Putting Together Your Capital Stack – Debt | S3E5

As far as deal-making and deal-doing are concerned, the last three episodes or so have been really focused on the making side. While making deals is great, if you can’t get them closed, they’re not worth anything. In this episode, we’re beginning to bridge over to the doing side.

Episode 5 is the second part of putting together your capital stack for deal-making and deal-doing in commercial real estate. Where the last episode talked about equity, this episode specifically talks about debt. Hear about the three things we think about concerning debt in your capital stack.

Below, find the video and audio version of the podcast as well as a transcript to follow along to.

Putting Together Your Capital Stack – Debt

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Episode Transcript

Announcer (00:00):

Welcome to the Adventures in CRE Audio Series. Join Michael Belasco and Spencer Burton as they pull back the curtain on everything commercial real estate and introduce you to some of the top minds in the industry. If you want to take your skills to the next level and be part of a growing community of CRE professionals across the world, this is for you.

Sam Carlson (00:25):

All right. Welcome back. This is season three. We’ve got a good one for you today. I’m joined in studio by Michael and Spencer, how you guys doing?

Spencer Burton (00:32):

Sam, nice to see you.

Michael Belasco (00:33):

Very well.

Sam Carlson (00:35):

All right. So I want to go ahead and introduce the topic today. We have… in season three so far, we’ve talked… and maybe you can help me remember. We were talking about strategy, sourcing, capital.

Spencer Burton (00:42):


Sam Carlson (00:43):

And this, we’re almost calling a part two of capital, is that right?

Spencer Burton (00:47):

Yeah, it really is. So capital really we were talking about raising equity. In this episode, we’re going to talk about… share some war stories and the like around debt. There’s an important distinction between how one raises equity and how one secures debt, so we’ll go through that today.

Sam Carlson (01:08):

Okay. Again, if this is your first episode, maybe you’re a new listener, you’re keying into Adventures in CRE, our Audio Series for the first time, season three, we have a theme running through the entire season, which is deal making and deal doing. The inception of this idea is because honestly, between the two of you, we’ve the complete, really package. As far as the transactions are concerned, deal making, deal doing and I feel like a lot of the last three episodes or so have been really focused on the making side. But making deals is great, but if you can’t get them closed, they’re not worth anything. So we’re going to start now probably… it seems like we’re bridging now over to the doing side. So I’m excited. I think everybody who’s watching or listening is also excited. So let’s go ahead and jump into it. Spencer, I’ll turn it over to you first.

Spencer Burton (02:01):

Yeah. So when I think about debt, and I’m really now putting my making hat on. In the industry, we call this the business side of a transaction. What matters most are really three things when I think about debt. The first is its important to understand the lender mindset. So many of listening or watching, you’re on the borrower side of this equation. And from the borrower’s perspective, this is a real estate investment. It has risks embedded in it and hopefully, the return outweighs the risk, such that it’s an investible opportunity. The lender’s mindset is different, right? So the lender has no upside. Since the lender has no upside, it must ensure that it’s downside is fully protected.

Sam Carlson (03:00):

Explain that further. Why does… just bring it all the way home, why does-

Michael Belasco (03:04):

That’s really good. I mean, it’s so simple but it’s right on point. Yeah.

Sam Carlson (03:08):

Why does a lender for those… why does a lender have no upside? What’s the reason?

Spencer Burton (03:12):

Yeah. So a lender lends either on a fixed rate… and by the way, there is protection that the lender puts in place, even on a fixed rate, right? Because where’s the risk in a fixed rate loan? Well, it changes in interest rates. So they use certain pricing mechanisms, they include prepayment penalties, in order to ensure that even their fixed rate is hedged against interest rate risks. So either they’re lending on a fixed rate, or they’re lending on a variable rate, but it’s at some spread above their benchmark. Which really essentially what a variable rate does is it takes the… it pushes the interest rate risk over to the borrower. But at the end of the day, the lenders are either earning that spread above some benchmark, which is essentially a fixed return, or it earns the actual fixed rate that it earns on a loan.

Spencer Burton (04:06):

And therefore, if you’re… you as the owner, make a home run on this deal, the lender makes the same amount. If you lose money on the deal, theoretically, the lender makes the same amount. The lender has no upside, and so therefore must protect its downside.

Michael Belasco (04:24):

So when you’re putting the capital stack in your mind and you’re looking at the traditional capital stack, it’s GP. They’re typically the most aggressive. They’re the ones that are selling the dream. You have the LP somewhere in between. The LP stands to earn more the more successful it is, but they need to bring the clouds to the ground a little bit, is kind of the way you think about it. And then the debt, it’s all about preserving their capital. They are… what are the risks because I have no upside? I don’t care how successful you are, if you’re moderately successful, I’m making the same. If you’re going to go in the tank, I hope I’m protected from that downside.

