Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.
Josh: So, everybody, welcome back to Accelerated Investor. I’m really excited that you’ve been able to join me today. Wherever you’re at in the world, whether you’re at home, social distancing, whether you’re out for a walk. I would say on your way to the gym or in the gym, because a lot of people do listen or podcast in the gym, but that’s not happening right now. So maybe you’re in your home office, maybe you’re working out at home, maybe you’re listening in your car. Wherever you find accelerated investor, just want to say thanks and tell you how much I appreciate you. How much gratitude I have for you engaging with us in our Accelerated Investor community. As you know, I love to do solocast and guest interviews that I think are gonna benefit you and your investing, your entrepreneurship as a business owner, being a better leader.
Josh: And that’s exactly what we have today. I’ve brought on three guests. Their names are David Lindner, Richard Fry and Nate Sinn. And they are attorneys that work for a local firm called Buckingham. Buckingham has over 60 attorneys. And Nate Sinn, I work with on a pretty regular basis in our private equity fund. When it comes to notes, mortgages, foreclosures and workouts for our borrowers. People who are borrowing money from our private equity fund and using that to buy residential and commercial real estate. We provide again, primarily acquisition and bridge loans. And Nate’s been instrumental in working with us for years now and forming up all those notes and mortgages. Then if there is a borrower going sideways, helping us work through that loss mitigation and workout process. They are working right now kind of in the mix of this COVID-19 pandemic and working with a tremendous amount of clients, both in real estate, business owners, people who own property owners that are doing leasing, multifamily commercial. And they’re also working as tax attorneys to help people understand how are these forbearance agreements? How are P.P.P loans? How is all this going to work out for clients? So in an order, I want to say hello. So, Richard Fry, thanks so much for joining us today.
Richard: Thanks for having me. Excited to join your podcast.
Josh: Fantastic. David Lindner. Thanks for joining us today.
David: Thank you. It’s great to be here.
Josh: And of course, Nate Sinn, good morning. How are you?
Nate: I’m doing good, Josh. Thanks for inviting us. We’re happy to help you.
Josh: You bet. And I want to tell my audience right away that on their Web site, you can look up Buckingham in Cleveland, Ohio. You could visit their Web site at BDBLaw.com. And if you go to their Web site and go, there’s a big banner on their Web site that has COVID-19. If you click on that, it’s BDBLaw.com/covid19. The guys have written a tremendous amount of content and articles for business owners and for their clients on how to help navigate this pandemic. So, Nate, let me start with you real quick. And why don’t you just talk for a second about what are you currently? What are some of the conversations? Again, you don’t get into the detail, but high level, what are some of the conversations that you’re having with clients, things that you’re kind of preparing them for, kind of some of the questions that they might be asking? Because obviously, this is something that nobody has really been through before. It’s sort of unprecedented time. So how are you helping to maybe calm your clients down, educate your clients and some of the discussions that you’re having? Again, I know you can’t talk about specifics, but just high level. What are some of the things you guys are working through?
Nate: So it’s interesting because, you know, this is obviously like you said, exactly. It’s not anything we’ve ever seen before. So this is wildly different than the 2007, 2008 crash. I remember as a personal note that I asked for a raise from my boss at the time, the same day that Lehman Brothers filed bankruptcy. Being a banking litigator and helping bank clients, you know, was probably not the best time. So this is different. So it has a lot of the same similarities is that we anticipate that there’s gonna be struggles in multiple industries. So initially, kind of the initial conversations we were having, a lot of it was geared towards employees. You know, the shut-in orders, the stay home orders, how that affected businesses. You know, businesses were closing. Employees were being laid off or furloughed.
Nate: So a lot of the initial conversations had to do with employee benefits. And then you started to see the states kind of open that up and then the federal government program. And then beyond that, then it was like, OK, well, I still have all these obligations. You know, I’m a commercial property owner. I’ve got to pay my bank, my tenants to tell me they’re not going to pay my rent because they’re not open. They have no revenue right now. And so on a real high level, no matter what industry decline is in. We’re telling them to review their documentation, do it quickly, understand what your rights are, and then take a practical approach to it. So if you have a loan and you think that you might maybe not now that maybe 60 days, depending on how the situation plays out, you know, you might have a cash flow issue. You might start defaulting on things while understand what those issues are. Read through the covenants in your loan. Call an attorney if you need to to understand them and then take a practical approach. Reach out to your lender and say, look, I’m just trying to be proactive. We think this might be an issue coming up. What can we do together to work through this?
