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SHOW NOTES FOR EPISODE 543: COMMERCIAL LENDING IN A COVID ECONOMY
Many things have changed in our Covid economy, including commercial real estate lending. In today’s podcast, CEO of Clopton Capital Jake Clopton shares how Covid has impacted commercial real estate, affected commercial lending and changed real estate investing in general.
What You Will Learn
- What are the three main things lenders look at with multifamily loan applicants?
- Which commercial assets did best in the Covid economy
- Which commercial assets did poorest during the Covid economy
- How Covid became a “trends accelerator”
- Why investors are taking out shorter term loans
- How is the Federal Reserve Bank is trying to fend off a market crash
- What types of commercial loans are going crazy right now?
About Our Guest
Jake Clopton
Jake Clopton founded Clopton Capital in 2010 and is active in all commercial mortgage broker operations. He has an extensive background in commercial finance and interest rate markets, serves as the company president and head mortgage broker, and personally oversees each loan arrangement. Jake has personally negotiated hundreds of millions of dollars in real estate loans and advisory work. Under his guidance, the company developed an extensive network of pertinent relationships. Prior to founding the company, Jake traded interest rate hedging futures. He worked with the largest participant in the Eurodollar futures market (LIBOR) and gained extensive and unique insight into interest rate markets and commercial finance. Jake has created his company with the right balance of versatility, reliability, resolve, and measured aggressiveness in closing deals that make his company a force in the commercial real estate funding industry.
More About Jake
- Before Jake started Clopton Capital, he used to trade inter-bank hedging futures, 3 month LIBOR, fed funds, treasuries with a proprietary firm in Chicago
- Worked 1-3am every day
- In 2009, there was a mortgage crisis but also a banking liquidity crisis
- Everyone was having trouble finding money – businesses, commercial real estate, etc.
- Seeing the need, he wanted to move into the commercial space to help people find money
- He started out helping businesses and real estate owners
- It quickly turned into commercial real estate focus
- And that’s what it has been ever since (for about the last 12 years)
His Business Today
- There focus now is on $1 to 60 million financing side
- All asset types
- Nationwide
- He has his own commercial real estate portfolio in Chicago area
- We just came out of a health crisis, yet the banks have been cautious to lend in light of the pandemic’s impact on the economy
Covid’s Impact on Commercial
- Some commercial real estate has faired better than others
- Office buildings are still there but we haven’t seen the long term impact yet
- He refers to Covid as a “trend accelerator”
- There was already a lot of telecommunicating and other “virtual business” infrastructure in place
- The workforce was primed for what happened
- Covid just forced it to happen sooner than it would have in a more organic transition
- He believes we haven’t fully seen what’s going to happen yet
- There are all viewpoints out there right now
- Some say we aren’t going to need half of the office space out there because everyone is going to telecommute
- But Covid’s not over yet
- Many people are still doing a “hybrid model”
- He’s more with the other camp
- A lot of people will want to do telecommuting
- But once employees see how easy it is for companies to let them go if they never show up at the office or how fast they get looked over for promotions if they’re never there and some other person who is always showing up at the office get the promotion, they may change their tune.