Sam Carlson (04:57):

Well what’s interesting about that is just from a perspective, just understanding the different perspectives, the mindset, the approach, I mean, the way you communicate with people, that is like the central, that’s the hub. That’s the catalyst of your results in your career, okay? So if you’re talking to a GP an LP, whatever the case may be, you really have to know what their motivations are, and if it’s to protect capital, in this case we’re talking about debt, then you got to talk to them in that way. That’s a foundational structure. Something where we need to start the conversation there. So as we talk about debt structures and the capital stack, that it all makes sense because there are. There’s quite a few nuances from the last podcast where we talked about raising capital, relationships with people and things like that, networking. This is largely guidelines to an extent. And I’ll let you Spencer kind of explain it better, but-

Spencer Burton (05:59):

Yeah, I think there… definitely the things we talked about in the previous episode around relationships and experience are relevant, as it comes to securing debt.

Sam Carlson (06:10):


Spencer Burton (06:11):

But really, there’s more to it. It’s understanding that lender mindset allows you to frame conversations and present your deal in such a way where it understands where the lender’s coming from, right? It encourages you to be patient with a lender that needs to check its boxes and it’s not all just bureaucratic. It’s very much… the lender knows what it’s downside is and it needs certain documents. It needs to go through a certain process in order to ensure that that downside is protected, and that can be difficult.

Spencer Burton (06:55):

Maybe I’ll give my first example. And this was… I think all of us are aware now, through the stories that we’ve told over the last few episodes that I spent a fair amount of time developing housing projects in Panama. So how that process worked is we were the developer, so we secured the land. We lined up the contractors, we entitled the property. We were also though the builder, and so we would develop the property and then we had our own in-house construction workers, for lack of a better term.

Michael Belasco (07:35):

Team. Yep.

Spencer Burton (07:36):

A team, yeah. Who put the walls up, who put the… plumbing, electrical-

Michael Belasco (07:43):

All with equity.

Spencer Burton (07:45):

No, we had debt.

Michael Belasco (07:45):


Spencer Burton (07:46):

And that’s a different story. So where I’m getting with that is we essentially would bring the house to completion and then the meantime, we’d gone out and we actually presold the house. So we had a borrower in place. That borrower, with our help… in a way, we were mortgage brokers as well. It’s very vertically integrated in Panama. So we would connect that borrower with a lender, okay? And that lender would provide financing to that borrower so they could purchase the home. And one of the lenders that we and our buyers would work with was called Banco Nacional de Panama. It was the national bank of Panama. It was a public bank.

Spencer Burton (08:33):

So for one, you have the bureaucracy of a public sort of entity like that, but then you had the realities of a lender and a lender mindset. Those of us who sit on the equity side, we say equity, GP and LP, time is money. And we think about that all day long. So it’s like how can we do this faster? There’s always this urgency. Well lenders generally don’t have urgency and even less so, public lenders. So our very first phase, we put out this whole block of homes. And how phasing worked, at least how our capital worked was… and the loan that we had with our construction lender, we could not start the second phase until the first phase was completely sold. And sold meant closed and so we had to wait on the end lenders process to close, to pay us… to ultimately close the house. We would… it would return all of our equity, capital. We would pay back our construction lender and then we could start phase two.

Spencer Burton (09:55):

And most of the end lenders that were providing the financing to our buyers were reasonably fast. Now, they still took twice as long as we had anticipated because their requirements were such that again, that lender mindset. There’s not urgency. It’s very much give me these 30 items and then I’ll close, unless I find two or three other things that I also might need.

Michael Belasco (10:24):

I was just going to say, you’re missing a critical phase.

Spencer Burton (10:28):


Michael Belasco (10:28):

Go ahead.

Spencer Burton (10:29):

Yeah. So we were pretty frustrated. We were stalled. We have this whole team of people who are on payroll, who are meant to be building houses that were just sitting on the sideline earning a paycheck, but not actually working. And it came down to this very last lender Banco Nacional. And we had to close four final homes with them. And week after week would go by and pretty soon we’re worried about being able to pay our people, right? Because we’ve got finished houses, we’ve got people that are on the payroll and nothing is happening and on top of that… and there’s this bank. So I had this moment where I was feeling some serious stress, largely because there was a question whether we would be able to make our payroll. And so I set up a meeting with the head of that department to talk to this individual, and… by this point in time, I developed a fair mindset around how lenders think.

Spencer Burton (11:43):

Early in my career, I was a partner in a mortgage company. So I understood to a certain degree, now this is a whole different country. And literally here I went in the door, hat in hand, I remember sitting in the lobby three hours. I kid you not, three hours in the lobby waiting to speak to this individual. I went into this individual’s office and essentially, and as diplomatic as I could, plead for those last four homes to closed and try to understand what exactly are you needing? What’s holding these last four homes up? My pad and paper, what can I do to help you? And we laid out some items and he said, “If you can get me this and this by this date, I’ll commit to you that I’ll have these last four closed.” And we did. I mean, we rushed immediately and that’s it-

Michael Belasco (12:43):

How much of a time frame was that from-

Spencer Burton (12:45):

I think it was 10 days.

Michael Belasco (12:45):


Spencer Burton (12:48):

That’s another lesson here is-

Michael Belasco (12:49):

Can I ask a question real quick?

Spencer Burton (12:50):

Go ahead.

Michael Belasco (12:51):

I should know the answer to this question by the way. Was the construction lender the same bank?

Spencer Burton (12:56):


Michael Belasco (12:57):

Okay, so two separate banks?

