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Construction loans are a key piece of the ecosystem that allows for new construction of multifamily, industrial and other types of commercial real estate. So how can passive, accredited investors participate in this profitable market segment?
Austin Carlson, managing director and head of sales & investor relations at Parkview Financial, joins the show to discuss private real estate debt offerings and more.
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- Why accredited investors and their advisors should consider private real estate debt as part of an overall portfolio.
- The advantages of the private REIT wrapper (and whether the relevant tax advantages are likely to remain in effect in the future).
- Austin’s view on inflation, and how it is affecting the current commercial real estate landscape.
- How Parkview Financial is able to achieve double digit yields without using excessive leverage.
- A unique philosophy on underwriting (and how Parkview Financial has a potential advantage when they underwrite deals).
Featured On This Episode
- Featured Deals (Parkview Financial)
Today’s Guest: Austin Carlson, Parkview Financial
- Parkview Financial – Official Website
- Parkview Financial on LinkedIn
- Parkview Financial on Twitter
- Austin Carlson on LinkedIn
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.
Andy: Welcome to the Alternative Investment podcast. I’m your host Andy Hagens, and today we’re going to be talking about private real estate debt and how it can be a part of your portfolio. And with me today I have Austin Carlson, who is the Managing Director and Head of Sales and Investor Relations at Parkview Financial.
So Austin, welcome to the show.
Austin: Thank you very much, appreciate you guys having me.
Andy: Absolutely. So, you know, let’s dive right in. So I think even among accredited investors and some more sophisticated investors, a lot of investors are used to investing in real assets and real estate on the equity side of deals or in equity funds. So what’s the appeal of private real estate that, you know, why now, why should this be a part of a high net worth or a very high net worth investor portfolio?
Austin: Yeah, I mean, the answer, quickly in bullet point form, is cash flow and risk/reward profile, right? So I’ll dig into those just a little bit. So when, just as you alluded, when you analyze the average high net worth investors portfolio, right, of course there’s alternatives, and then there’s real estate exposure.
But most of the time, that exposure comes in the form of maybe they own an apartment building or something on their own directly. Public REITs tend to be the most common one, and again, most commonly, those are on the equity side of the capital structure, meaning ownership. And so what you don’t find, though, is debt side exposure. So what does debt provide you? So debt, of course, are just loans on individual properties or construction projects which is where Parkview specializes, which we’ll get into here shortly.
But with that, there’s a cash stream, right? There’s cash flow. So origination fees, monthly interest collections on a quarterly basis, those will be then be distributed out to investors. So it’s a cash flow stream. When you look at yields, at other asset classes that you could possibly invest in: corporates, municipals, treasuries, you name it, we all know that those yields have been extremely depressed for quite some time.
So stretching out a little bit into real estate debt, let alone construction, which is again, which is what Parkview focuses on, right, you can get those cash yields up to 10%, 11%, 12% or even a little bit better net. You know, and those are annualized, of course. But the other side, though, is the risk/reward. So in a market dislocation, we go into a recession, for example, let’s say hypothetically, property valuations take a hit.
When you’re on the equity side of capital structure, you’re gonna feel that, right? On the debt side, though, worst case scenario, if we have to take back an asset, and we did our underwriting appropriately, we’re taking back an asset at $0.60 cents on the dollar, meaning our basis is very strong in the deal. And then that gives us a lot of optionality, right, we could sell the note itself at a premium and make some money, we could actually foreclose and our basis is low enough, again, that we can then sell the asset for profit.
So it just provides you a lot of optionality, and again, risk/reward, depending on what’s going on from a macroeconomic perspective.
Andy: Got it. So I guess, one word answer: Alpha.
Austin: Yes, yeah, I should have just led with that, yeah.
Andy: So tell us a little bit about your fund structure. So I understand that it’s structured as a private REIT. So can you tell us a little bit about the advantages of that as a wrapper?
Austin: Yeah. So you know, with the tax overhaul a couple of years ago, or just a handful years ago now, right? You know, with the Trump tax overhaul, he’s a real estate guy at the end of the day, right? So there is tax benefits to a private REIT structure, and really mainly in two forms. Whether you’re a taxable or tax deferred/tax exempt investor.
