How to Scale Commercial Real Estate Podcast with Sam Wilson On the New York City Podcast Network

Commercial Real Estate Financing Solutions

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In this episode we talk to Ari Shpanya co-founder and CEO at LoanBase the leading online platform for commercial real estate lending He discusses the story behind the company and how they are making it easier for investors to find the financing they need He also offers valuable insights on the current market specifically on the lending environment and breaks down best practices to become a better borrower 00 01 – 07 04 Loans Made Easier Ari talks about his humble beginnings in real estate Introducing Loanbase and the solution they offer in the space Clients can now search for loans in a very simple and seamless way Finding the best lenders by proprietary algorithms and partnering with banks Leaning into product-led growth Focusing on making a good quality product Expanding their customer base through referrals 07 05 – 17 11 Navigating the Current Market The impact of higher interest rates on lending Why we should expect more defaults and foreclosures This will also open up opportunities in distressed real estate It s important to be conservative and don t optimize for profit Make sure no deals will go bad Ari lists things to consider when underwriting conservatively Being a better borrower gives access to better loans Track record matters Establish credibility and experience 17 12 – 18 13 Closing Segment Reach out to Ari Links Below Final Words Tweetable Quotes If your product is good then product-led growth is the best thing because then it becomes viral or at least one happy borrower can tell their colleague And that s the best type of marketing I think in our industry and in general – Ari Shpanya The better borrower you are the better track record you have the better access you have to rates the better access you have to capital the better access you have to investors and inventory and so on – Ari Shpanya —————————————————————————– Connect with Ari through LoanBase com Connect with me I love helping others place money outside of traditional investments that both diversify a strategy and provide solid predictable returns Facebook LinkedIn Like subscribe and leave us a review on Apple Podcasts Spotify Google Podcasts or whatever platform you listen on Thank you for tuning in Email me sam brickeninvestmentgroup com Want to read the full show notes of the episode Check it out below 00 00 00 Ari Shpanya I just couldn t wrap my head around the fact that I had to research for three or four months to find the best lender So you have to pick up the phone you have to call one broker to another broker You need to call too many banks local banks regional banks credit unions and so on and try to compare everything and decide what s the best for you And I just wished I had something that I can just go and put all the filters I want to and get the kind of a simple order or arrangement of which banks I should work with 00 00 42 Sam Wilson Ari Shpanya is the co-founder and CEO of LoanBase Ari welcome to the show 00 00 47 Ari Shpanya Thank you for having me Sam 00 00 49 Sam Wilson The pleasure is mine There are three questions I ask every guest who comes in the show in 90 seconds or less can you tell me where did you start Where are you now And how did you get there 00 00 57 Ari Shpanya Okay I started by buying a single-family home I lived there while I was attending actually a program at Stanford And then I remodeled it by myself And from there there was one more and one more And that s how you get to multifamily I guess But it s always about humble beginnings and I think I m still kind of at the beginning of it 00 01 19 Sam Wilson Interesting What do you do now at LoanBase 00 01 23 Ari Shpanya Oh on a high level LoanBase is a KAYAK or Expedia for commercial real estate loans and investment properties We help investors and borrowers to find the best loan for their needs by searching in a very easy and seamless way Just like you shop for flights on SkyScanner or KAYAK or Expedia 00 01 44 Sam Wilson That is really interesting I guess tell me how did you know or what hole did you see in the market where you said man this is something I need to create And then I guess we ll start there Let s ask that question first So I m not asking you too many all at once 00 01 58 Ari Shpanya Yeah I remember a couple of years ago that was a few months after COVID hit I needed to refinance a couple of properties in San Francisco multifamily it was a 10 million loan for both of them And I just couldn t wrap my head around the fact that I had to research for three or four months to find the best lender So you have to pick up the phone you have to call one broker to another broker You need to call too many banks local banks regional banks credit unions and so on and put all these little notes and you know comments and then try to compare everything and decide what s the best for you And I just wished I had something that I can just go and put all the filters I want to and get the kind of a simple order or arrangement of which banks I should work with And the same was for the process of underwriting and and during underwriting and during that process with the bank it was like it was like pulling a teeth right That was really two three months And you feel like you are being asked for so many documents and everything goes by email So it was really horrendous So yeah I remember actually finding out by the broker that the broker is actually making another yield spread on my deal So not only did you pay a broker fee you re actually paying someone a fee to give you a deal that is better for them rather than better for you And I was really upset So I remember calling the broker and telling them listen this is not okay This is not for here s what I going to do I m going to start a new company and putting you out of business So yeah a joke aside that s kind of what happened and you know it was a result of a real pain of four months process that should be less than a week 00 03 39 Sam Wilson Right man Yeah I I love stories that start that way cause it s like you know what you just you saw problem You said I I can solve this in a more efficient manner How do you stay in front So you you guys aggregate you know like you said you re the KAYAK for loans so I mean you know I I can understand it from the airlines perspective where it s like Hey you know what here s our flights that are available and they can probably integrate their data or