Spencer Burton (12:57):

Two separate banks. Yeah. In fact, the construction lender did also provide financing to buyers and they were much faster, because they had slightly different incentives. They were sitting on both sides of this equation. But in this case, there was no urgency at all and in my experience, virtually all lenders are this way and that’s because protecting their downside’s so important that they can’t rush anything. And there are lenders that move really fast and don’t get me wrong, nevertheless, a lender in needing to protect its downside must cross all its T’s, dot all its I’s. So in this case, what I had to do is humbly accept that these are the things the lender needed, whether I thought they were reasonable or not, the lender needed these items and it was my job to provide them, so that we could get to the finish line. And we did and it worked out okay. Went on to the next phase and we learned our lesson from that.

Sam Carlson (13:54):

I wonder if… I don’t know if this is… I know we’ve got some notes with some general ideas of where we want to take this, but I’m actually kind of curious now, based on the last couple episodes we’ve done, when we’re talking about debt, capital, everything that we’ve been talking about over… this episode and the last one, do we take… how much of that is taken into consideration when we’re at those beginning phases, that strategy phase? Because are we… in a way, you develop a capital stack strategy at the strategy phase, is that right?

Spencer Burton (14:27):

Yes. You need to understand where your capital’s coming from at the strategy phase.

Michael Belasco (14:32):

Now you might not be dialed in, but you will have a general idea early.

Sam Carlson (14:37):

Okay. So maybe… and I don’t know if this is kind of derailing where we’re going, but I’m kind of curious, at the starting phases, how does the money… let’s say we’ve already talked about relationships and how to get capital and now we’re talking about debt. When we’re starting, how does it chronologically… how does it flow? How do we use the two pieces? How do they work together? I mean, in this case you were talking about the construction loan, and then we’re talking about a take out loan, so then the construction loan can redraw again, right? So talk to me about… when you’re talking about… does this make sense if we go back and talk about the strategy phase-

Spencer Burton (15:16):

The process or…

Sam Carlson (15:17):

Yeah, the process. I guess what I’m getting at is I think the nature of debt is… it seems like that makes sense to me. But I’m wondering when you’re operating… and Micheal, this is to maybe your beat. When you’re operating the finances of the business, I imagine that you’re almost like on a daily basis looking at “Okay, debt, equity, debt, equity. Reach out to that person. Reach out to…” how do those two things balance out? When you start something, I’m guess you’re forecasting. So I just want to know when you look at the… just the chronological, the implementation of the stack, I guess is what I’m asking.

Michael Belasco (15:59):

Well it depends on what type of project you’re working on. I mean, it’s constant. You need to be constantly focused on liquidity. Liquidity, liquidity, liquidity. Timing. When do you expect equity to come in? What’s the process for drawing equity? What’s the process for putting debt in place? So whatever it is, if your development, typically it’s equity out first. And only when that equity has been placed will the debt start to come in. So it depends. I mean, for us when we’re putting portfolios together and things like that, we have to manage. We have a set amount of capital to purchase properties on the equity side, a set amount of debt. Each of them have their processes and we need to just manage that. So we look… you could look one month, two months out and just time all that. When are you closing your property? How much lead time do each of these entities need? And you manage accordingly, so it’s really tailored to the individual strategy or project.

Michael Belasco (16:54):

Now, if you’re doing a one off purchase, they’ll close. Typically, debt and equity will close simultaneously and then you go through the whole process of doing by what you then get that debt procured. But equity is usually committed earlier than debt, I think almost across the board.

Spencer Burton (17:11):

Yeah. Oh no, it most definitely does, right? The debt’s going to look at the equity, because the equity is the borrower. It’s the sponsor, it’s the… group that is either going to make or break the deal and when you think about one element of downside for a lender, it’s a borrower that doesn’t know what they’re doing. So it’s rare that debt will come… will be secured before equity is in place.

Sam Carlson (17:43):

Okay. So I’m wondering now… so you get terms from both equity and debt. You can against your equity to specific… whatever your prearrangement is, is that how this works basically?

Spencer Burton (17:58):


Sam Carlson (17:58):

Okay and you’re doing the same. You have some… maybe more… because you’re working with the debt in a more… complex way?

Michael Belasco (18:09):

It’s more structured and rigid.

Sam Carlson (18:11):


Michael Belasco (18:11):

I would say it’s more structured and rigid, is how I would think about it. There are guidelines. You have guidelines in place and there’s rigidity in the equity structure, but you got to think about the incentives of the equity side versus the debt. So if something isn’t going to plan per se and you need to go back to your equity partners, and maybe there’s an opportunity to have a better outcome, right? Those are things that, I think an equity or LP and GP collectively might entertain and change with a debt or capital part, or with a lender that’s much more rigid and structured. So I don’t know.

Spencer Burton (18:45):

And again, it’s because they’ve put boxes around every one of their downside risks. So if you’re going to change things, they go “Okay, well now I need to rethink about every place that I could possibly lose money and ensure that this change doesn’t affect the protections that I put in place to eliminate or reduce those downsides.

