Whitney Sewell: This is your daily real estate syndication show. I'm your host, Whitney Sewell. Today, we've packed a number of shows together to give you some highlights. I know you're going to enjoy the show. Thank you for being with us today. Marcia, welcome to the show. Honored to have you on. I love having guests on who have been in the business a long time and with your level of expertise and experience, especially talking about a topic that's It's on everybody, everybody in this industry. Anyway, it's it's high or I hide on their list of wanting to know more about and have having lots of questions. So thank you for being on the show.
Marcia Kaufman: It's great to be here, Whitney, and thank you for having me.
Whitney Sewell: Yeah. Honored. We're honored to have you. I want to jump right in. You are an expert, no doubt about it. And just in lending, right. And been in this business a long time. And you even mentioned, you know, this is one of your superpowers is the lending landscape. And I think that's what everybody wants to hear anyway. So I want to just jump right in. Why don't you paint that picture for us a little bit right now in the current, you know, landscape around lending and some things that we should know as buyers and, and, but let's get started there.
Marcia Kaufman: Well, an expert, I appreciate that vote of confidence. I've been in lending for over 30 years, really in the commercial sector for the past 10 years. And when the Fed started their interest rate high campaign and interest rates started to soar, people started to panic. For me, it's a market. I started lending when interest rates were 18%. So when rates are at 7%, it seems like a really good environment. However, as you know, when everybody enjoyed two to 3% interest rates over the past couple of years, they lost sight of what a, you know, a very stable, normal lending environment is.
Whitney Sewell: Yeah. That, you know, to think about 18, I always remember the story. My, my in-laws talk about when they bought their first house and I think they assumed the debt because I think it was 17 or 18% and they were thankful to get 16, 17, something like that.
Marcia Kaufman: Correct. So right now with the Fed interest rate and commercial loans are normally tied to a 10-year bond. And when the bond started to inch up on the yield, interest rates rose pretty quickly. The difference in this market compared to other types of the cycle where interest rates are up and down is this was a pretty quick rise. They went up very quickly. interest rates normally go up very quickly and come down very slow. But this was a pretty rapid acceleration. And it caused a pause when people started looking for opportunities, and to see if they were worthwhile with this current interest rate environment.
Whitney Sewell: Yeah, walk us through that a little bit, maybe even the repercussions of, you know, them going up so fast that maybe, you know, like, we haven't seen that, you know, in the past.
Marcia Kaufman: So the repercussions are when investors or developers are looking for a multifamily opportunity, they'll take a look at it from obviously from a cash flow economics perspective, including debt yield and cap rate. And one of the key factors in analyzing a transaction is the current interest rate. So when interest rates are very stable, it's pretty relatively easy to analyze the deal makes sense to invest in. We've seen an appreciating real estate market in the last 10 years, like we haven't in a very long cycle. Normally there's always a bell curve. It comes up every 10, comes down, there's that curve. This was a very long time on the curve. So people were buying into opportunities and appreciation. As soon as interest rates start to increase, they stopped buying into an appreciating real estate market and into a more normalized market. And what does that all mean in basic language? So in basic language, it means that you're looking to acquire a multifamily property, interest rates are two and 3%, rents are rising rapidly nationally, rents have increased rapidly. So when you acquire property, you acquire it, you'll renovate a couple of the apartments so that you can increase your rents, and you'll buy that asset based on appreciating rent after you renovate those properties and re-rent them. The problem is that rents were appreciating, interest rates were appreciating greater, so the cash flow couldn't catch up to the interest rates. So the deal started not to pencil so quickly. So people start to sit on the sidelines and say, you know what, I need to see some stability on the interest rates. That's one side of it. The other side of the concern was, OK, usually on commercial loans for multifamily, they're term loans. There are three, five, seven, 10-year terms, and then they mature, and then you have to refinance. Well, if you acquired that property when interest rates were between 3% and 4%, and now you have to refinance around 6.5% to 7%, can you refinance with the current loan balance without bringing equity to the table? Will the rents support, with the rents rising, will they support the current interest rate environment? So there was a lot of concern in the market. There was a lot of concern in the market. And I think the fear has really stabilized. The rents have really been able to keep pace with the increased interest rates. And we're not seeing that many people on refinances having that big a problem yet. I don't know what the future brings as all these loans start to mature. But right now we haven't seen, you know, the people, there was major concern in the market. I think that has softened quite a bit, it has tempered.