So take the latter for a second, if you’re tax deferred/tax exempt, meaning your IRAs are an endowment or something like that, your Roth IRA as well, there’s no UBTI, or any sort of that sort of income that you’d have to be worried about. Now, on the taxable side, say your family trusts in LLC and your personal name investment, any income that comes from a private REIT, there’s a 20% deduction on that income.
So for example, very simply, you generate $100 of income from a fund a year, you’re going to be taxed on $80 of it. So it’s a free 20%, if you will. So which is a nice benefit. You know, there’s been talks about when Biden came in that they were going to do away with that, that kind of ended and died right there.
So it’s still a great tax benefit for investors.
Andy: Yeah, you know, I think we heard buzz about maybe the 1031 getting an overhaul. So it seems like there’s a lot of these sort of real estate tax advantaged things in the code that are, I think people were more worried about, maybe 9 or 12 months ago.
Andy: And now that the economy has hit a rough patch, and you know, I think it’s fair to say that the administration has maybe hit a political rough patch, the upside is that I don’t think we’re as worried about some of these tax benefits going away in the near term.
Austin: Yeah, you know, the big tailwind that we have, and we’ll get into this further in the conversation too, though, is that municipalities around the country are providing very large tax incentives for developers to build, right? There’s just a lack of housing in this country. You know, and you may have seen in the headlines right now, there’s this big tax incentive in New York City to provide affordable housing.
Tax incentives might be going away, it might be expiring here in the next couple of months. And so it doesn’t look like the state of New York is going to continue that tax benefit. Which is a bummer, right? Because that’s how just a lot of stuff gets built.
Austin: Now, as you can see the pros, right, things are getting built, more affordable housing. Now, the cons and the people who don’t want it to pass are saying, “Hey, it really only benefits the rich,” which they’re trying to…kind of change that narrative. And they’re trying to quit that, those benefits. So again, there’s just a lot of political biases and a little political game of tug of war going on. But yeah, I mean, it’s generally speaking, you know, from a tax perspective, real estate’s always been pretty beneficial.
Andy: Yeah, absolutely. And, you know, on the note of…back to just the core appeal of private real estate debt. So this kind of interesting, I mean, even though I’m the founder of AltsDb, I love Alts, I’m actually historically have been a big proponent of a 60-40 portfolio, even for a young investor, just like, keep it simple.
Set up a portfolio that helps you sleep at night that you’re not going to mess with, like, you know, at the wrong time. Like when the market tanks, you’re not going to sell everything. But more and more lately, not just at AltsDB, but other investors, other advisors, it seems like I’m hearing more about like a 50-30-20 portfolio mix, where it’s like, everybody just acknowledges that real assets have a place in a portfolio.
I actually just had Meb Faber of Cambria Funds on the show.
Austin: Okay, yeah.
Andy: And he talked about the Talmud portfolio. So this is a portfolio model that’s literally 2,000 years old that he referenced. And again, it’s like 1/3, essentially, conceptually, 1/3 reserves, which is like bonds, 1/3 business ventures, you know, stocks, and then 1/3 real assets or real estate. So when I’m thinking about…sorry to get all theoretical, I just I love…
Austin: No yeah, I like it. I’m a finance nerd at heart. So it’s okay.
Andy: Exactly, exactly. This is how I nerd out. If I’m looking at private real estate debt, is that more of a bond substitute? Or do you consider that more a part of like the real asset mix?
Austin: Yeah. You know, I come from the school that…so just my background really quick. I started my career at JP Morgan in New York, right? The private bank specifically. So ultra high net worth individuals, families, institutions. You know, and very early on, it’s…alternatives is never a replacement, right? It’s always a complement.
And so when you think about your fixed income portfolio, when you think about real estate debt and how it fits, it’s just a compliment, right? Because it’s a cash flow stream at the end of the day. And so yeah, definitely 100%, I would say that that complements kind of that fixed income bond portfolio. You know, and you have a lot of opportunities. And, you know, I was just reading an article in the Wall Street Journal today, actually, about, you know, you see a lot of these big time, private equity shops, hedge fund managers, they’re coming out with these funds that are more of like 40 act funds, if you will, right, lack of a better term, for the accredited investor.