Michael Belasco (19:09):

So yeah. Again, if this is a one off, you’ve structured with equity and debt, you pretty much created your box so that the lender will look at it. You’re not flip flopping around and you’re not going to go to a lender with the strategy that then you trade on during the negotiation. Obviously that’s not going to cut it.

Sam Carlson (19:27):

So let’s take this episode and… I don’t want to repeat the last episode, but how do you procure a debt partner? Right? Because we talked about last time relationships and being creative, different things like that, your investment strategy, all this. I’m guessing it’s almost very parallel to what we talked about on the equity side.

Spencer Burton (19:49):

Yeah. Somewhat. The lender cares less about the strength of the strategy. I mean, they care a lot, right? Because there’s downside to risk, but they care less than your partner. They care more about who the borrower is and their ability to pay the debt service. They care more about the past than the future. That’s another big distinction between say an equity partner and a lender. A lender generally is backwards looking. They’re not in the business of…

Michael Belasco (20:30):

Hopes and dreams.

Spencer Burton (20:30):

Hopes and dreams. Yeah. No, that’s exactly right and so on stabilized assets, they’re going to look at the last two years of operating statements and they’re going to base their underwriting on that. And they might believe a little bit about what could happen over the next three to six months, but they’re certainly not going to buy some story years into the future like an equity partner might.

Michael Belasco (20:53):

They’re still projecting it and they’re still doing their DCFs and projecting the future, but they are… you’re not selling them the dream I think is the point.

Sam Carlson (21:04):

So picking an equity… or a debt partner, what’s the mindset? What’s the process for doing that? I mean, I know that… it seems like when you’re going after LP money, for example, you are looking for somebody who catches the vision, right? I’m guessing it’s different for debt.

Spencer Burton (21:24):

Yeah, it is. There’s far more relationship… the relationships matter far more on the equity side than the lender side. I mean, the relationships matter still a lot, but it’s more of a marketplace, in the sense that when you need debt, you go out and you get multiple quotes. And you weight those quotes against one another. And if there’s a relationship, that weighs in the decision. But ultimately, from a borrower standpoint, it comes down to who’s going to provide the best terms? Who do I believe will execute in the best way? And oftentimes, that’s okay, who’s lending me the most money at the best rate with the most flexibility?

Michael Belasco (22:10):

Yeah. You’re still pitching to the lender by the way. Your strategy, it’s not that you’re not selling them the dream. It’s just there’s a different perspective. You still go out there and pitch, give presentations, whatever you need to do in that regard, but-

Spencer Burton (22:25):

Well what’s interesting… and I’ve worn a lender’s hat a couple times throughout my career. The strength of your strategy doesn’t really impact pricing. I mean, it does to a certain degree, but not like in equity where it really makes a big difference. It’s more the lender says, “How risky is this?” And then they price accordingly.

Sam Carlson (22:50):

So I have a question. I started my career in residential mortgages, and when I first started, the relationship between the underwriter and the loan officer and the processor was kind of… once you caught it, it was like, “Oh okay.” One of the things I learned really early, not that I was great at it, but I learned really early that the way I present my documentation in my file to the underwriter would make the transaction super simple at the beginning, or super complicated. And a lot of times what I found was when it was… and you said something that made me think of this. When it was complicated, it was because I gave them too little up front. Like I gave them income and assets and things like that. I didn’t really give them anything else. I’m wondering if there’s a parallelism when we’re talking about institution level lending and if you could either share the nuances and maybe some case studies, something along those lines.

Spencer Burton (23:52):

Yeah. No doubt and this is really to the doing side now, right? So one thing, when we say making… on the making side of securing debt, it’s really about going out there, getting quotes, lining up your quotes and choosing the right quote, negotiating then a term sheet. And the term sheet really there is the terms of… so a quote comes in, but then you negotiate a term sheet, things like what’s the term of the loan? How much interest only? What’s the rate? What kind of prepayment options do I have? Can I prepay this without a penalty? Usually no and so therefore, what’s the prepayment cost and what’s the structure of that?

Spencer Burton (24:41):

And then you get into a whole host of things around whose the guarantor? Or what type of guarantee must be in place? Is the loan simply guaranteed by the entity that owns the real estate? Or is there a principle guarantor, a separate entity or separate individual that is guaranteeing to the bank something? And what type of guarantee? Right? In a lot of commercial loans, they’re non-recourse, meaning there’s no… if the loan goes bad, it’s only on the real estate and is not to the individuals that are behind the borrower. But there are often what are called bad boy carve outs.

Spencer Burton (25:25):

These are called an exceptions to the non-recourse element where they… so Sam Carlson takes out a commercial loan on an industrial building and if the loan goes wrong, the lender’s only recourse is to the building. Meaning they can foreclose on the building, take it back, sell it and hopefully recoup their capital. However, if you, Sam Carlson as the borrower, perform… or do some sort of bad boy acts, maybe you put the entity into bankruptcy, maybe you pocketed rent and didn’t use the rent to pay debt service. Maybe you failed to pay a property tax when you should have under the loan. There’s a whole variety and those are negotiable by the way. So when I talk about the term sheet, what you’re really negotiating are all these points that aren’t in the quote. Once you negotiate that term sheet, it’s usually nonbinding and now we’re all talking making at this point, nonbinding.