Josh: I mean, what are you what are your clients that are doing that that are reaching out to tenants, that are reaching out to their bank on the other side. So obviously, the property owners kind of in the middle or the left, you know, in the lender could be on the one side and that the tenant on the other. Are you seeing clients having success in kind of cutting deals, if you will, with their tenants? And then secondarily, cutting deals with the bank to try to work it out for everybody? Because it’s got to it’s kind of like nobody’s winning here. So how do we just cut the losses as much as possible so everyone can stay afloat?
Nate: So I’m seeing a broad spectrum, and that’s a lot of that’s based on the work that I traditionally do. So I work in the distressed market anyways. And so we’re seeing this new funding with the PPP loans. Well, the people that are requesting PPP loans are in my world already in default with their lenders. And so you have an ongoing workout situation and then you have new funding requests at the same time. That are being, you know, supported by the federal government. So how do you work through that issue? And then from the property standpoint, a lot of the properties that I deal with are in receivership or some other court-controlled process. And so we are having success, but everything’s different. So you have to take everything one at a time, every fact patterns different. You have to look at every situation differently.
Nate: So, for example, we have a receivership that’s a large office building here in downtown Cleveland. Several large commercial tenants. A lot of those tenants are asking for concessions on their leases. My client, who I represent is the court appointed receiver in the case. So the receipt there is a lender involved, but we’re not necessarily making debt service payments, but we have to run a lot of things through the lender. So we’re in essence, the middleman that’s brokering these concessions that are happening in the same time, you still have the property owner who is adversarial in this situation, who doesn’t necessarily agree with everything that we do. So you really there’s not really sort of like. It’s not happening the same for everybody. Every situation is different. The best thing I can tell you is to be proactive and be practical, but expect that they might not go along with it. So you have to be creative to work it out. What’s your next option?
Josh: Right. Got it. So, David, let me let me let me ask you to just expand on what Nate said, but also to talk a little bit about, you know, funding that’s out there for new deals. I know you’re a you know, as a transaction attorney, you do a lot with buying, selling, leasing. A lot of clients, obviously, in the last 60 days might have had property that was under contract that they were going to sell or there was under contract that they were going to purchase. I imagine there’s numerous deals that have fallen out or people have tried to retrace the prices of properties that they’re buying. So just as you expand on what Nate already said. Tell us a little bit about what you’re actually seeing in the marketplace. I imagine there’s, again, a lot of unprecedented things that you’re seeing or deals being re traded, deals being canceled at the last minute. And also, what do you forecast maybe in the next 18 months as this thing shakes out? Do you think that there’s going to be a lot of properties out there for sale? There’s going to be, you know, kind of maybe the more experience, more liquid buyers there to be scooping up properties at a discount. What are your thoughts on those?
David: Yes. Well, let me try to start at the beginning there. Sure, that’s a lot. Couple items I’d add just to what Nate was saying, I think, you know, as a property owner, as a landlord, you’re gonna be getting these requests from your tenants. But it helps to, like Nate said, you know, check your documentation. Know what your rights are, either as a landlord or as tenants. And you know, what we’ve seen is a lot of landlords now are not necessarily taking everything at face value. There have been a lot of tenants requesting relief and sometimes even major public companies who may have access to funding or credit lines or other things. And landlords are starting to say, wait, you know, why should I also be your bank if you do have a source of funding here? Right. Well, you know, some landlords are requesting financials and other documentation from tenants before they’re granting these concessions.