So where the asset class have traditionally invested in private equity, you know, you have to have $250, $500 million ticket sizes, you got to be a qualified purchaser, you know, they’re kind of scaling that down. Because there’s a whole lot of market of what they’re calling the million dollar net worth investor, that you can really tap.
I mean, it’s over a trillion dollar market that they could start tapping into. And so I always think about these different things and rounding out that Alts portfolio of kind of little pieces here to complement the more broader strategies that you alluded to, right? So you know, whatever the ratio mix that you want to have between stocks and bonds, adding Alts in there to complement those strategies, because they’re just gonna do different things at different times. And more of that ‘sleep at night’ mentality that you’re talking about.
Andy: Yeah, no, that makes sense. And you know, what I’m thinking of like a 50-30-20 portfolio, I think, for most investors, so this would fit more into the 20. And, you know, it might be a complement to other types of Alts. So I think it’s like an ‘in addition to,’ not an ‘instead of,’ sort of thing.
Austin: Yeah, exactly.
Andy: But you know, the yields that you’re describing I think are incredibly appealing right now. I just recorded an episode as a guest on Jimmy Atkinson’s podcast, the Opportunity Zones podcast. We talked about financial repression and what effects that has on all of these different products. You know, so we’re in a situation where CPI is in the eights, right?
And depending on who you talk to, if you look at the PPI or, you know, other ways to measure inflation, you know, it’s knocking on double digits. Whereas bond yields, even though interest rates have ticked up a little bit, they were so low, I mean, they were they were virtually zero or negative in real terms, that we’re still in the situation of financial repression, where you’re parking your money in bonds as an investor, and you’re seeing it shrink in real terms, year over year.
So, you know, how does this…given that, you know, the yields that you’re describing, they’re one of the rare yields, it’s actually in excess of the CPI rate, how does that situation affect your strategy? Or does it?
Austin: You know, the reason I’m pausing is because there’s a couple of ways to think about this, right? So from the yield component of the fund, just from off the top, right? You know, so historically, we’ve done 12%, 13% net yields to investors. Now, again, 90% of our portfolio, 95% of our portfolio is ground up construction financing, right?
So that’s going to be more expensive than the bridge guys, right? And so when you look at a bridge fund, like a fix and flip strategy, or value add real estate debt strategy, those yields are five to seven, somewhere in that range, right? It’s just cheaper money. You would think, if you’re taking construction risks, you should be paid for it. And that’s exactly what’s happening here. Now, at Parkview, we were originally developers, we were builders ourself, that’s our core.
And we moved over to becoming a lender, post ’08, you know, the principal family behind Parkview started to see the writing on the wall at that time. And I’m digressing here, but I’ll get back on track here in just a second. But…
Andy: Oh, I want to hear about the writing on the wall.
Austin: Yeah, well, you just start to look, in every cycle, right, valuations just start to become silly. And you know, lenders are making ridiculous loans at ridiculous valuations that just don’t compute. You know, and Paul was starting to see it, Paul Rahimian, the founder and CEO. And he said, you know what, I’m done being a developer, I’m gonna sit back, let the dust settle, which was a good call.
And he was unlevered, were very leverage adverse on our side as well, as a fund now, today, as Parkview is today. And by December of ’09, it was actually Paul’s father who had the idea to start lending on construction projects. You know, the joke is, Paul thought he was crazy, but they did their first deal. And they fell in love with the space. So, you know, we were a single family office, if you will, for the first five years. And then we launched the fund in July ’15 and started accepting outside capital.
But yeah, you know, given the expertise that we have, it was a natural migration, right? We have the ability and the team, construction team and underwriters, loan originators, all in house, we don’t third party any of that stuff. So, you know, it’s our core competency, it’s what our history is. And so being a construction lender, like we don’t see construction as a risk, right? It’s because it’s a space we understand.
So if you underwrite properly, and you deploy your capital properly, and you’re focused on your asset type and your basis, you’re gonna be fine. Because the way to sum up Parkview in one sentence is what I like to say is we’re an asset-based lender, extremely focused on our basis. And so by basis I mean, your price per square foot, or your LTV, or however you want to think about it, because it just opens up a world of opportunity if you have to then take one back at any given point, right?