Spencer Burton (26:31):

Then we get in… now we bring the attorneys into the equation and you have your attorneys and I have my attorneys, and by the way, I’m paying for you attorneys and my attorneys, okay? That’s how this works on the debt side generally. Those attorneys start negotiating now a whole host of other things like the… like what documents must Michael and the doing side present in order to close, and what kind of insurance must be in place when this closes and-

Michael Belasco (27:00):

Timing obligations. All kinds of things, which the doing team then gets-

Spencer Burton (27:03):


Michael Belasco (27:04):

Heavily involved.

Spencer Burton (27:04):

The sort of things that really makes us, on the making side, our eyes glaze over and attorneys get all sorts of excited about, and we’ve already negotiated what we call the business terms and the attorneys dig into the balance of it. And at some point, we sign a loan agreement and once that’s signed, this process really passes over to the doing side.

Sam Carlson (27:25):

So let’s pass it over to the doing side.

Spencer Burton (27:26):

Yeah, let’s do it.

Sam Carlson (27:32):

Again, because I was in the loan game, I know the momentum of a transaction where you get a deal, you’re under contract. That’s the fun and excited part. You know, “Oh, the money’s already in the bank.” You know, in your mind. But then it passes over to the nitty gritty. So I just want to maybe give an overview of the nitty gritty and then I… do we want to talk about some of the pitfalls that happen in that process and maybe we can even resolve some of those in the process of that conversation. So what am I saying? An overview-

Michael Belasco (28:12):

Yeah, we can do that.

Sam Carlson (28:13):

And we’ll go from there.

Sam Carlson (28:14):

Yeah, let’s do an overview.

Michael Belasco (28:17):

It’s part and parcel to probably another episode we’ll do here, which is the overall due diligence process, and a lot of what we do in that process is part and parcel with the lender. So a lot of the reports we’re getting, a lot of this stuff is what we’re providing to the lender. So basically it’s what we pitched and… what the making team has pitched and promised to the lenders actually what it is and they’re going through their process, as are we to verify that it is indeed what it is. So they’re going to commit capital to what we had told them they were committing capital to. So it’s a process. I guess I would break it out in terms of… let’s break it out in terms of entities and sort of what they do. So once this happens, once a deals in place-

Sam Carlson (29:00):


Michael Belasco (29:00):

Going to commit capital, there’s really obligations of all the parties. There’s lender obligations, there’s the borrower obligations, there’s even obligations from the seller, there’s obligations from the tenant, okay? Property gets… or the loan gets signed up, first thing that happens typically is a lender will go out and find an appraiser and we’ll get an appraisal on the way.

Sam Carlson (29:22):

Sure, right.

Michael Belasco (29:22):

Right? And I’m going to stay high level because we don’t want to get in the nitty, so there’s an appraisal that’s usually under the lender’s obligation. The borrowers… so all the due diligence stuff we’re talking phase ones, PCAs, the surveys, seismic, if applicable, zoning reports, title commitment, these are typically the big buckets of which we are under way already during due diligence. But as we’re going through that and when we’re finalizing these documents, we need to present those things. We can go into… I think we’ll go into a little more detail into those in this episode, but maybe we’ll hold off on that.

Michael Belasco (29:56):

Then you go to the seller’s side. So there are certain obligations, the lender is again looking to secure every and any downside. So there’s a couple things that need to happen. They need to make sure that their mortgage, or deed of trust, whatever it is is in-

Sam Carlson (30:10):

First position.

Michael Belasco (30:11):

First position, most seen position, right? So they’ll look to whatever state or municipality you’re operating in, they’ll be a draft mortgage or deed of trust. You have a local council go and make sure that it’s legit so that it can be recorded. They’ll look to get an SNDA so the seller will initiate two pieces of paper, which are pretty important. The estoppel and the SNDA, okay? The SNDA is really the document that the lender cares about, subordination non-disturbance and attornment. So subordination meaning the tenant agrees that the mortgage interest is first priority. They’re acknowledging that and signing off on that. Non-disturbance means that in case anything happens with the GP, LP, the equity side-

Spencer Burton (31:02):

The borrower.

Michael Belasco (31:02):

The borrower, yeah. Sorry, the borrower. When they go into take over the property because of that issue, they agree to acknowledge the lease is in place and leave the tenant alone to operate their business. They won’t disturb them. And attornment is basically the inverse that if the person who the tenant signed the lease with, the landlord is kicked out, they acknowledge that the new landlord is a party to the lease and they won’t bail on the lease or anything. So SNDA, making sure the mortgage is recordable. That is really between tenant and landlord. I’m sorry, between tenant and seller-

Spencer Burton (31:44):


Michael Belasco (31:44):

Yeah sorry, well the seller has to request these documents and then… oh no, sorry. The seller has to request the estoppel, and actually in some cases, actually has to check a box to request the SNDA as well, if it’s a form SNDA. Now in the space we’re in, SNDAs are usually not negotiated when you’re dealing with national tenants, but on either bigger deals or certain deals where there’s a lot more risk, there is a negotiation that happens between the tenant and the lender. Did I miss anything? Was there anything? That was a-

Spencer Burton (32:16):

I… wake up.