David: But, you know, in cases where that’s appropriate, as a landlord, you want to look to probably deferring that rent, maybe doing a partial deferral, because as a landlord, you’re not only paying your mortgage payment, but you may also have maintenance and repair obligations for the property or you’re paying utilities or things like this. You may want tenants to be paying their share that even if they’re deferring, you know, the base portion of the rent to somebody. So that’s one thing that I look out for there in terms of, you know, buying and selling properties. I think it did. You know, we’re definitely seeing the impact. If you’re a cash buyer, you can you can certainly move forward. But people are having pause because they’re buying at a certain valuation, often based on the rent that’s generated from the property. And if that’s taking a hit, if the future of those tenants is uncertain, they may be out of business in three months. Do you really want to pay that same value for the property now and being completely unsure of whether, you know, this one tenant leaves if you can find a replacement? Right. Only one who’s gonna be paying the same rent? Yeah. We have seen a number of those instances.
Josh: Yeah. You know, so far for us, you know, by the time this gets released, it’s gonna be probably late May. But so far for April and for May, we’ve seen the same collection rate as we saw in February and March, which is great. But right now also a lot of people are you know, we deal mostly in the multi-family side with our large multi-family investments and those tenants, again, where we have primarily properties and A and B markets. A and B class buildings. So, you know, we haven’t seen much of a fallout. But right now, we have been coming propped up by state unemployment, federal unemployment, stimulus money coming in. And that’s all kind of hitting right now in April and May. And so we expect that to go well. I think really key time is going to be July, June. We might to see start to see some weakness in collections on the multi-family side. And then July is really going to find out, like, have we reopened this country at all? And so we have a large 450 unit apartment building that we’re closing and we’re going ahead with that.
Josh: But we’ve re-traded the price on one of the buildings. We got a reduction of five hundred sixty-five thousand. In the process of retrading the other one. And then the third one is pieces new construction on Hilton Head Island. So that’s going forward. But part of the questions we’re getting from equity investors Is well is, is changing your valuation at all. And the answer in the short term is it could but we’re not investing in these buildings for the next six months to a year. And we’re also investing in multi-family, not retail, not office. And people are always gonna need a place to live. And so that’s kind of the difference. I’ve heard horror stories already, and I don’t know how much this is true or not, but that in the retail side sector that a number of buildings are only collecting 20 to 25 percent of their projected rents. Because those tenants are just we can’t afford it. We’re out of business. We don’t have the money. A lot of mom and pop type of tenants or small franchises that can’t pay for that. So I think, again, David, it comes down to like, who’s your tenant base? What kind of properties do you own from the beginning? Right. What’s recession proof and what’s not? So I don’t know if you want to comment on that.
David:Yeah, absolutely. I think you’re right. Like you said, housing people are going to need places to live. We may you know, we don’t know where things are headed as far as further stimulus payments. But at some point you think, again, there may be additional payments that are going to allow people to pay rent, because you do have you know, the unemployment rates are up. If people can’t afford rent and that just triggers the spiral effect here for owners, lenders and so on. So I think you may see additional payments there. I mean, the real question is how long does this last? And that’s hard to say. I mean, for retailers or restaurants, when are people going to be comfortable going back? When are people going to get out and start shopping? You know, better for the online retailers, I know that, you know, that, again, is a trend that is continuing. But for a lot of your strip centers or, you know, actual physical locations, restaurants, gyms, movie theaters, I mean, those are the big draws to a lot of patience. And if people aren’t comfortable, you know, coming together in big groups for a while, that that could really extend this for quite a while, even after any governmental type restrictions are lifted.
Josh: David, I want to ask you one more question, and then I have a couple questions for Richard, too, but help me understand, if you’re in the middle of buying or selling a building and something like this pandemic happens, how much, rights does a buyer or a seller have to back out of a deal because nobody writes in COVID-19 as an addendum to their contract or as a contingency.
David: I’m seeing that now on new contracts.
Josh: Yeah. New contracts. Right. But on stuff that was written, you know, 90 days ago in a commercial building or a multi-family or a strip center, maybe even 120 days ago. And all of a sudden it’s the middle of this. It’s, you know, mid-March, it’s mid-April. And all of a sudden people want to retrade the price. How bound are they or how much flexibility do they have to get out of a transaction in the middle of this thing? I mean, it could be just flat out fear like this was a great deal 90 days ago. But right now I’m scared as heck. And I don’t want to close even though all the other contingencies are done right. Even if your financing could still go through and your bank is still funding that deal, you’re just scared out of your mind to buy it now. How much leeway do you have? Because that’s not really built into a normal contract from, you know, four to six months ago. That could be closing now in the middle of this.
