President of First Commercial Capital, Gil Figueroa. Exceptional experience originating, underwriting, and closing multi-family and commercial real estate loans. Real Estate Broker since 1993 with in-depth knowledge of the apartment lending and commercial real estate and mortgage industries. Comprehensive knowledge of diverse and complex loan programs, escrow and title procedures, and loan documentation requirements. Outstanding ability in identifying mortgage loan opportunities and financial benefits for clients. Highly experienced financial analyst/wealth planner for high-net-worth individuals focused on delivering practical and effective investment strategies specifically tailored to meet investors’ financial and retirement objectives.
Excellent communicator and professional speaker with over 9 years presenting at wealth conferences and seminars. High degree of integrity and business ethics. Committed to continuous professional growth and learning.
Episode:
Narrator This is The Norris Group’s real estate investor radio show the award-winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever -changing real estate market hosted by author, investor, and hard money lender, Bruce Norris.
Bruce Norris Hi thanks for joining us. My name is Bruce Norris, we have a special guest today Gil Figueroa he is President of First Commercial Capital Inc. He’s got access to exceptional experience originating, underwriting and closing multifamily commercial real estate loans, real estate brokers since 1993, with in depth knowledge of the apartment lending and commercial real estate and mortgage industries, comprehensive knowledge of diverse and complex loan programs, escrow and title procedures, and loan documentation requirements, outstanding ability and identifying mortgage loan opportunities and financial benefits for clients, highly experienced financial analyst wealth planner for high net worth individuals. Focused on delivering practical and effective and investment strategies specifically tailored to meet investor financial and retirement objectives. Excellent communicator, professional speaker with over nine years presenting at wealth conferences and seminars. And that’s how he and I met. And to be honest with you, I’ve always enjoyed his presentations. And I would say one of the few people I take notes on every time I hear him speak. So, that’s pretty cool. So Gil, thanks for joining us today.
Gil Figueroa Thank you, Bruce, and all the accolades I’m humbled.
Bruce Norris Well, it’s true, you know, it’s kind of fun, especially when you get to into charts. You know, I’m so into charts. And you know, whenever you start saying, Hey, this is about to happen in real estate interest rates, and then it happens is you’ve got my attention, man. So, let’s talk a little bit about and the reason this is coming up again, I what I said to you off of the recording is that this is not something that I’m really familiar with is commercial lending. And I’m trying to see what the ramifications are for the economy and so forth. And if there’s some dominoes that are about to fall that I would like to need, I would want to know about. So, let’s go back to the 90s 93 is when you got into the, into this business. Can you take me through the journey of interest rates from let’s say, back then to you know, go through the journey with me about you know, how high they were? And I know how low they got, but what’s the range? That occurred over? That’s a long period of time. That’s what, a long time.
Gil Figueroa Yeah, Bruce, I’ll even take you back a little further actually started in the industry in 91, during the Gulf Wars, and everyone was excited, when I call them with a single digit interest rate.
Bruce Norris There you go.
Gil Figueroa I had great timing getting in the market. So we, you know, the market was in the tents. And during the Gulf War we dropped in nine. So, hence started the refi revolution, so to speak.
Bruce Norris For the, and since then.
Gil Figueroa Yes. And since then.
Bruce Norris Yeah. You know, so that’s what’s interesting. See, that’s what’s kind of in my mind, too, is that the residential journey has benefited from 40 years of interest rate reductions, basically, it’s not been a straight line. But it’s been excessive 17% to two and a half or something. That’s a heck of a journey that keeps buffering the prices together, give it another chance to run. So in your world, you know, that’s why I was interested in the journey. You know, you’re, when you say 10%. And that sounds like a bargain. It’s because you came off of the 80s when it wasn’t 10% That’s for sure.
Gil Figueroa Exactly, exactly. People were excited.
Bruce Norris Now, if they saw at 10%, they’d they flip out and you know, and that’s part of what they’re seeing now, as they are flipping out, probably it may be double what they currently have. So yeah, that’s an eye opener.
Gil Figueroa Yeah.
Bruce Norris Go ahead.
Gil Figueroa Yeah, it’s been unprecedented to have this many increases in one year in such a short term. So yeah, there’s there’s a shock to the system, obviously. And, you know, our traction slowed down so people have slowed down. There’s a lot of deer in the headlights right now.
Bruce Norris Yeah, so what would you say the cap rate history was during that journey? So somebody said, okay, you know, I’ve got to have this and then you’re you go all the way to the 2020 and 21 mindset, what was the acceptable cap rate? And what was that journey? Like? It seemed like it probably would have come down a lot.