Whitney Sewell: Is that a surprise maybe that you haven't seen as many issues as maybe expected, or maybe they weren't expected?
Marcia Kaufman: you know, is it a surprise? You know, I'm not really sure. I'm not sure, have we not seen a surprise or have we not seen a surprise yet? It's a beginning. As I said, we're seeing the 10-year bond start to come down a little bit. Interest rates come back down. I'm sure that's causing a lot of ease of the concern. So it all also depends on how did that sponsor buy that property? Did he buy it? Did he cash out and take all the equity out? Did the sponsor keep low leverage so that the rents really kept pace with the current interest rates? They didn't take all their cash out? There's a lot of different variables when we're analyzing what will happen.
Whitney Sewell: Who are, you know, or I guess, what are the situations now that you see that are, are the operators that are in the best seat, right? Or are they prepared for this? Well, you know, what's the difference in them and maybe the ones that like you talked about, maybe they, their rents won't support, you know, a refi.
Marcia Kaufman: So the different, the key factor I think is, you know, was the sponsor really experienced? Did they have a track record? Did they understand the asset class they were buying in? Did they not seek really high leverage when financing a deal? You saw a lot of newcomers come into the real estate multifamily market in the last number of years because there was so much opportunity. Everyone thought it's so quick, so easy. Oh, let me buy a property, multifamily, whether they were using their own equity or they were syndicating a deal. And we'll just, you know, we'll buy them, we'll get the rents up, we'll refinance, return all the, you know, give great returns back to our investors. And it was wild for a while, right? Well, now it's not that quick. It takes a little longer to perfect their business plan. They may not be returning those type of returns so quickly right now. Investors may have to stay in their deals a little bit longer. which is truly what a multifamily deal should be. It's not a fix and flip deal. It's a long term play. So, you know, these are all things that I think we're seeing. But a very experienced sponsor who looked at multifamily opportunity has that track record and that experience, just like I do. I've been through many cycles of real estate. So I look at lending from a conservative, aggressive conservative perspective. We understand that prices could come down, rent could come down, interest rates could come up. So we don't look to lever people very high. As a bridge lender, we'll be a little higher leverage because we're lending to the value added and how they can exit our loan, but we also take into consideration as the market starts to change, what factors did we have to consider? So let me expand on that just a little bit. So when the Fed started their interest rate campaign, Bayports is a bridge lender. We'll take a sponsor who's looking to buy a multifamily building, will identify an asset and might need short-term debt to add value by renovating the apartments, raise the rents, and then they'll exit to a permanent loan from either a bank or an agency loan or a CRE loan or insurance funds or something of that nature. So when the Fed started raising rates about 18 months ago to 14 months ago, I told my chief credit officer to start adding 200 basis points to interest rates a while ago. And my office was in uproar. My originators were like, our deals won't pencil, we won't capture deals. And I said, the best deal we do is the deal we don't do, right?
Whitney Sewell: And we're not kidding.
Marcia Kaufman: Right? And we're not doing an investor a favor by putting them into a deal they can't get out of. We have responsibility. So we were very proactive in really modeling to a larger spread. And we also, we're typical debt service coverage ratio. You look at 1.25. I told my staff, model it 200 basis points wider, do 135, just add some cushion because we don't know how long. the Fed will start this campaign, how long rates will stay high. And we want to make sure that the borrowers can exit our bridge to a permanent loan. Long story short, it was the right thing to do. As the Fed slowed their campaign, we eased up on that 200 basis points to 150, 100. Now we still are about 50 basis points above the current spreads. And we're back down more to 125 because we're seeing it's covering. And it actually worked out very well for us as a lender. We're a balance sheet lender, it's our own money. And it worked out very well for our investors or our sponsors rather, who went out and identified opportunities that they bought a good opportunity.