David: Right. You know, and what I’ve seen, you know, just from my experience, it’s always, of course, going to depend on your contract. And there will be those issues, whether you’re going to lose in earnest money deposit. If you walk away with it, you may have some extension riots. Sometimes you can pay an additional fee to extend your due diligence periods. Sometimes that’s built and you may have a financing contingency if your lender’s unable or unwilling to move forward for a while. But, you know, assuming you don’t have any of those options, what we’re saying sometimes is just a negotiated either, hey, let’s just kind of do a standstill for a little while and see how things shake out. Or OK, well, we’ll terminate for now and maybe we can reach an agreement. Know, maybe we’ll give you back part of your earnest money and we’ll just agree. That’s OK. We’re going to go our separate ways, but we’re still interested in doing a deal here when things settle down and shake out more.
David:So people are maybe avoiding litigation just because they want to stay on good terms because again, it’s not like a typical situation where you’re going to say, OK, well, I’d lose one buyer, I’ll just go move on to the next one, because any other buyers probably have the same concerns right now. Right. I did have someone just step in and replace them. So sellers, I think are being a little more understanding and trying to negotiate something, even if maybe they could push harder under their actual contractual agreements.
Josh: Right. Yeah. And if you’re a seller and you have a buyer under contract, there’s no guarantee that another buyer will even come ever under an under this scenario, under this pandemic. So probably makes a lot more sense to try to work with that buyer, even if you retrace the price and continue to keep them under contract, even if closing gets delayed, if that seller is interested in still selling and it’s still a reasonable price. Might have to drop the price a little bit because there’s no guarantee that another buyer will show up or that next buyer could even get financing. You know, the whole financing world has really been turned upside down in the last 60 days or so. So you have we’re seeing that now. We have a 265-unit deal in northeast Ohio, multifamily property that we’re under contract. And us and our partners are going back and looking for, you know, a pretty substantial reduction in price. So we’re working our way through that one now. Richard, let me jump over to you for a minute and talk a little bit about, you know, you’re a business tax attorney. So obviously work with a lot of real estate investors, but work with a lot of people on the tax side of things. Of course, you probably got a lot of questions about P.P.P and what’s going to happen with getting those PPP dollars, especially with forgiveness. If that forgiveness qualifies under debt forgiveness income. If people are going to end up having to pay tax on the debt forgiveness piece. So what are some of the things about peopIe, some the latest updates and some of the challenges or questions that you’re talking through with your clients again? Not specific to any one client, but high level. What are some of the things that you guys are talking about now?
Richard: Sure. Yeah. So a lot of the PPP funding has already been received or approved at this point. One thing I think it was a great point that you pointed out, you know, April and May, you may not see many as many people struggling for rent, but depending upon how long this goes on, that’s when the struggle really, you know, towards the end of the summer. Still being affected. One of the great things under the PPP program is rent is one of the items that would be forgiven. So I’ve had commercial landlords work with their tenants to make sure it’s paid within that. Eight-week period after the funding, but who knows what’s going to happen after that eight-week period? Now to your point about whether it’s a cancelation of debt income. So in the statute provided that the forgiveness of the BPP loans are not going to be income, so business, it would not be taxed on that. Now, it’s kind of controversial, but the IRS came out and said, well, also for those expenses for which are forgiven under the loan, businesses are not going to be able to also deduct those expenses. So they can’t kind of get a double benefit of having the loan forgiven and getting a business deduction. Now that when there’s been some legislators, some congressmen who are attacking that position and there is a bill that’s going to be introduced that would provide that, those expenses are also deductible. So it’s an interesting situation right now on that. And, you know, by the time this airs, we might have a different answer, but right now they’re not deductible. But you also don’t have income for the forgiveness portion.