You know, in the seven years of the fund, we’ve done over 180 loans, we’ve only taken back two, and they’re both profitable. We’re about to profit off the second one here momentarily in the next couple of months. But so going back to your question, that’s just how we get the yields that we had, because I want to set that table here, there for a second.
But in terms of inflation; so our notes to our [inaudible] are floating, they’re usually based on…and some lenders do this, some don’t. If somebody is going to do fixed, you’ll see that note rate a little bit higher just because the borrower is going to pay for that fixed rate optionality. For us, they’re based on SOFR, like LIBOR is gone. So everything is based on SOFR today, and SOFR has a floor.
So say we’ll price the loan at SOFR with a 1% floor, and there’s going to be an 8% spread on top of that. So they’re effectively playing 9% to start, and if SOFR goes above 1%, the 30 day moving average, which it has now, I think it’s 1.08%, a couple basis points, so then that note then becomes floating.
So from an investor, that all sounds good. That’s a tailwind, right? Great. My quarterly distribution should go up. Now the headwind to that is, well, if the borrower’s expense, interest expense to their lender is going up, chances are there’s other aspects in the project that are also becoming more expensive.
And so now, in our initial underwriting and ongoing underwriting, as through the project is continuing to be built, we need to make sure that that borrower has well capitalized to deal with those price increases, right? Part of it is inflation, so, for us being the construction lender, we’re typically refinanced out and paid off before the appliances, bathtubs, sinks. Right?
Those are the things that you’re really seeing the inflation pressure on. They’re coming overseas, supply chain issues, but a lot of the concrete, plywood, two by fours, a lot of that stuff is made here in the US and traveled by train or something like that, right? More often than not, I know that’s not always the case. But again, more often than not. So, you know, we’re usually taken out of the deal where the borrower themselves really starts to see those inflationary pressures on, again, microwaves, stoves, TVs, all that kind of stuff, right?
So hopefully that answers your question, but happy to go into it deeper.
Andy: No, it does. And so tell me a little bit about the lifecycle of the deal. So like a construction loan, is that typically 36 months or how long until Parkview is paid back fully?
Austin: Yeah, good question. I’m going to preface that really quick by just giving you a quick overview of just kind of the lifecycle from a lender’s perspective of a development project. Right? Simply there’s the land lenders that helps the developer acquire the land itself, because during this time, then once they’ve acquired the land, they have to get the permits, the entitlements, everything approved by the city, which takes time, takes a couple of years.
Once they’re ready to start digging, go vertical, in comes the construction lender. And that’s what Parkview sets. Once the construction risk has been taken out of the deal, meaning foundation, framing, roofing, H-VAC system, electrical, plumbing, the sheetrock been put up, the quote unquote, construction risk has been taken out of the deal, and that’s when a bridge lender will start to get comfortable.
Because at that point, you’re doing flooring, sinks, bathtubs, right, again, quote unquote, the easier part. So that’s where the borrower will look to cheaper money like a bridge lender at 5%, 6% money, which is cheaper than the 9%, 9.5% they’re paying us. Then we get refinanced out. And then from there, once they’ve got the certificate of occupancy and the assets have been stabilized, meaning it’s been leased up, then that’s the more permanent money.
Bank, agency money, [inaudible] right, all that kind of stuff. Okay, so the lifecycle for a loan for us. When a deal is signed at LOI, staged by our own originators, the average note tender is about 24 months. And on that agreement, there’s usually two six-month extensions, and then there’s a fee to utilize those.
Those are fully at Parkview’s discretion. So if they’re not making progress, we’re going to deny their extension requests, as an example. But in actuality, the effective duration in the portfolio historically, over the last seven years, since inception, has been about 17-18 months. So 17-18 months to get that construction risk taken out, that I was mentioning a few months ago, that’s essentially kind of more short term duration loans at 1718 months.
So again, and that all goes into the conversation, too, about inflation and what the yield curve is going to be doing over time, so we’re on the lower end of the yield curve. We’re not taking a 3, 5 year, 10 year risk here.
Andy: Yeah, no, that’s amazing, you know, thinking about that sort of yield with a duration of 18 months. But on that note, on the note of inflation, I got to ask, are you on team transitory? And let me preface that. Well, one’s on team transitory anymore in terms of, you know, we’re about to flip back.