Gil Figueroa Well, I remember when I first started, and in looking at it Investing in multifamily, we had almost double digit cap rates. Now, this is a time where California had a lot of jobs leave because of the airspace, I mean, the, you know, the military and the different entities that kind of left California and we were left in a kind of a void, and we had a, you know, hide higher vacancies, 10, 15%. And we had cap rates and double digits. I think that takes us to somewhere around, you know, the early 90s or so. And then, you know, we started the lower interest rate, March sort of speak, and you saw cap rates, you know, compress dropping. So, you know, I wouldn’t say there’s an average, but they’ve been dropping, you know, steadily for the last, you know, 20 years, they’ve been dropping and dropping and dropping. So, you know, at the low, we had caps, you know, probably in 21. At three, you know, I’ve seen two and a half caps in the west side of Los Angeles. So in the higher premium areas, some brokers weren’t even proposing a cap rate because they didn’t have one. So we saw some Pasadena deals and some West Side Beverly Hills and Santa Monica deals without even promoting a cap rate, because it was, you know, inverse situation, so to speak.
Bruce Norris Yeah. See, that’s what’s interesting. So, I mean that that world happens in residential real estate. So, I’m very familiar with those charts. And I do does commercial, does it do it at the same time as or is it in a different cycle? So I’ll just go through when you got into the two markets, a 91. From 89 to 95, or six residential real estate didn’t go up, it went a little bit down every year for that was that chunk of time, after 96. And that was when I wrote my first report of California come back, so prices will double. So, residential, started gradually going up and then got excessive. So, what was the journey of commercial real estate? Let’s say from 91 to 96. And then from 96, to ’06?
Gil Figueroa Wow, you’re gonna test my memory. What I do recall is 96, had foreclosures. We had a tough market, we had a tough market in multifamily. It was a tough market. And we had higher vacancies and and higher cap rates. So, I, as far as my recollection, we didn’t start getting into a positive, upbeat format to probably I’m gonna say, 98, 99.
Bruce Norris Yeah, that makes sense. Yeah.
Gil Figueroa We started picking up aggressively, even through the dotcom bust, we still kind of kept precedent and values were increasing. And then the 94, 93, we saw a big bump and net, and then we started a steady upward trend, or I should say, downward trend in cap rates, upward trends and value.
Bruce Norris Now, when you say dotcom, we’re talking about the, the journey forward to go all the way up, or at that time, we’re broke, say 2000, 2001. So what happened to a commercial?
Gil Figueroa Yeah, it stayed steady. It didn’t lose his short, so to speak. And we saw, you know, more pickup, obviously, thereafter, you know, and especially when the Fed started lowering rates aggressively, during 2001 and forward, then we saw a tremendous pickup we saw cap rates go from eight to six, even five quickly, quickly.
Bruce Norris Yeah, yeah. So that wasn’t, you know, that wasn’t driven by a real estate problem that was delivered of came about because of, let’s say, an economic situation with the stock market and trying to stave off a recession. What happened after say, 2007 when the real estate residential market just tanked tons of foreclosures that had to feed people into apartments. So I wondered what the cycle was for that type of inventory?
Gil Figueroa Well, interesting enough, it did slow down during that period. I think it’s just fear based because it was a fundamental based. So like you said, fundamentally, we had more tenants, we had more people looking for apartments, and we have lower rates, our rates started to drop, you know, as you know, during that period.
Bruce Norris Right.
Gil Figueroa So you know, right before that, we were in the you know, sevens and maybe we dropped to, you know, let’s low sixes. So, we had a nice drop. So fundamentally, it was sound. We had a little bit of a of a hiccup during 08, 09 and then a steady climb from then on. Very steady. People who bought in 09 did great.
Bruce Norris So, the residential price from peak to trough which was kind of bounced in 2009 1011, and 12, are almost the same number for residential California. So, you still had damaged mentally, and also just people’s credit was all messed up that price it was over 50% from peak. So, what was the journey from top to bottom? And I know that we’re talking always on top commercial real estate, it’s always a different product. So apartments and office building, let’s just use those two worlds that how was damaged different for both of those types of products?
Gil Figueroa You know, that’s a good question. Frankly, I didn’t prep for this, but my recollection is, apartments dropped maybe 10%? Not much, maybe 12%. I didn’t see a tremendous drop, we still had demand in product, I think it was more just fear based situation. But the fundamentals were there. And, and we steadily climbed up, especially with rates dropping.
Bruce Norris Okay, and office, now that office get hurt?
Gil Figueroa You know, not not a big office lender, so won’t go, we didn’t, our our market share was probably 85% apartments MSBA in some strip retail deals. So, we didn’t do much in office, we saw some softness, but again, based on my recollection, as far as funding is concerned, office wasn’t one of our big criteria, so I don’t really have a handle on them.