Michael Belasco (32:19):

Sorry, was that a total bore?

Spencer Burton (32:21):

No. Well at the end of the day, it’s not that you did anything wrong, it’s that the process is detailed, it is… there’s a checklist. There’s a lot of things. There’s a lot of documentation, a lot of due diligence, a lot of people doing the CYA thing, right? And it’s nature. It’s not as-

Michael Belasco (32:38):

It’s not sexy.

Spencer Burton (32:39):

Not it’s not.

Michael Belasco (32:40):

It’ll put you to sleep, but it’s… there’s an art to it, you know? The key is organization. Organization and communication and if there are ever any issues or problems, it’s… always about… and this is where relationships come in, making sure that you can work through those. Now there’s… it’s harder to do that on that side, but always keep communication, making sure you’re getting documents when you say you’re going to get them. And just making sure that process is well organized.

Spencer Burton (33:12):


Sam Carlson (33:13):

Go ahead.

Spencer Burton (33:13):

I was going to say I think a really important aspect to this is anticipated the needs and wishes of your lender partner, right? And by the way, that’s a whole other point is treat your lender like a partner. We can get to that in another point, but try to anticipate the needs of the lender. So Michael listed off a laundry list of items, we call these closing conditions or conditions of approval, depending on the stage at which they’re required. And every loan may be a little different about what they require, but it’s a long list. When I say anticipating what could go wrong or what are the pitfalls, hopefully you know your property well enough and you know your lender well enough to know where there might be issues. Bring those up sooner, rather than later. Let me give an example.

Spencer Burton (34:09):

I was on the lender side wearing a lender hat for a residential property, it was actually senior housing, with a borrower that we had dealt with quite a bit. And they brought a property to us, so one off property, like I said, residential property built in the 90s. Now if you’re familiar with construction in the 90s, plumbing was either copper or polybutylene piping and they call it poly, and it was… I mean, I don’t know what it is. It’s some form of plastic that they liked in the 90s. The problem with poly is about 30 years in, it starts-

Michael Belasco (34:57):

To leech?

Spencer Burton (34:58):

To leech, yeah. Maybe you understand-

Sam Carlson (34:59):

Just to break down, right?

Spencer Burton (35:00):

Essentially break down and this particular property had polybutylene piping. So before we spent any money, and I say we, the lender… in the case, sometimes it’s the borrower that initiates the property condition report or the environmental, other times it’s the lender who initiates and just every lender’s going to be a little different. In our case, we would initiate the property condition report. Before we did that, the borrower who had a great relationship with came to us and said, “I want you to know there’s poly in this property.” And before we even spent the money, there was a discussion saying “Are we comfortable lending on an asset that has poly?” And there was a week of discussions. Ultimately, the answer was no. And the borrower then went off to another lender that was, I guess more comfortable with poly, but because-

Michael Belasco (35:56):

Or unaware.

Spencer Burton (35:57):

Or unaware, yeah.

Michael Belasco (35:59):

That happens.

Spencer Burton (36:00):

It does happen. But because they knew the sensitivities of the lender, they were able to bring that to the forefront, right at the beginning, rather than wasting money and time, only to discover… which by the way, what would have happened had they not done that is a property condition consultant would have been engaged. They would have gone out to the property, they would’ve spent… the borrower would have spent $5,000 in order to get this 100 page report that… amongst that report, one page would have said, “There’s polybutylene piping in the property.”

Michael Belasco (36:34):


Spencer Burton (36:35):

Throwing up the red flag, circling of the wagons internally on the lender side to decide, “Do we… is this an issue? What can we do? Maybe we escrow, maybe we have the borrower escrow $500,000. Let’s find out how much it costs to replace poly with copper.” And in the end, likely would have been a loan that wouldn’t have proceeded and the borrower would have spent $40,000, $30,000 in due diligence to discover that. Yeah.

Sam Carlson (37:05):

My question is… so Spencer, in the deal making side, how much are you doing to mitigate those types of scenarios so his side is more vanilla? You want your side as vanilla as possible.

Spencer Burton (37:16):


Sam Carlson (37:16):


Spencer Burton (37:17):


Sam Carlson (37:17):

So Spencer, when you’re doing what you’re doing, I would imagine that… I mean, putting my loan officer shoes back on, sometimes you want to just… the idea of just getting deals and doing deals, there’s so much driving that ambition that you only have the rosie colored glasses on and so you kind of… maybe you overlook those things. Oh, we’ll be able to handle that or whatever the case may be, so… I’m sorry, go ahead Michael.

Michael Belasco (37:46):

You take it. I just wanted to say there’s a constant feedback loop by the way, that happens between the making and the doing. There’ll be things learned. We see tax bust and lease or tax caps, there’s leakage, there’s things like that. We learn about certain geographies that have high transfer taxes that we discover. There’s this constant feedback loop into which allows the maker side or the sourcing side to get smarter on that stuff too. So they protect us and then we keep… it’s a nice little cycle.

Spencer Burton (38:14):

Yeah. As it relates to the lender, really what I would say is… ultimate transparency. Never think that you can slip something by your lender. First off, eventually they’ll find out and they may find out after they lent you money.