But do you see inflation returning to, let’s say, you know, the four-ish range in let’s say, the next 12 months? Or do you think it’s going to stay elevated even, you know, past a year from now?
Austin: Yeah, it’s…we’re in the bandwagon that it’s gonna stay higher for a little bit longer. And this was before even Janet Yellen just came out and said, again, another article in the Journal, expecting higher inflation for quite some time. And so, I mean, we’re definitely in that camp. Oddly enough, though, you’re starting to see construction costs come down a little bit, themselves, which is interesting.
You know, they were elevated during COVID, just all the issues that that brought, right, it’s hard to remember two and a half years ago, or two years ago at this point. You know, it’s interesting, right, and there’s labor shortages and stuff, at least in construction that we need to focus on. But yeah, from an inflation perspective, I mean, with the Fed shrinking their balance sheet, which is going to take time, you know, the rising rates, and I mean, another article in the Journal today, I mean, I sound like, again, I told you, I’m a finance nerd, right?
So I’m always keeping track of what’s happening in the Journal, but commercial real estate sales have come down, right? They’re starting to slow a little bit just because there’s less buyers at certain valuations and they’re trying to get financing and the deal just doesn’t pencil anymore, with higher rates with higher monthly interest expense. So you know, it’s gonna stick around for a little bit longer, but hopefully we can keep it in check.
Andy: Yeah, I mean, you know, hopefully, I keep saying it’s, we’re looking for that Goldilocks. But, it’s not a great Goldilocks though, right? Because we’re stuck between high inflation and a recession. And it might be a mild recession or a mini recession, or whatever you want to call it, that moderates inflation, not even to like a low level, but to like a medium, high level.
The other day, I was listening to the radio. And I heard like three or four car commercials in a row. And I was like, “Wait, what’s going on? I thought that all these car dealers had no cars to sell?” So it kind of feels like with economic news, and you’re referencing the Journal, I’m getting a lot of mixed signals…
Austin: Really weird.
Andy: Yeah, exactly. And it feels a little to me like there’s like an air pocket with valuations, that there’s price discovery going on right now.
Austin: Yeah. You know, in our internal meetings here, I feel like I’ve been saying it forever, but the music is going to die, because the consumer can’t sustain the economy forever, right? And that’s essentially what’s been happening in a nutshell. The consumer, even through COVID, which people didn’t think was gonna happen, which surprised us for how strong the consumer maintained through COVID, and broadly speaking, I know, there were pain points, I want to acknowledge that.
But broadly speaking, which is pretty amazing. But it can’t last forever. Right? So the amount of the consumer spending at the rate we’re at, versus you’re not seeing wage growth, you’re not seeing other things to continue…the music’s gonna stop, right? And it’s just to the magnitude, how deep is it gonna cut? You know, we’re in the tune that it’s going to be a decently mild recession, right?
Shouldn’t be too painful. Take that with a grain of salt. But, you know, be careful of what you wish for, right? Because also, at least in our industry, there’s a lot of lenders out there, period, there’s a lot more in this industry than there has been previously, a lot of investor capital, given the yields that we’ve already talked about has flocked to this space.
So there’s just increased competition out there for us to win deals, the best deals, and you know, and it pushes rates down, and we can charge of course, competition is healthy, no question. But it gave rise to, quite frankly, I’m just going to be blunt, a lot of lenders that we see that don’t know what they’re doing. And, you know, as an investor, you got to be careful for that. Right?
You gotta be very careful and understand how the sponsor, how the lender is coming up, A, with the deals, what’s their valuation method, because I can tell you, like our…I’ll give you an example: Our blended LTV in the portfolio is 63%, but those are future value estimates or estimates at any given point in construction. They’re not somebody else’s, right?
They’re not a third party appraisal.
Andy: So that’s from your own…
Austin: That’s from our own underwriting and analysis. That’s right. But we do get third party appraisals for it because of the bank. And I’m assuming we’ll talk about leverage and stuff and the effects of that. But so we have a warehouse facility that we use just to help fill in the cash flow gaps, like we don’t lever up the fund in the traditional sense to boost returns, we just use a bank line to help fill in the cash flow gaps because construction, there’s cash in and out on a daily basis.