Josh: Sure. Well, wouldn’t it shake out? Like, I don’t have the ability to do the math in my head real quick. Well, maybe I can. Look, let’s just say somebody got a five hundred thousand-dollar PPP loan and three hundred and fifty thousand dollars of that is used for forgivable expenses. Let’s say it’s payroll. Mortgage interest. Rent. Things like that. Utilities. If a business has a say, five million dollars of annual income and they’ve got half a million-dollar loan. And let’s just say four million dollars of expenses. So net, you know, they’re out there running a 20 percent margin and they got a hundred a million dollars of net operating income when the whole thing said and done. Well, if they’ve got four hundred thousand dollars of expenses. They typically would have written off. That would be part of the 4 million in expense and they’d write that off. But now they get $500000 a PPP dollars that comes in. They can no longer write off that four hundred thousand dollars because it was forgiven. Right. That’s what you’re saying under the current law. They can’t write that off. So that creates four hundred thousand dollars with no offsetting expense. So that’s now gonna flow down if it’s an LLC. It’s going to flow down to the owner and that’s gonna be another $400000 of income payable at their tax rate. Versus if they took the four hundred thousand, wrote off the expenses, took the $400000 in and the $400000 was now written off and as it was and forgiven. But they also had to pay debt forgiveness, income tax on the four hundred thousand that they wrote off. Is the net effect the same is? Yes. Isn’t it about the size?
Richard: It’s gonna be exactly the same. Right. Because you don’t have the income, but you don’t have the deduction. So essentially, it’s a net zero situation. You’re not going to have any change in position. I think what the congressmen or commentators are saying while they really should have gotten additional benefit from the forgiveness and that additional benefit would be the deductibility of expenses.
Josh: OK, gotcha. Gotcha. OK. So we’ll see what happens there. That’s an interesting because now it’s like, okay, you have the they solved some of the liquidity problem by giving that business and approving that business for $500000 of PPP money. But they did. There was no real benefit financially tax benefit other than you have the liquidity to pay your employees. And you could make the argument then you could make the argument of what I don’t want the money. I just rather let the employees go. So I don’t have the expense because I don’t have a business anyway. Because some business owners that I know are thinking, well, now I have the PPP money. Now I have to spend it on expenses. Like say I have a gym. I have employees that I have to pay. But the employees cannot come to work. So what’s the benefit of paying the employees when I can’t write it off?
Richard: Yeah. I mean, it’s a decision that the businesses have to go through as far as, you know, each of their particular circumstances. In that case, though, I personally, I have not seen a situation where it was a bad deal to take the PPP money because, sure, like I said, it’s always gonna be a net zero. Plus in that situation, let’s say you’re gyms operating as an S corporation. Presumably you’re paying, you know, the owner as the president or whoever the offices are, officers are. So you get that amount forgiven, but that’s still gets to go into your pocket as wages. Additionally, you get to continue to pay your rent. That’s gonna be forgiven under the PPP loan. So there are some advantages, even though there’s not a tax advantage. So it would be. I haven’t seen a situation where it’s a bad deal to take the PPP loan.
For the rest of this conversation with Richard, Nate, and David, please see part 2.
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In this two part series, attorneys Nate Sinn, Richard Fry, and David Lindner from Buckingham join me to talk about what they’re seeing on the legal side of the real estate investing equation as COVID-19 impacts the courts, contracts, bankruptcies, and business deductions.
No matter what industry their clients are in, the attorneys expect to see a decline across the board. They’re encouraging their clients to review their contracts, do it quickly, understand what their rights are, and take a practical approach to their business.
Because they already work with distressed clients, they’re seeing the same clients asking for help and forbearance on loans. From the landlord’s point of view, David cautions against taking a business’s request for help at face value. Asking for their financials or other documents will protect a landlord from being taken advantage of.
So much has changed in the last few months, so it’s normal that investors are regretting contracts they’ve signed. I’ve been able to renegotiate more than one contract down and save myself some money. From David’s perspective, he discusses how many options people have for breaking or rewriting a contract.
The PPP money has already been received or approved at this point, and it’s bought us all some time. One of the biggest questions that Buckingham’s clients have is how much of the PPP loan will be forgiven. Richard talks about the loan benefits, but cautions against the idea that you can have both loan forgiveness and a business deduction.
Don’t forget to join us in part 2 of this podcast for a discussion that includes how to find distressed commercial properties using court records.
- How property owners should be approaching forgiveness and deferment.
- How much leeway does a buyer have to back out of a deal because of COVID-19?
- April and May rent collection were propped up by unemployment, so the danger lies in June and July.
- How much of the PPP Loan can be forgiven?