Michael Belasco (38:30):

Yeah. You may… it’s actually worse if you get away with it.

Spencer Burton (38:33):

Oh yeah, much worse because they’ll then know that you knew and didn’t tell you. Either you’ve been in breach of some contract that you signed, or even almost worse-

Michael Belasco (38:45):

You’re incompetent.

Spencer Burton (38:47):

They view you as either incompetent or unethical. What’s interesting is all these lenders know each other, they speak to one another and just because you think, “Oh, I’ll just never do business with that lender again.”

Michael Belasco (39:00):


Spencer Burton (39:01):

That’s just the wrong way. So the right way is complete transparency. You disclose what you know, when you knew it, as soon as you know it and look, some lenders you can’t do it. Another example was… and this is an example where the borrower did not know of a situation, and what was that situation? Large apartment complex, out of state investor, actually a huge… private equity firm and this was one asset in a large fund, and they were looking to… just basically recast the debt with some nice long term debt. One of their assets was… huge apartment complex in a major market, and I think, if I recall right, it was a garden style deal. But if I recall right, there were 28 buildings. One of the buildings had an easement that ran underneath that building. And why was therapist an easement? As the investigation went on, and this actually came through the zoning and survey report.

Spencer Burton (40:07):

There was actually a major water line that ran underneath this building, 16 inch water line, which is huge, that serviced the entire neighborhood. And what would happen if that water line were to burst underneath that building? They could have the right-

Michael Belasco (40:24):

Oh my gosh.

Spencer Burton (40:25):

To tear down that building. And so this is something that comes up in the due diligence. The borrower didn’t know, but as soon as this came up, a discussion arose. And ultimately what happened was you have to carve out that building and you have to lend a little bit less, and… the borrower… anyway, it was complicated. But because… again, a great borrower, they ended up working well with the lender. They came to a conclusion. Lender couldn’t lend quite as much, carve out this one building so it wasn’t at risk. But sometimes you know upfront, sometimes you don’t. What matters most is that you are a borrower that discloses what you know, when you know it.

Sam Carlson (41:09):

The process sounds like it could be as… ambiguous sometimes based on the situations, right? And I’m wondering though, from a person looking… let’s say Michael, I start working with you today… speaking some broad strokes. What are some of the definite things, impediments, potential issues that you’ve learned that you say, “Hey, we just got to make sure that we…” Where do people go astray I guess? Maybe some of the key areas.

Michael Belasco (41:41):

So I think from a high level, the most important thing that needs to happen from the get go is that the expectations are clear and set out right from the get go. How this process is going to work, what the lender needs and there can’t be any ambiguity. That’s very important.

Sam Carlson (41:55):

So are you getting that information directly? Who are you being clear with? I guess.

Michael Belasco (42:01):

The process needs to be clear between how-

Sam Carlson (42:03):

I see.

Michael Belasco (42:03):

Thing are going. So documentations that are required, or things that are need… whether it’s pre-closing or post closing. If there are certain requirements and the lender sometimes stipulates that and you need to know as the borrower, you need to know what their expectations are, and you need to make sure they are clarified. So you can roll all the way through a process, get to the very end… for example, assume an SNDA is a… or an estoppel for example, may be a close… a post-closing item. You get to the day of closing and the lender comes back and says, “Actually, we needed that. We need that pre-closing.” Which could then delay your closing. So it’s a whole big situation with brokers, your reputation. There’s all kinds of things and implications that could happen. So making sure that your expectations are understood of both sides.

Michael Belasco (42:52):

And really, you as the borrower need to make sure that you’re meeting the lender’s expectations and making sure that they’re clear. So that could be anything, but really just making sure those documentations are delivered on top and as expected.

Sam Carlson (43:04):

So maybe if I’m hearing you right, so basically the idea is is because there’s nuance to every deal, just go in with as clear a plan as possible, and being able to adapt as quickly as possible, right?

Michael Belasco (43:20):

Yeah. Right. If this is a one off property, it should be more straight forward what the expectations are. If you’re running a continuous platform and you have a large pool-

Spencer Burton (43:29):

Or development.

Michael Belasco (43:30):

Or development.

Spencer Burton (43:31):

I mean, development’s the same way. You’re drawing capital constantly and… I think the key really is communication. So if you’re running the process right, you have a weekly deal call with your lender and you’re talking about what’s needed, what are the blockers to get those things done? And this applies both to if it’s a… an acquisition loan or a refinance, just a simple financing or whether it’s a more complicated loan like a development facility or… line of credit or the like. You meet once a week, you talk about what needs to get… what the lender’s needing, what’s holding you back and that sort of process really makes it smoother. It’s never smooth really, but-

Michael Belasco (44:22):

Reporting protocols. It’s organization and communication. You get those in line, like Spencer said, weekly meetings… any type of reporting documentation, depending on what type of project it is. Just make sure that all of that is… there’s a regular cadence, which is, I think critical.

Spencer Burton (44:39):

I think the last piece of this and I know we’re running up against our time on this episode, but… just because you get the loan close or even the equity closed, that’s not the end. In fact, there’s as much, or if not, more work that goes after that.