Whitney Sewell: Yeah. Wow. No, I appreciate you diving in there. I think it's, it's hard oftentimes to, to keep up with what's happening or what the federal reserve is doing and what that means for us. And, and yeah, I, uh, I've heard more and more talk about, you know, the, the caps that are coming due and, and whatnot, and people can't afford them, you know, and you, you briefly talked about, you know, you can't afford the refile, whatever. But there's many issues on the debt side. And one thing I wanted to mention that you said even earlier, you know, you talked about sponsors that have the experience, you know, typically they'll have the lower leverage as well. And, and on and on, you know, different people I've interviewed even recently, as we're talking about risk and people that have been in the business like yourself, 30, 40 years. And one of the biggest things they say is low leverage, low leverage, low leverage. And, and so I just, it just keeps hitting me in the face and I'm glad it is right as an operator myself. And so, you know, but, but it's tempting, right. When things were just going amazing or how much, you know, how high a leverage can we put on something, right. And, and that's, you know, you're not thinking long-term, right. You're not thinking about the potential downside in that moment.
Marcia Kaufman: Correct. And as a lender, we're competing for deals, for originating deals out there. And we're sticking to our credit guidelines, our underwriting guidelines. And we have long-term borrowers that have been with us for many, many years. And we'll hear many times that the guy, the lender down the road is going to offer more leverage. And for a moment, you take pause. Are they smarter than we are? Right? Are we willing to lose a borrower to a lender who's a lot more aggressive or given more leverage or may underwrite to a lower debt service coverage ratio or lower cap rates? And as a lender, you really have to say, what do we do here? It's very hard at times when you're trying to build volume as a lender to stick to those strong principles. But if you don't stick to those principles, you're not going to be in business to talk about it. But as you know, as everybody knows, there's been a lot of liquidity in the market over the past seven years. Everybody, Wall Street's come in very heavily, insurance companies, the market's been very liquid, and the deal flow has been very strong. And in order to compete with deal flow, it's a couple of things. These are lower interest rates. higher leverage, more flexibility on sponsor experience, all the things of the bells and whistles that create, you know, should we be doing those deals? Ding, ding, ding, ding, ding. And yet we have to do business. You know, I have, you know, partners, a board that I report to, they're always discussing how's volume, how's origination, you know, how's performance, how's our, you know, our assets under management performing. And it's, you got to balance that, it's operating a company.
Whitney Sewell: No doubt about it. And I want to get to some of that in a bit, maybe in the next segment, just so the listeners know just the operation side of a company and how you have grown at what 40%. I think, you know, the business since you've been there. So I'm wanting to get into that, but before we do, maybe it's a good time for you to speak to say private, you know, lending versus say larger institutions and maybe some of the benefits, you know, of that. I know many operators, you know, listen to the show and may have used both, but, but maybe it's a good time for you to elaborate a little bit.
Marcia Kaufman: Great. So when the Fed started their interest rate hike, and we saw a couple of banks had some difficulty. I'm not going to get into those names. We all understand who they are. And banks in general started to have pencils down on commercial lending. They were taking a pause. Either they had to increase their deposits or for whatever reason, they took a pause or were slowing down. Maybe they wanted to see how their assets under management were performing. we're an alternative lender, we're a private lender. And we have liquidity, we're here to lend money. So we're here to support borrowers and sponsors in their real estate opportunities. So private lenders, alternative lenders like Bayport are doing very, very well. People may say we're a little more expensive. It's not really the case, especially as interest rates have risen. But we have seen a big uptick in inquiries and business with the market the way it is. The flip side of that, we've also turned away more loans than we've actually done, because some of those loans are refinances of loans that are either not just a maturity default, might have an event default. So we've been very careful about the loans that we are putting on our books. but we are there to support the sponsors with their good opportunities and their good loans. We're also there to support the sponsors who have maturities default, but they just couldn't get their deal done on time. So they perform very well at their current lenders. They might be mid-construction or mid-renovation. They need a little more time. Maybe they had building department delays or supply chain issue delays, and they just need a bit more time to complete their project. We've seen a big uptick in those type of loans come across our desk, and we've actually originated quite a number of those. That's been very good for us from a business perspective during these times.