Bruce Norris Okay, now, so let me just make sure when we go forward, what is the what is the product type that you’ve concentrated on? Let’s say, in the last 10 to 15 years?
Gil Figueroa Yeah, the product type that we are about 80 to 85%, based in is multifamily. So far, five units, typically under 100 units, that’s been our kind of our farming sort of speak, it has a a good turnover rate. And assessable buyers, who are, you know, some of the bigger product or hedge funds and so forth.
Bruce Norris Okay. Yeah, some of my questions are going to be not in that world, but I’m trying to I’m trying to get a sense of what’s next for the lender. So let’s talk about who’s the lender for the apartment building? Is it different from the lender of the office, because I just wonder if that whatever’s going to happen in the office space is going to kind of be a contagion to the rest of the portfolio of loans, that type of thing.
Gil Figueroa Right, right, I think office is, is having a lot of issues, because some companies did perform well during, you know, the COVID locked down and and had good metrics. Some people are coming back to the office and wanting their, you know, their client, their employees back in the office space. But right now, what’s bullish for most lenders is multifamily and industrial. So, they haven’t picked up the bullish one on office as of yet at all, so I’m not seeing that as of yet. Not to say it won’t come because a lot of bigger firms are requesting their employees to come back to work and work at a desk and so forth, a stationary area. So it could come back. But my point is, office got hit not only with, you know, obviously other factors, but also with that COVID locked down and not being able to go in the office. So, it some balance sheets performed well, and some others just performed mediocre. But some companies are still moving forward on the no office space model.
Bruce Norris Okay, well, I guess my take would be office, office lending and office occupancy is going to be a be a problem. But I understand that what you’re saying is the apartment of world. Okay, let’s talk about the when you have the the mindset of I think I’ll buy an apartment building at a three or four cap. And now things are changing. So, what would be the impact of the cap rate, let’s say now, and if the direction is less positive, you know, what would be a reasonable cap rate and how does that impact value? And then how does that impact, I want to get a refi and so I bought it at a three cap, what would you like to give me you know, let’s say can I get the same loan amount or am I adding capital at this point?
Gil Figueroa That’s a great question. So if you were, you know, getting lower the lowest rates in town, so to speak in 2020 and 2021. We were selling rates in the low threes, you know, very low three, I think we sold one right at 3% for 10 year money, you know, which was just phenomenal. Ah, just phenomenal, you know. And if you’re if you’re leveraged maximum leverage product and you’re looking for, you know, maximum DCR, which is 120, typically, your the metrics will not work for a refi unless you do pay down. So, if you were maxed out unless you raise rents accordingly to the increase in rates, so you had to be aggressive on your written rental income. And if you were then it might pencil for a 120 day. But in essence, if our rates went up, let’s say 28%, were your rents should go up 28% to keep up with that flow to be able to refi that’s the key question. And a lot of people couldn’t do that, because of COVID and other restrictions and so forth.
Bruce Norris Well, you know, you just brought up another subject. So, somebody that’s holding the paper at 3%, do they have an asset that’s no longer worth face value? And how does that impact the stability of the lending world for them?
Gil Figueroa Great question. So far, and I’ll give you just a heartbeat of where we’re at right now. So, right now, I just had a conference call with with a lot of big institutions, and one of them was Albert Brooks, who heads up heads of Chase Multifamily Lending, for all southern well, actually all a California.
Bruce Norris Okay.
Gil Figueroa He said something that was pretty interesting, especially in this environment, he said that all of California, multifamily have zero 30 day lates on their mortgages. And that was impressive to me. So we’re every one is, yeah, so everyone is, you know, stating gloom and doom, apparently, people are able to make their mortgages. It’s not just some people, it’s everyone in their portfolio. So that’s pretty powerful.
Bruce Norris Performance wise.
Gil Figueroa Right, performance wise, and and a lot of people, you know, aren’t leveraged out. So, there was, what you have to look at, as far as in the non performing product line would be who actually went over leveraged between 20 and 21. You know, because if they were over leveraged in 19, they still bought in the high fours or 5%. So, so chances are, they’re not going to be affected that much. So, it’s, not such quite a big window. So, when we got an 3%, cap rate and 3% interest rates, those people are the ones that if they max leveraged could have an issue and have to pay down potentially, to refinance unless the rents kept up with the interest rate growth.
Bruce Norris What about the actual value of the paper itself? Because that’s what caused the problem with the banks. So, I’m holding, because I’m sure you had clients, maybe multiple, excuse me, refinance multiple times as rates got into numbers they never even thought they would dream of you probably gave him a call and said, ‘Would you like to go from a four to a three and a quarter?’ And of course, they’d say, Yeah, I think I would do that. Well, now there’s a lender that holds that paper, but in a market that’s no longer that. So what is the value of their paper? And are they forced to mark it? Mark to market?
