We sat down with Debt & Structured Finance expert, Rob Doxsee, to discuss the benefits of non-recourse debt. Rob is active in all areas of commercial real estate lending and possesses strong expertise in multifamily agency debt, financing.
Rob, you’ve mentioned before that your clients are always looking to grow their portfolios. Why is it most important for them to do so with non-recourse debt?
Most clients don’t own just one multifamily property; a good portion of my clients own several of them. First-time buyers typically go to the bank looking for a loan because they don’t know where else to go, and what they find is they are required to put a personal guarantee on those loans. One of the challenges people have when looking to expand from one to two properties, is that they end up getting capped by the banks and what the banks’ lending limit is. In that case, they’re going to be forced to find another lender for the next deal and another lender soon after that. It’s constantly dealing with different relationships, different underwriting criteria, different loan forms, and this is happening for them on every transaction they do. In comparison, if you do a non-recourse loan with an agency lender, like CBRE, each deal is looked at in a silo. What I mean by that is that if you have five loans with them/ us, that doesn’t limit the ability to lend to you. It’s constantly the same underwriting, the same terms, and the same forms. It just gives the client simplicity and some consistency to their financing.
You mentioned CBRE looks at each deal in a silo. What do you mean by this?
Good question. When you’re doing a non-recourse loan, the property that we’re looking at needs to support that loan. The lender won’t be dependent on what your personal income is or how much equity you have on your house because you aren’t personally guaranteeing the loan. Each loan you do, your personal financials need to meet the requirements just for that one loan.
If you’re personally guaranteeing that loan, now it brings into play the global cash flow and liabilities you have on that property as well as others. An example of that is recent client of mine is a retired individual, who owned the property for several years and he had no other income other than the real estate. He was looking to refinance the property and the bank required the property to cash flow on not only the buildings’ debt, but also all his personal living expenses and anything else, so it significantly limited how much he could borrow.
In comparison, we’re only looking at the property and nothing outside of that because for us it’s really a stand-alone transaction. Another deal we executed that came to mind, was a borrower who was looking to borrow around $5 million on two properties, but his personal net worth was only about $3.5 million. We required the net worth to be at least equal to or greater than your loan amount, so by looking at each transaction on its own, we’re able to take that $3.5 million net worth and qualify him for two separate $2.5 million loans on each property and make the deal work where others, like a bank, could not.
Clearly non-recourse debt is the way to go if you’re looking to grow your portfolio. How do you advise your clients when they are looking to expand? What risks are they taking if they don’t use non-recourse debt?
When you’re looking at an acquisition, a lot of times our borrowers don’t have enough cash to do it themselves, so they need to bring in additional partners for that equity stack. All though it is a partnership that they’re purchasing the asset under, typically there is one person that is the manager or point person, who’s really running both the partnership and the transaction. On a recourse loan, everyone in the partnership who owns a certain percentage, typically around 20%, is required to personally guarantee on that loan. On a $2 million loan, each person is then liable for that full $2 million, even if they’re only a 25% owner and they only want to be liable for $500,000. In comparison, if you’re the manager and you’re signing on anon-recourse loan, the only requirement is that you meet the net worth requirements that we’ve discussed earlier, meaning no one else must sign anything for that loan.
In addition, and more importantly, if you default on that loan, because the property doesn’t perform as expected, you’re just turning the keys over to the lender and walking away. There’s no recourse back to you. You’re and your partners are not jeopardizing your personal residence or anything else. It not only protects you, but your investor as well.
In summary what is most important when considering non-recourse debt?
If I were to try and sum it up in three take-aways, I’d leave people with this: Number one, consistency in underwriting, standards, and process which gives the borrower the ability to execute multiple deals with ease. Secondly, each deal is a standalone transaction. Therefore, the borrower isn’t limited by net worth and other miscellaneous requirements and can expand his/her portfolio without issue. Lastly, non-recourse debt protects the borrower and any investors.
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