But I forgot what was gonna say now, I went off on a small tangent and then, gone.
Andy: We were talking about just you know, frankly, there are, you know, all of these spaces, it sounds like on the debt side as well. But on the equity side, valuation has got so high, so many people in this space, I would say chasing what they think is easy money, is not necessarily easy money.
And so we’ve seen cap rates just compress. Crazy. I mean, I think they’ve gotten somewhat crazy. So in my view, you know, if you see the cap rates just ease up just a tiny bit it’s like everybody can breathe a little easier. But you know, I hate to say it, I want to see a 10%, 20% correction in a lot of ways. If you have any dry powder, if you are a net saver, you don’t want to see asset prices that are overpriced.
Austin: Yeah, no, value investor, right? So sorry, when I lost track, I remember what I was saying there about third party appraisals. So if we were to go buy those, our LTV and our portfolio would be more like 55%, which sounds really low. That sounds great.
But that’s just not reality. Right? Because, and that’s the point I was trying to make there is that as an investor and you’re looking at sponsors, like manager selection is real, like, that’s a big thing, right? If you have 10 managers in the same space, they’re all gonna perform differently, and it comes down to selection at the end of the day, right? And so again, as an investor, and you’re doing your due diligence, got to figure out how the sponsor is really coming up with their numbers, cuz if I’m just gonna have third party appraisals, and I say our LTV is 55%, wow, that sounds really attractive.
That’s not real, in our humble opinion.
Andy: With appraisers it’s like two words I don’t necessarily want to hear together: optimistic and appraiser, and my question is always who’s paying the appraiser, right? Like, who does the appraiser work for?
Austin: Well, because we said every once in a while, we’ll get those calls and the appraisers like hey, what do you need this to come in at? What? I mean, it happens, it happens. It makes no sense. We say you go tell us when you figure it out.
Andy: You know, that’s just amazing that it happens at…
Andy: Exactly. I was gonna say, you know, my dad appraises antique cars. So you know, he might be appraising something to $5,000 and then appraising something at $50,000, $5 million, $50 million, $500 million, $5 billion, it’s like, it doesn’t matter. You know, you have to look at incentives and track record.
I mean, especially, in any kind of alternative. But in this space, I always tell people to look at sponsors, look at asset managers that have a long track record that have gone through a couple of market cycles. I think people who have entered the space in the last three or four or five years, who weren’t necessarily in the space in 2008, 2009, just for instance.
You know, they’ve seen less of the overall potential landscape that we can see. I mean, even broadening it out, again, with the episode I recorded with Meb Faber just a couple years ago, people don’t understand that, you know, the bond market, if you look at the past 100 years, some of the losses that the bond market has taken, some of them are losses that the equities market has taken, some of the losses that even like a 50-50 portfolio balance between bonds and equities, the maximum drawdowns that they’ve seen over the past 100 years.
So I think this issue when people’s track record is too recent, it’s like they just haven’t seen enough of the landscape to have that intuition. I mean, I would almost describe it as intuition. It’s like something you don’t even know how to write down. But you just know, like, this doesn’t feel right. This valuation gives me that pit in my stomach.
Austin: Yeah, you know, and you make 100% valid point. And for us at Parkview, you know, like I said, Paul started doing this himself at the end of ’09, right. So post ’08, up through today and it’s been a relatively bull market, right? We’ve had a market hiccup in ’15, ’16. COVID, obviously, 2020 and 2021.
And, you know, we got through all those fine. But also too, look back at what the sponsor was doing before that. So I mean, Paul started developing in the 90s. So he went through any downturn in the 2000s, 2008 as a developer and didn’t lose money. So from a developer standpoint, knows what he’s doing, became a lender, you know, a byproduct of the environment and what it provided.
But, yeah, no, I totally agree with you, too. So yeah, definitely the track record and what they were doing before and certain other cycles, if they weren’t doing what they’re doing today, in those other cycles, just you know, as case in point, but yeah 100%.
Andy: So let’s talk about underwriting a little bit and our sister site, multifamilyinvestor.com. Scott Hawksworth is the host over there. And he recently had an episode all about conservative underwriting, and talking a lot about, you know, what LPs need to look into. You know, LPs don’t necessarily have the experience or all of the knowledge necessary to underwrite every fund that they invest in, but listeners and viewers, that was episode number 34 at Multifamily Investor.