- Nonetheless, lenders are being careful and cognizant of that
- Office trends used to be to fit as many people as possible in a space
- Post-Covid, you now need more square footage per occupant because of social distancing
- Therefore, businesses may need more space with less people
- Post-Covid, you now need more square footage per occupant because of social distancing
- Other commercial sectors got hit harder by Covid
- Hospitality
- The income got shut down overnight
- Hospitality
- And some sectors are doing very well
- Industrial
- Warehousing
- Because online retail and anything logistical is exploding
- Apartments/Multifamily are doing pretty well too
Asset Prices and the Economy
- He looks at what kind of liquidity is being pumped into the system
- If you look at the M2 Money Charts, going back to 2010, you could see where they started quantitative easing
- From 2010-2014, we pumped in about $4-5 trillion into the economy
- In 2020, we did about the same amount but in only a couple of months
- It hasn’t had nearly enough time to filter through the system
- We’re still doing quantitative easing and there’s still really cheap money
- What that means is that asset prices are going to continue to get pushed up
- The Fed has to do that to thwart any kind of depression
- Depression happens when you get asset deflation
- Asset prices crash
- All the loans against them get worthless
- That’s when banks become insolvent
- That’s what they try to avoid
- Depression happens when you get asset deflation
- He doesn’t think asset prices are going to get hit badly
- He thinks they will likely keep moving up
- From 2010-2019, people were saying that we were in a bubble and that prices couldn’t go any higher, but they did
Loan Terms
- Jake is seeing more shorter term loans
- 10 year debt at 3%, on an apartment building, isn’t too bad
- Lots of construction, bridge, renovation, value-add loans
- If you’re buying an apartment on a shorter term value-add proposition with a value pop and maybe you’re going to re-cap
- For stabilized properties, there is quite a spread between buyers and sellers
- Sellers want top dollar and the properties aren’t moving
- For buyers, things may look OK but maybe they’re a little skittish or are looking for a deal
- Therefore, he’s not seeing a lot of stabilized property acquisitions
- Most activity is on the shorter term end
- The longer term fixed rate market is still pretty active
Moving from Single Family to Apartments
- Jumping up to apartments, from single family rentals, is very different
- Single family is residential and apartments are commercial
- The financing for both is very different
- For example, when he looks at a commercial loan, he looks primarily at the asset first (not the buyer)
- Underwrites it
- Looks at the number
- Sees if it will work
- Whereas, with residential, you really look more at the person
- On commercial, if the asset works, then he looks at the person(s)
Criteria for Apartment Buyers
- What he looks for from a buyer is:
- If the person is doing agency debt (Fannie/Freddie):
- Looks at a net worth that is similar to the loan amount
- Looks at liquidity for a decent amount of liquidity (outside of the loan)
- 6-8 months of principle and interest payments
- He’ll look for their experience in owning multifamily buildings
- If they are planning on managing the property themselves, they will look for years of experience doing that
- If the person is doing agency debt (Fannie/Freddie):
Hottest Commercial Loans Right Now
- Any kind of construction for commercial properties
- It’s a difficult product to place but they have lots of experience and get lots of calls
- He also did a lot of construction loans for the single family market in 2020
- Home builder financing
- Flips
- Build to Rent
Advice for Old Dawgs Looking at Moving Into Commercial and/or Apartment Investing
- When he looks at commercial properties, he doesn’t look at it these properties as an investment
- He looks at them as a business
- Acquiring and managing 30 plus units can be a full time job
- You need to understand the commitment and the importance of the management function to your success
- He doesn’t recommend managing it yourself
- He highly recommends getting a good property manager
- You need a good game plan going in
- Put together a good Pro Forma before starting
His Business
- Long term, he wants to continue to do what he’s been doing and improve along the way
- He doesn’t want to run a million different races – he wants to just run a couple really well
- He’s going to stick to his space but continue to add lenders and equity providers
- He also has some cross sales – commercial property insurance
- He continues to network with other suppliers that will benefit his clients (i.e. title insurance, etc.)
Rap-It-Up
- Favorite real estate book: Rich Dad Poor Dad Books
- Favorite business book: Freakonomic Books
- Most valuable web site for success (other than your own): Wealth Management, Real Estate Investing Today, Realty Today, CNBC, Eye on Housing
- Favorite app: They have a Commercial Mortgage Calculator
- Favorite quote: “Just start making phone calls, ask lots of questions and you’ll get to where you want to be.”
- If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? If I were to start all over, I would start with off putting together $20-30 million dollar deals because they are easier to get done than the $500,000 deals. You can get lots of investors in. The financing is easier.
How to Reach Jake
- DM him on LinkedIn: https://www.linkedin.com/in/jakeclopton1/
- Phone: 312-775-0233
- Email: jclopton@cloptoncapital.com
- Website: CloptonCapital.com
THIS PODCAST EPISODE WAS BROUGHT TO YOU BY ROBERT AUGUST CUSTOM SHOES
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