they do integrate their data some way such that it can be displayed on KAYAK But how do you guys stay in front of what each lender is offering the terms they re looking for the money they have to lend I mean that s got to be constantly especially right now moving target How do you guys stay in front of that 00 04 18 Ari Shpanya Correct So there are three ways that we do that First is we have banks that are partners so we get their rate cards and rate sheets and essentially we scan them and we do what s called auto parsing So we scan the rate cards and that is being imported to our database We also talk with the banks to verify that So that s part of data integrity And some banks some lenders we we also have a direct integration so that s another way to get the data When the rates are changing we also have some proprietary algorithms that essentially are looking into the fed rate the treasury and calculating based on the rate fluctuation So if the fed rate is increasing today obviously the banks will follow There is a difference between regional banks and national banks and debt funds So some banks are more less receptive or less sensitive to any kind of change in a in the fed rates cause they were lending off their balance sheet but most shops and so on they will be in line with that change So we add that spread or that change to their rates And that s what we present to the consumer at the end of the day or to the borrower 00 05 37 Sam Wilson Tell me about building your company I mean okay so you got this great idea You figured out how to integrate the rates from the lenders And now you said all right the next thing I need is clients I mean you need somebody to come to you and work with LoanBase What was that process Cause we talk a lot of it on the show of scaling your business scaling you know real estate What was the process for you for scaling LoanBase 00 05 59 Ari Shpanya Yeah it s a good question Initially we re relatively a new business We ve been around for the last 18 months out of that probably 12 months in beta So it s really important to have to nail down your product to give a good experience to your first customers So we re still in this kind of stage we re still working mostly based on referrals We get friends clients that refer other clients Obviously we do get some new clients by paid search or by anything of like content or articles out there or but at the end of the day I really think that if your product is good then product-led growth is the best thing because then it becomes viral or at least one happy borrower can tell their colleague I m sure that you have a lot of people you work with so if you are happy with a certain product or a certain technique then you re definitely going to share it with others And that s the best type of marketing I think in our industry and in general 00 07 02 Sam Wilson Got it No I think that s really really cool Tell me your general feeling I mean this is you re involved in the financial markets How should borrowers be protecting themselves What steps should they be taking right now I guess just give me a kind of holistic view if you will on where we are and then what people should be doing 00 07 22 Ari Shpanya Yeah it s interesting that you ask Sam I ve just seen today one of the latest surveys and very thorough research reports And it seems like there is a consensus among the US consumers that this is one of the worst times to to buy a home or at least that s you know as opposed to to last year We can really see that decline And obviously with combination of increasing interest rates it s really something that might be alarming So we are potentially heading to recession Obviously the fed is going to try to make sure that we are not going to hit there but in terms of interest rates we are seeing in our industry right We are seeing the interest rate going up We see that across the entire markets including secondary markets So right now if you are a real estate entrepreneur and you are getting a hard money loan for it can be a rehab construction bridge entitlement land title and you name it you used to get it for seven and a half maybe six maybe even four and a half If you had a good relationship with your local bank Now it s close to ten and ten and a half So it s really not sustainable Debt service coverage ratio is just completely being destroyed if I may say And that will create in my opinion more defaults because if you are in a project already you know that s fine but it will be very hard to get that takeout loan 00 08 53 Ari Shpanya And if you are starting a new project then all the lenders are essentially underwriting to new guidelines And new guidelines mean that there are no more takeout loans at four and a half I m putting aside the relationship discount and so on but most debt shops are underwriting to you know an interest rate of six and a quarter So that means you really need to have a very profitable project I think we re going to see a lot of foreclosures I think we re going to see a lot of projects going to default That s going to create more opportunities Cap rates we see that that is being pressured So this is the end of the cycle just like 2008 so there there are you know winners and losers So I think it s a good time to to have your war chest and be ready for you know for gobbling up some some inventory that will be distressed And if you are an investor you do want to be very cognizant and conservative definitely not over-leverage Always go on a like I would say 65 to 70 LTC like leverage not over-leverage yourself better to have more equity in the deal This is not the time to optimize for your profit This is the time to optimize for your reputation and your deal to survive 00 10 09 Sam Wilson That is really interesting you know what you say there I think that that s sound advice It is not time to optimize for profit That s absolutely great Tell me about this you think the foreclosures will be on the rise because if people are mid-project and like you said they need to take out a loan or they need to you know they need to recapitalize they are not going to be able to refinance at the rates that maybe they underwrote to Is that what you re saying 00 10 31 Ari Shpanya Yeah exactly I mean look the inflation when when the inflation is going up right So you have a certain pressure there you have an interest rate that s going up At the end of the day that creates some pressure on a cap rate So we we see cap rates that are going up as a result we see on a on a higher interest rate we see a debt service ratio that is