Gil Figueroa Right. Well, I’m assuming just based on on the complete, you know, the credit rating now I know, that’s a precarious statement, credit rating, but I’m assuming because there’s no 30 Day lates is very few defaults, that that’s probably not going to come up, but as of now.
Bruce Norris I don’t mean the default stuff I’m talking about left. Okay, what happened to the bank, they didn’t have any defaults. They had 10 year T-bills, but they had 10 year T-bills at 1.2% in a market that was approaching four. So the mark to market of the 10 year T-bill was in face value was very discounted, so that I guess I’m not worried about the, I guess I’m thinking about and I’m asking because this is not my expertise. Is there somebody looking over like an auditor for whoever is in charge of this looking at their loan portfolio and going, Wow, you have all everything’s current, but this is no longer worth a million dollars. This is a million dollar loan at 3% in a market, that’s now six. So do they extrapolate value and say you really have paper that’s not worth very much? I’m just curious.
Gil Figueroa Well fundamental fundamentally what you’re saying is logical, and they should, but I don’t know the internals of that auditing. To to give you clarity on your question. I would, my assumption, I would assume that as long as it’s performing, it doesn’t become a problem. Now, you know.
Bruce Norris Why didn’t the T-Bill become a problem. So I was kind of blown away by that because you’re right. No one’s laid on the T-Bill. Sorry, we can’t wait…
Gil Figueroa That’s, that’s fractional baning, right? So, remember, when banks are lending, they’re creating money. So, they’re creating money flow through lending, right? So, as far as, you know, the banks that had the problem, they had too much liquidity, and they didn’t have a way to pay out their customers back because of the discrepancy of T-bills to, you know, what the funds that they held. So, there’s the issue. Now, your logics does sustain to the point where people who bought in 20 and 21, that were over leveraged, couldn’t increase rents, and didn’t have a very good strategy to increase rents. Okay. So there is a group of people that might be injured. And these loans should be downgraded to a certain extent, if there was some grading system that would account for that. Now, that being said, one thing that lenders are probably looking at and spooked about, is that reset. So if you had a five, 7 year fixed on a short term product, like a LIBOR? Well, LIBOR is almost at five today, typical bank margins are two and a half, that’s seven and a half. So if you captured a loan at three and a half, and all of a sudden you’re gonna get hit, which there are hurdle rates, some lenders only allow a 2% or a 1% increase during that big adjustment period, some don’t. So, my point is, eventually, if they don’t refinance right now, where rates are in the mid fives, and they just allow the adjustable to continue. That rate could be in the mid 7s. So, that’s a drastic change. There’s no way that loan, I mean, that property can perform unless they increase rents, basically, 60, 70%.
Bruce Norris Yeah, well, that wouldn’t be an option. So, they would have to either bring in cash to get the LTV to be the lead the lenders number, right.
Gil Figueroa Exactly. Exactly. The debt service. Yes.
Bruce Norris Okay. So there’s a lot of that money coming due in the next three years.
Gil Figueroa There is and more so what I’d say is the most precarious position is the money that bought three cap rates bought three and a half cap rates and bought a 3% interest rate. So that 20 to 21, you know, acquisition period, maybe even early 22, if they bought over leveraged if they bought maximum leverage, I should say at 120 and haven’t been able to raise rents. That’s a precarious position. So, there there is a group of investors and funds that could be in a precarious position. Once dealing, yeah, go ahead.
Bruce Norris Well, you say 120 I don’t know what that means. So you have to explain that to me.
Gil Figueroa Yeah. In simple layman’s terms, a lender wants to see after all expenses, alright, so they take your gross rents.
Bruce Norris Right.
Gil Figueroa Use a vacancy factor, then they use all expenses you can imagine including taxes, insurance, management fees, rehab fees, maintenance fees, and so forth, then you have a net number. So, that net number has to be 20% greater than your mortgage payment.
Bruce Norris Wow. Well, that’s pretty conservative lending.
Gil Figueroa That’s, that’s, that’s commercial lending in a nutshell.
Bruce Norris Okay.
Gil Figueroa And some lenders have even a higher threshold of 130 or 135. Like office space typically has a 135, you know, we’re apartments might have a 120, per se.
Joey Romero Well, that’s gonna do it for this week’s episode of the Norris Group Real estate radio show and podcast. Join us next week for part two as Bruce talks commercial and multifamily lending with Gil Figueroa, President of First Commercial Capital Inc.
Narrator For more information on hard money, loans and upcoming events with The Norris Group, check out thenorrisgroup.com. For information on passive investing with trust deeds, visit tngtrustdeeds.com.
Aaron Norris The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