Whitney Sewell: Yeah. Yeah. I, it's such a relationship business. Right. And you know, I love the, you know, having the expertise of, of our lender to underwrite our deals. Right. And give feedback. I love that. I love more eyes on that and experience, you know, teams like yourself who have been doing this even a lot longer than we have as well. So when they push back on something, Yeah, it, it, it sharpens our knife, right. It sharpens our, our pencil, I should say. And so we get better, you know, at underwriting and I bet, I bet many of those deals that you didn't do, you know, those operators may not have done it, but they're probably thanking you now. Right. You know, they're, they're thinking, man, you know, I, I, they did me a favor by turning them away. So.
Marcia Kaufman: Right, and you brought up a very important point. There's no substitute for sponsor experience. There is none. We meet and speak to every sponsor that we lend money to. People think that's archaic, but it's not. We want to look at them in the eye. We want them to express verbally what their business plan is, talk about their experience. There's no substitute for that, getting to know somebody. Either it's done in person via Zoom, or we'll go, if it's out of our, our home geographic, we'll get on a plane or a train and go visit them, look at their project. We want to know where we're deploying our money and who we're deploying it to. And I would think equally important to a sponsor, if we're going to a private lender or alternative lender, you want to know who you're borrowing money from. Do they have the capacity to deploy? You don't want, a sponsor doesn't want to take down a loan and have construction or rehab money and not understand how that draw process money is deployed to them and how that affects their loan and their timeline. So it's very important for that sponsor-lender relationship, getting to know them, meeting them in person. It's a very mutual relationship.
Whitney Sewell: Yeah. You know, we, we've created a relationship with a, with a lender lender. That's our good, I'm friends with the owner and stuff and, and over time. Right. And as they've gotten to know us, you know, we had not done a deal with them yet, but we, we. Had another lender back out two weeks before closing and they had backed out almost 500 loans. You know, at this time, it wasn't anything just about us. And so it was a massive ordeal. Right. But this relationship, you know, this, this new lender came in and closed, you know, within two weeks. for us. So, but it was, yeah, it was a relationship that we had built over, you know, quite a long time. And so I can't speak enough about what you just said, just the relationship meeting and, you know, and just, you know, doing life, some life together, right. To get to know each other, right. Before, before you're in a crunch situation like that, then you're, you're calling Marsha. You're trying to figure that out and you only have two weeks. Well,
Marcia Kaufman: But to that point also, that's the difference with an alternative lender is that timeline as opposed to going to a traditional bank. If you were in that bind and you came to an alternative lender, private lender like a Bayport, and you said, I have to close, I have a time of the essence, I need to close in two weeks, no problem. As long as we have that appraisal and title and we can really get your information in, that is a tremendous asset that we lend to our sponsor, that timeliness of being able to close quickly. It's a story we hear all the time.
Whitney Sewell: I bet. I bet it is. It has to be, you know, what about, you know, speak to the federal reserve a little bit and activities, you know, what they do, right. How that affects a multifamily and, and maybe your expectation, you know, over the next six, eight, 12 months.
