him, his or her own name and make that investment in,
in that personal lame as long as the funds come from that personal US bank account. At
the least, as you mentioned, the bank has already gone through that KYC process. You
still have to ask questions that still should answer the questionnaire and all that to make
sure that you have to docs in order wiser, that you still have that obligation as someone
who accepts money from, from some one from abroad. But at least you’ll have that very
high safety net that U S bank has already gone through that process. Right? Yeah, because the banks could have more access
to a thorough background and underwriting check of someone versus just an independent
syndicator that’s probably never even dealt with this before. So that makes, that makes
perfect sense. So.. That’s right. Yes. And banks have a whole
armies of departments that, that’s focus on this, right. So syndicator couldn’t never
replicate the systems that the oldies US-based banks have in place to verify. Obviously it
still happens to them that they make mistakes, but overall, at least that the have all the
systems that, at least reduce the riskvery significantly. Okay. All right. Great. And I want to just
ask, if you have new investors that come to you looking to invest maybe in their first
larger property and if their US or foreign base, what is the, what is the advice you
usually ask them for what they should do before they start? Any type of process of purchasing
multifamily? Yeah. if it’s always leave who do the direct
investments, just investigate that market, investigate the legal and tax ramifications
right. So that’s really the key part when you do it passive investment, investigate
the apart from just studying the market themself, right? Investigate a sponsor and when you
feel that you’re comfortable, investigate again and probably investigate again. So that’s
kind of the crucial piece. When you’re a passive investor from abroad do not believe whatever
you see on Facebook and LinkedIn, right? Talk to other investors. That have invested with
that particular sponsor that you’ll really get the true picture of that sponsor. Well
and on top of that, still look at the legal and tax ramifications of your investment.
Why? Because as a sponsor, you are not really a responsible it comes to the tax ramifications
for your bank account, right? So a sponsor, obviously if there are withholding taxes with
payments and all that. The sponsor is responsible for that but you have a double taxation by
comb is not really the sponsor’s responsibility to determine that. So that’s really you as
an investor, that’s your responsibility and that’s a very important element. Yeah. They definitely do their due diligence
and then make sure that they have their tax and legal basis covered before getting started
with anything. So how can people learn more about Peak Multifamily and your firm and yourself? We’ve, the easiest is to to reach out to us
through our website which is a peakmff.com. Like the mountain peak and then M as in Mary
and 2 times f as a frederick dot com. You can also reach me directly. My phone number
is 9727257878. My email address maybe or posting it. So it’s [email protected] We are also
on Facebook. We are on LinkedIn, so it’s very easy to, to reach out to us because we’ve
worked with a lot of sydicates. We are everyone with our firm pretty active on Facebook and
LinkedIn. So it’s if you reach out to us through messenger or any out of form they will respond
to you through that channel too. Okay. Yeah, for sure. And I will post all
that contact information and links all in the notes and in the both for podcasts and
for YouTube. And I want to appreciate you for being on the show today and I know we’re
going to be at another conference this weekend, so I’ll see you in a couple of days. Yeah. Looking forward to that and thanks for
having me, Charles. Thank you very much and have a great rest
of your day. Yes, you too. Thank you for listening to the Global Investors
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