But the take home that I got from that episode was just, you know, you want to have conservative underwriting, you want to know what your assumptions are, and you need to be comfortable with them internally. So, you know, you’ve described how Parkview does all of your underwriting internally, and even your appraisals are internal.
Would you describe your underwriting process as you know, very conservative or conservative? Is it possible will be too conservative to the point where it’s no longer possible to do any deals? You know, how do you look at that underwriting overall?
Austin: Yeah, yeah, so the underwriting approach really takes two tracks internally with us, right?
Track number one: is the true underwriter valuation…every lender does it, right? Where you have to figure out what’s your basis in the deal, your price per square foot, your LTV. But also you need to be able to structure the loan itself in the legal documents to mitigate as much risk for Parkview and our investors as we can, right? I mean in our legal documents, anything, we could put a borrower in default if we want to for quite a number of things, right?
We don’t, because we want them to continue moving forward, get to a point where they can pay us off. And if you’re just going to, you’re going to block the borrower from making progress, right? You’re going to impede them more than help them. So with that concurrently, in track number two is the full construction analysis. So we have a full construction team here. And I don’t mean the guys swinging hammers, I’m talking about the engineers, former project managers for large scale construction companies.
And so we actually get the drawings of the project from the developer, run through a constructability analysis, meaning making the building actually be built, the way that it’s designed. Structurally, is it going to stand, is the design itself functional for the type of asset it is? And then most importantly, our civil engineers go through and they reprice the project down to the last group, because we lend on cost to build the asset. So if we lend up to 75% of cost, the borrower needs to bring the other 25% in the form of their equity, they need to fund that first before we ever fund $1.
And then the nice thing too, about construction, in our humble opinion, is that we incrementally fund as they hit the milestones in the development. So $20 million loan, we’re not giving them $20 million day one, you know, and that’s what happens on a bridge side, right? You basically fund the loan proceeds upfront. But with construction, yeah, you kind of piecemeal the loan proceeds as they’re hitting milestones.
So if they stop hitting those milestones, and they stop construction, right, we’ve just only deployed a small portion of our money, and we put down the gate on them. We said, “Hey, we’re not deploying any more proceeds until you continue to move forward and catch up.” So but to your point, yeah, you know, we tend to be more on the conservative side than our peers. But given our construction background of the team, right, we can be very unique in how we structure a deal, right?
We can see things a little bit differently because we are developers versus…and that’s why I run sales IR in front office, right? I’m the Wall Street guy background. I mean, what do I know about taking back a construction asset construction? I don’t, right? A lot of our peers in the space are guys like me. Right? I understand finance, I understand how to underwrite, I understand the numbers, but there’s just a tangible aspect to it of being former developers like the rest of our team, that gives some ability to be able to structure a deal in a certain way that, you know, maybe others wouldn’t think of or wouldn’t do.
But yeah, it gets to a point, there’s more deal flow – to answer your last question – there’s more deal flow right now than we know what to do with. Which is a good position to be in, right? And, you know, if we go down into an economic recession, we’re in the trough and deal flow dries up, and you know, are we going to be too conservative, and there’s not a lot of deal flow? Maybe, potentially, that’s okay.
I’d rather have years of lower yield performance and downturn then have to take back 10, 20, 30 assets, right? And I’ll take that trade all day long. And I know the rest of the team would. So that’s okay. And if we have to return investor capital, too, because there’s no deal flow, and it’s either that return capital or sit on capital and deplete performance, like, we’ll return capital too, because I think longer term investors are going to appreciate that.
And when the cycle evolves again, because it always does, it always has historically, no reason why to think that it won’t again, times are good again, and deal flow’s there, and we’re raising money again, I think investors would appreciate the decisions that we made in the fund.
Andy: Awesome. Yeah. And you know, our show is mostly geared towards LPs and advisors, but I know we have a few sponsors and developers, at least that listen to the show. So can I ask what’s your sweet spot for a project? Like what type of project, what size?
Austin: Yeah, good question. So we stick to the four main food groups of commercial real estate. So multifamily, office, industrial, retail, you know, we tend to…I shouldn’t say we tend to, we do, we stick away from hospitality, which served us very well in 2020, 2021. But we also stick away from hospitals, assisted living, churches, temples, anything you need to run a specific business.