really hard to reach So we see that you know usually banks will need 1 25 at least but a project that used to be 1 35 is all of a sudden below one which means it cannot serve its debt So in that case it does create that pressure and some entrepreneurs they may you know they they may end up in in default or they may need to bring more collateral and so on You know I remember something that happened to me as a real estate investor in the past and present During COVID I had to bring more liquidity to the deal cause at the end of the day with this space you really want to make sure that you have no single bad apple You always need to have an impeccable track record because your record is everything And you need to make sure that no deal goes bad That s why you you want to go low leverage that s when you CR you want to have the interest reserves but I definitely think that there s going to be a lot of opportunities with these assets that are just not yeah a lot of single-family homes that going to drop in value A lot of other asset class that s going to come down in value and when they cannot serve the debt then that might create an opportunity for other buyers or you know so that s kind of where we are 00 12 20 Sam Wilson The term conservative underwriting is something that is thrown around all the time in our industry Like well we always underwrite you know super conservatively which to me it s like You know when you ask somebody how are you doing They re like oh I m great It really doesn t mean much It s like okay Yeah sure You write it conservatively When I say conservative underwriting what should people be doing if they are projecting a cap rate and exit Like how can they do that conservatively Like what what should people be plugging into their into their charts in order to say hey you know what I think we ve we ve really been hyper-conservative in our underwriting when when establishing our cap rate and exit 00 12 59 Ari Shpanya Yeah That s a good question from what I see with our lenders or you know we have visibility to thousands of lenders so I can tell you that conservative underwriting starts with conservative rent projections for instance So let s say in multifamily let s say we re in wherever in LA or we re in San Francisco where you know we we are looking into market brands that we have to take to account and let s say assume 80 of the current market rate right So we want to be conservative on the market rate We want to be conservative about the vacancy So we want to be conservative about the cost the other costs like the cost to manage a property That s one aspect Then you want to be conservative about the cap rate so let s say if you re in I don t know let s say if you re in LA then it will be used to be four and a half cap and now you re going to underwrite to five and a half for instance So that s another thing And then a third layer would be the debt service coverage ratio So it s actually you can increase that So rather than a 1 2 you can go to 1 3 And the last thing I would say is is take into account the interest rate that could be in a year from now and that s not necessarily a lower rate So you have to be you know hoping for the best and planning for the worst essentially So that s how I look into proformas of other lenders and I just see that everyone is definitely doing that and everyone is also reducing their LTV or LTC so lower loan to value Used to be 80 It dropped to 70 LTC used to be loan to cost 90 now we see it at 80 max And I see now what s called interest reserve So 12 months of the interest reserve holdback okay So that s money that you bring front to the deal especially on the construction deals or rehab deals So all of these are essential steps that lenders are taking in order to make sure that you bring the project to the finish line cause no one wants to get stuck With a construction project right 00 15 21 Sam Wilson No certainly not certainly not What is a practical piece of advice that you would give to somebody that s looking to let s say they come to your platform but what s one thing that they should be doing as a borrower that would set themselves apart and make getting approval on their loans easier 00 15 38 Ari Shpanya Well the thing about real estate investing is it s kind of has the compounding effect right So the better borrower you are the better track record you have the better access you have to rates the better access you have to capital the better access you have to investors and and inventory and so on I would really say it s important for borrowers to focus on their having like their experience with five properties five assets completed So that s something that every real estate investor every real estate borrower should have under their belt And once you have this experience again it relates to what we talked in the past It s okay that you didn t turn a huge profit You know it s really important to establish your credibility and your experience And even if you made a you know a 15 IRR 25 IRR it doesn t matter Even if your LPs made more money than you that s totally fine As long as you have these four or five projects in terms of experience on your belt and then you re golden because that s what you need You need that four or five buildings in terms of experience assets you want to have above a certain credit score which is not an issue And you want to have a certain net liquidity which is also something that you know you want to set aside something and never be over-leveraged So these are the three golden rules or the rules of thumb that I would say for getting a loan today or getting financed And I would say that s a key here 00 17 11 Sam Wilson Fantastic All right Thank you for taking the time to come on the show today It really gives us your view on where we are in the market cycle what s going on in the market and then really telling us you know how to be prepared as a borrower when we come to you know come and talk to the lenders and also just you know telling us about LoanBase and why you started it the problem you saw in the marketplace and then how you creatively solved it I think that s really really cool Certainly appreciate it If our listeners want to get in touch with you or learn more about you what is the best way to do that 00 17 38 Ari Shpanya LoanBase com 00 17 40 Sam Wilson LoanBased com Fantastic We ll make sure we put that there in the show notes Ari thank you again for coming on today I certainly appreciate it 00 17 47 Ari Shpanya Thank you Sam It s been a pleasure Click here to visit this podcast episode