The $1,600,000 Climb To The Top

When Jake and I purchased Park Place apartments, we knew that the property was underperforming and we had a terrific opportunity to “force” the appreciation on the asset.  The property was grossing only $53,000 per month due mainly to poor management.  Our goal was to implement our three-step repositioning framework, increase the Net Operating Income significantly over the next twelve months, and with some luck, refinance the property.

The next twelve months proved challenging, but with determination and hard work, we were able to increase the revenue to over $80,000 per month.  We implemented RUBS (ratio utility billing), began to charge all types of fees (late, pet, application), and raised the rents to market. 

We drove the income on all different fronts, while focusing on reducing expenses.

At the end of eight months, we began to shop around different lenders to refinance the property.  We received our first appraisal in December from a CMBS lender, a disappointing $5.7 million.  (We purchased the property at $4.075 million, but we felt the appraisal still came in light)  The lender just could not comprehend how we turned around an asset within eight months, and delivered a very low appraisal.

We then approached another CMBS lender, and as you can see on the picture above, we were met with more resistance.  At this point, we were losing faith in getting a deal done.  This is where our mantra kicked in: Patient, Persistent, but Willing to Walk Away.  We decided to seek out another lender who would give us the best terms.

Finally, almost a year after our initial inquiry, we struck gold.  We found a portfolio lender who was willing to offer a fair appraisal ($6.33 million) of the property along with very favorable terms.  The lender created a win-win situation.  He underwrote a large loan against a very stable asset.  We were able to cash out a huge sum of money, the lender required us to set aside a sizable capital expenditure amount to address deferred maintenance on the property, and the lender financed our next big multifamily deal. WIN-WIN!!

All lenders will require you to set up funds for a capital expenditure account based on the needs of the property.  Our first two lenders required us to fund the account with much more than what we felt the property needed.  Our portfolio lender’s requirement was much lower, and we were able to extract more equity for ourselves.

How does a capital expenditure account work?  Basically, the bank estimates the amount of deferred maintenance on a property and funds the account with proceeds from the refinance.  As you can imagine, the estimate is highly subjective and should always be negotiated with the bank.  In the end, these funds do belong to you but are to be used only for repairs made to the property. 

We allocated our cap ex funds to repairing parts of the driveway, exterior painting and upgrades to some of the units.  Once the repairs were finished, we submitted the receipts to the bank, and then the bank disbursed the money to us.

While you are in the midst of the reposition, take pictures to document your progress so you can use them to show the banks what you have done to add value to the property.  Maintain accurate records, while concentrating all of your efforts to revenue trending upwards every month.

The moral of the story:  Look to create value in any endeavor you choose, work hard to create that value and work even harder to get paid.  If one approach isn’t working, learn from that approach and try another one. 

Jake and I had to abandon CMBS lenders and partner with a portfolio lender.  It was one of the best decisions we have made.  The lender has become an integral team member and has financed several other acquisitions and refinances.  Our problem turned into an incredible opportunity.


If you want to learn how to invest in apartments and receive a huge payday, visit Jake and Gino and contact us today!

Begin to develop relationships with local banks.  Jake and I prefer to work with local banks (portfolio lenders) because they are much easier to work with and have an intimate knowledge of the local market.  They will understand your deal and will give you a quick answer whether or not your deal will meet their lending criteria.  The ideal timeframe to begin the refinance process is usually one year after the purchase.  Banks like to see consistent performance and are content with twelve months of performance.

Don’t always take the first deal.  Shop your deal to a couple of lenders and let them fight it out for your business.  We used to be thrilled when a bank offered us terms, but our true success came when we began negotiating with multiple lenders to secure the best deal.

CMBS: Commercial mortgage backed security that is secured by the loan on a commercial property.  The loans are then packaged and sold by conduit lenders on the secondary market to institutional investors.    This secondary market is vital and provides liquidity to the commercial mortgage market. 

The interest rate on these loans are fixed, the loan is typically amortized over a thirty- year period, a balloon payment is due at the end of the term, and there is usually a prepayment penalty.   The loan is non-recourse.

Portfolio Lender: This type of lender originates its own loans and holds them on their balance sheet.  These loans do not have to conform to Fannie Mae guidelines and allow the lender to be more flexible in lending guidelines. 

Recourse Loan: Debt that is backed by collateral from the borrower. The bank can go after a borrower’s assets in case of a default. (The bank has recourse)

Non-Recourse Loan: Debt that is secured by the property, and the borrower is not personally liable in the event of a default.  Ideal loan.

Loan points: A form of prepaid interest to buy down the rate of the loan.

Loan origination fee: A fee paid to the bank to originate the loan.  (Make sure to negotiate this fee with banks)

Amortization: A gradual paying off of a debt by regular periodic installments, which include interest and principal.

Balloon Payment: Large payment, due at a certain period of time in the future, is usually 5, 7 or 10 years.

Capital Expenditure: This is an expenditure for an asset that will improve or extend the useful life of an existing asset for a period to exceed one year. We set aside $250 per unit per year in a Cap Ex account.  Banks will require that you set up and fund a cap ex account when you refinance a property.   Think of a Cap Ex account as a rainy day account.  (Another avenue where your negotiation skills will be used)

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