And back to the underwriting question, when we underwrite, we have to stress test, right? And by that, I mean, okay, great, they’re 30% done with construction. They’ve defaulted. We take it back in foreclosure, now what? Right? Is it an asset that we want to own? Is it an asset that we can finish construction on ourselves?
Because Parkview brings that optionality to the table. Is it an asset that if we’re still in the trough of an economic cycle, and the project is done, can we lease it up? And can we operate it for a period of time until the cycle evolves again, and we can make a premium…?
Andy: And if it’s too specific, then you lose that optionality, right?
Austin: Bingo, right? Because very simply put, 12 month leases in a multifamily asset is much easier to operate than at night over turnover in a hotel. Right? So that’s kind of the way to think about it. And you know, if Paul were on this call too, he would say, I like to lend on stuff I built myself. So very simple.
Andy: Awesome. Does the fund use leverage?
Austin: Good question. So I think I briefly mentioned we’ll fill in the cash flow gaps. So we have an overarching warehouse facility, $200 million, that will draw on and pay back daily, just depending on what cash flows of the fund. So historically speaking, we’ve been about 12%, 13% levered. And the way you get to that number is, since inception, the average running balance of the bank line divided by the average running balance, or AUM.
You get 12%, 12.5%. So relatively unlevered strategy, you know, and then usually the next question I get as people are like, “Well, how do you get double digit returns?” And that’s a good question about leverage is that it’s really a four legged stool. One is we charge an origination fee on the loan itself when the loan closes. So if it’s two, two and a half percent on the total loan commitment, we collect that income on day one, when the loan closes.
Monthly interest collections on deployed capital, so as loan proceeds are dispersed, right, they’ll pay their monthly interest on that. The warehouse facility, it adds a little bit, you know, 50 to 75 basis points of performance a year, it’s not much, but it means something, right. But the fourth leg of that stool is our ability to recycle capital. And that’s the big one, right?
And I’ll give you a quick, simple math scenario. So you do a $10 million loan, two years in duration. The origination fee is 3%. Okay, you collect that upfront on the $10 million. Now, because when the construction risk is taken out of the deal, we tend to get paid off, because we touched on that earlier. So but to keep the math easy.
Now, let’s say at month 12, when we’ve deployed $5 million, we get paid off. So mathematically, that origination fee is equivalent of six. Now you just received your money, paid back much sooner than you thought you would, you recycle that into the next deal, collect an origination fee. And we have 65 deals in the portfolio. So you do that frequently. And it’s just our ability to recycle capital.
Andy: So you’re telling me that LPs, this is an opportunity for LPS to love the word origination fee.
Austin: That’s right. Again, the difference between debt right?
Andy: Sorry, go on, go on.
Austin: No, that’s a great point. So, you know, you just really put those four legs to the stool together and that’s really kind of how you get to the return profile we have without being an overly leveraged fund.
Andy: Excellent. Well, I think a lot of our listeners and audience will be interested in the Parkview Financial REIT, so where can our listeners and viewers go to learn more?
Austin: Yeah. ParkviewFinancial.com. You know, my email is [email protected]. Very simple. But yeah, I mean, a lot of our stuff is on there, you see some recent deal history, you’ll see the team on there. Read a little bit more about our history. And if anybody’s interested, feel free, they can reach out to me directly.
You know, there’s a link on there for more information, you can do it that way. And it comes to the website straight to me. Whatever is the easiest to people I’ve interested. And, you know, as you mentioned, there might be developers out there too, looking for capital, by all means we have our own originations team in house. And Brad Ross runs that, you can see him on the website, that side of the business for us.
Andy: Excellent. Well, for our listeners, if you want links to all of the resources we discussed today, including all those links that Austin described with Parkview Financial, make sure to check out our show notes at AltsDB.com/podcast. And don’t forget to subscribe to the show on YouTube and your favorite podcast platform so that you can receive our new episodes as we release them.
Austin, thanks again for coming on the show today.
Austin: Thank you, Andy. I greatly appreciate it. And thank you everybody for watching and listening. And I look forward to speaking to y’all soon.