Marcia Kaufman: Well, everybody always asks me, what do I think rates are going to do? I don't know. If rates are going to go up, they're going to come down. My crystal ball doesn't work on Tuesdays or Wednesdays. Catch me maybe on a Friday. But the Federal Reserve, there's a campaign because they have to control the inflation. We're seeing some very good indicators. I think the employment numbers came out today. All those, high unemployment's good for interest rates, good for the economy. I think that we're gonna see, I don't know where they're going. I believe that we should see softening hopefully within, I would say 18 months or so. Some people say they're gonna start to see a softening already. You ask three people the same question, you're gonna get four different answers, right? But it had to, the Fed had to raise rates. Did they do it too aggressively? Inflation was out of control. real estate prices appreciation were out of control, rents were out of control, there was a need. This is not the first time that we've seen this. As rates go up, values come down, things come back in line. Although in some parts of the country, we haven't really seen home prices come down or values come down or rents come down. That has to do largely also because we have a housing supply shortage in the United States and that's a big problem. So geographically, depending on where we're lending or where people are borrowing, you know, it depends on where the geographic. On the East Coast, you know, housing supply is tight. You know, if we just took the site multifamily on the one to four family site, get the housing shortage, right? Home goes on the market, it goes right away. So we haven't seen home prices come down really aggressively. In more densely populated condo areas, urban areas, have we seen those types of prices come down? Yes. In the multifamily sector, have we seen rents really top out? I think they're topping out, but we're still seeing slight appreciation, not the way that it was before. And then you have geographic areas where government situations, where governmental controls, where you might have rent stabilization or rent control. And those leads to a whole bunch of other issues. In the New York area in particular, they did away with the 421A. That's been a problem where sponsors or developers would come in and build a new multifamily with an affordable factor because they had this 421A tax abatement. New York's done away with that. It has been a real incentive for sponsors to come in and build new multifamily because there's no tax abatement and the numbers don't make sense. So it depends on where the geographic area is and, you know, and that has a lot of effect on it as well. There's not a lot of incentives.
Whitney Sewell: Yeah. Where do you see, I guess, the most activity, right, or the most, you know, or from multifamily as far as, you know, different parts of the country or, you know, places that are, that are still moving or not.
Marcia Kaufman: Well, we're seeing wherever we saw a huge migration from a, from migration, like New York, you saw a lot of, and, and California, you saw, you saw a lot of migration to Florida and to Texas, right? So, and it's not just in Florida in particular, it's not retirees. They're young families, people starting their careers, moving their families down there, and they have a housing need. And their population levels have really exploded and continue to increase. So those areas we're supporting, especially we do a lot on Florida. We don't lend in Texas. Actually, we do Dallas. We've actually moved into Dallas. And we see a lot of opportunity there as well. But we're seeing in the areas where the politics are right, and the income taxes are correct for much more take-home pay for people. We've seen that population migration, and therefore, they need a lot more multifamily needs in those areas.
Whitney Sewell: Marcia, you know, one thing that's mentioned in your bio, and I've read a little bit about you on the website and whatnot, is this a 40% growth since you've been CEO at Bayport. And I wanted to dive into that as well. I get questions all the time about scaling, how we've scaled, how we've grown to what some would say fast. But, but I think there's, it doesn't happen by accident. More times than not, I'll say. But so I want to dive in there and maybe you can, you know, help us just dive in on how you all grown, how, what, maybe some practical things you all done and, and, and let's talk about it.
Marcia Kaufman: So absolutely. Thank you. So as we all know, you know, growing a company is not an easy thing to do, especially we had a lot of headwinds this last, you know, 24 months. And we also had headwinds with COVID when I came into the company. We just, right when I started about a little less than a year later, we hit COVID. The reason I attribute the growth to is, one, we have a tremendously well-seasoned staff. When a borrower is looking to a lender to borrow money for their assets, to build their business, they want to do business with a lender that is really steeped in knowledge, not people that can't talk to their business. So one of the things that I did when I came into Bayport funding is I brought in some very well experienced people in lending from a multifamily perspective that understood how to pencil and how to do deals and how to grow the company. So that's one. So I attribute a lot of that to our great staff that we have here. We have a phenomenal team. Number two, we were very fortunate to be able to increase our credit facility with our agent bank, where they had a lot of confidence in Bayport, basically based off of our performance of our assets under management and our lending criteria. So increasing our credit facility to two, one of our facilities to $200 million was a huge advantage to be able to lend more money and grow the business. Without that, you couldn't grow our business. We also were able to grow our geographic expansion. We now, we started out as a tri-state lender and we are now lending from, we're an East Coast lender and we lend in Dallas as well. We're very methodical about how we grow our geographic footprint. We want to make sure that we have boots on the ground, that we spend time in those geographic areas, and understand the law of the land, and that includes landlord-tenant rules, foreclosure rules, what's customary from a legal perspective, a title perspective, so we're very methodical in that area. I also attribute our growth to increasing our market share. Because we're a balance sheet lender and it's our own money, we've been able to pick up quite a bit of new borrowers who, during the past number of years, were going to aggregators. And what's an aggregator? Because there was so much liquidity in the market, you had a lot of companies that, lenders that came into the business that weren't really lenders. They would originate a loan in their name, They'd sell it to another party. They'd sell it to Wall Street. So they didn't really originate and keep those loans and service those loans. They basically were super brokers. And when the sophisticated sponsor realized that they weren't dealing directly with a lender, but more to like a super broker that sold to another third party, they fled from those relationships because they weren't, they were not long-term to support what they needed. And we picked up quite a bit of market share. We also expanded our, besides our geographic expansion, we expanded our lending box to include ground-up construction for multifamily and the one to four family investor in properties. We do that heavy mid-construction refinance for maturity, loans maturing well for another lender. And we've expanded that box as well. So it's not only one area that I attribute are able to grow our business by 40%. It's an accumulation of all these different factors that have positioned Bayport to be a very strong lender and pick up additional business.