Michael Belasco (44:55):

Post closing.

Spencer Burton (44:56):

Post closing, yeah. So your lenders can expect quarterly reports. Some cases monthly reports, if it’s a construction facility. Your equity partner’s going to expect monthly or quarterly reports, and there’s as much, if not more work in that than there is in getting to close.

Michael Belasco (45:21):

It’s more standardized and predictable, but there’s work there. It’s not like a one off, yeah, but it’s on repeat and it’s continuous and there’s a lot there too.

Spencer Burton (45:29):

Until something goes wrong, right? So there are certain covenants that must be met each quarter to be in compliance, right? If something goes wrong and you break a covenant, now all of sudden there’s a lot of work that has to go in, because the lender’s going to start questioning. So every lender’s a little different, but they’ll generally have a list of properties that are out of compliance. And the terminology varies by lender, but essentially it’s a list of properties that are in trouble, or may be in trouble. In fact, some lenders will have… okay, you have a list of properties that are actually in trouble, and then there’s a list of properties that might be in trouble and so we should watch those. A watch list of sort, and if you are the borrower on either of those lists, you’re going to have great scrutiny. You’re going to be taking phone calls every week or every month from your lender asking, “What’s going on with this?”

Michael Belasco (46:28):

You don’t want to get on that list. It’s funny. I was taught… it’s critically important to get those reports on time, never late and always right. And what’s going to happen, at least what I’m told is that… maybe there’s people looking at them. The only time it really matters is if there’s a problem. So it’s an unsung hero, just make sure it gets done, making sure you’re doing that because you don’t want to hit up on the potential problematic property, you’ll never get out of that box.

Sam Carlson (46:59):

It’s almost like there’s a fiduciary duty to each party. Like the fiduciary duty to an equity partner is take care of our money, but we want to grow it, right? And the fiduciary duty to the debt side is “Hey, we’ve got depositors.” I’m thinking this is largely coming from depository banks and/or pension funds or things like that. Where the strategy is just to… preserve capital-

Michael Belasco (47:20):


Sam Carlson (47:21):

And maybe keep up with inflation? I don’t know. Did you want to say something?

Spencer Burton (47:25):

Well yeah. I mean, we could go a lot of different ways. There’s a lot of different lenders and their reason for lending varies, right? So you have depository banks, you have… syndicators that syndicate and then sell to larger pools of capital. You have pension funds which have their own… but generally pensions are lending through an investment management firm that puts their money out. Life insurance companies, which are one of the larger lenders in commercial real estate and what they’re looking to do is match the duration of their liabilities, life insurance policies with assets that have the same duration. So therefore, what they care about is that that money that… service comes in every single month until the very end of the predefined term. And if it doesn’t, either you prepay it or the loan goes bad, then they’re in trouble because they’re matching that with a long term liability like a life insurance policy or some other insurance policy.

Spencer Burton (48:31):

So every lender is going to have different reasons, but you usually catch that at the onset, right? That’s going to, the lender you choose will depend on your investment, but at the reporting stage, they’re all kind of the same, right? They want to make sure that you’re paying your debt service and that you’re likely to continue to pay it. And that when the loan comes due at the end of the term, that there is… that you’ll be able to come up with money to pay the balloon payment, right? Because in commercial loans, they’re not generally fully amortizing, meaning they’re not… at the end of the loan term, there’s a balance almost always, and they want to ensure that the asset that is securing this loan is sufficient to pay off the loan at the end of the term. So all of this reporting is what they’re thinking about. Every time a report comes in its like, “Okay, am I still going to get my debt service? And will I be able to pay off the loan at the end of the term?”

Sam Carlson (49:29):

Anything else Michael?

Michael Belasco (49:31):

No. I think that’s great. We could go on about different types of lenders, but I think we’re…

Spencer Burton (49:35):

Yeah. Yeah.

Spencer Burton (49:36):

I’m starting to glaze over.

Sam Carlson (49:37):

I’m starting to glaze… well I think to your point, I think we’re going to do some more in depth… I mean, we really have gotten down and dirty into the process somewhat. I know we didn’t talk about all… I mean, there’s a lot of things that go through the processes.

Michael Belasco (49:51):

It’s challenging to go the check box, you know? And make it…

Sam Carlson (49:56):


Michael Belasco (49:57):


Sam Carlson (49:57):


Michael Belasco (49:58):

So we’ll try to balance that.

Sam Carlson (49:59):

Yeah. No, I think my big takeaways from this is… I mean, a lot of the same skills that were the skills and tactics that we’re using from the previous efforts, relationships, communication, strategy. These are all parts of this process. So the debt side is a big side to success in your strategy and without it, you’re not… I mean, there’s no real strategies without some level of debt, right?

Spencer Burton (50:28):

In most cases, yeah. Debt’s almost universal to investment strategy. I mean, you see all equity strategies, but there.

Sam Carlson (50:34):

Okay. Well if you’ve been listening to this, hopefully, it was very enjoyable. We will look forward to the next episode where we’re going to talk more about the deal-making and doing. And until then, we will see you real soon.

Announcer (50:48):

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