Whitney Sewell: Yeah. Love that. I love that. You know, you can just list out these things too. Like this is exactly what we did. Uh, and, and, you know, starting at the top though, uh, it's, you know, even going back to yesterday's segment a little bit, talking about partnerships, right. And bringing in, uh, experience. You talked about people that are getting started in it and you definitely had the experience, but you still knew the value and having seasoned staff and people that were, you weren't training right from the ground up in the very beginning. you know, speak to finding, you know, how you were successful in finding and bringing on, you know, the experience, the experienced staff.
Marcia Kaufman: Absolutely. So, you know, initially, the labor market was very tight. And everybody was working from home, as you know, I only everybody want to be remote, they want to work from home, people were asking for crazy salaries without the expertise. So we had a very tight labor market. So fortunately, for me, I've had I've employed a lot of people over the years. So it was easy for me to pick up a phone call to some of my old staff who were maybe looking for a change. And where I've called me and they were looking for a change. So it's opportunistic for me to say, OK, I have an opportunity for you to come join us. So I hit the ground running because they knew how I worked. I knew how they work. And that was great. And then, you know, we have I don't have a work at home or remote philosophy. I know that sounds a little bizarre in this day and age with all the millennials want to work at home. I like everybody in office for a number of reasons. One, it becomes a much more collaborative environment. You can mentor people and there's also more accountability. So you're running a much more efficient operation. I also like the separation between work life and home life. So when people go home at night, as opposed to work at home, there's no separation. They go home, they take a break. So we work in the office. There's no remote, unless people have something that they need to take care of, which we're very understanding and we're very flexible with. But that ability to have everybody work in office and build that collaborative, cohesive environment has really been very, has been tremendous for Bayport. And it's been great for our staff as well because it's a great training opportunity for them to learn and to cross train as well. So unfortunately, you know, as I mentioned, it was a very tight labor market. And, you know, we had to parse through a lot of people who applied for a job and they really didn't have the skill set that was needed. And we just took our time to hire the right people. And we're very fortunate. Our team is very strong. They're very experienced. And there's a lot of course training here at Bayport Funding.
Whitney Sewell: So, Marsha, pleasure to have you on the show. Grateful for your time. And tell the listeners again how they can get in touch with you and learn more about you.
Marcia Kaufman: Great. Thank you. And Whitney, thank you so much. This has been a real pleasure. You can reach out to me at Marsha, M-A-R-C-I-A, at bayportfunding.com. Or you can dial me directly in my office always in local area code 516-441-5888. That's 516-441-5888. And please, you know, anyone wants to call and ask me any questions, I'm always here to answer those questions.
Whitney Sewell: Thank you for being with us again today. I hope that you have learned a lot from the show. Don't forget to like and subscribe. I hope you're telling your friends about the Real Estate Syndication Show and how they can also build wealth in real estate. You can also go to lifebridgecapital.com and start investing today.
