Sep 28, 2022
Kevin Swill has more than three decades of deep and extensive experience in the commercial real estate and finance industries. He is a proven leader in initiating and driving change that is required to continue to positionThirty Capital Financial as the trusted, innovative partner that our clients rely on in an ever-changing commercial real estate industry.
Kevin served as Executive Vice President of Capital Markets for Lloyd Jones and has held positions as Director of Capital Markets for Willton Investment Group, a family office with a concentration in multifamily development, Operating Officer of The Carlton Group, President of Westminster Capital, and Kushner Properties. Kevin has also held several senior positions at Merrill Lynch, CIBC, Deutsche Bank, and Citicorp/Citibank. He received a bachelor’s degree in finance and business administration from Muhlenberg College and holds Series 7 and Series 63 licenses.
In this episode, he gives us anything we need to know about defeasance. He also talks about the benefit of transitioning from LIBOR to SOFR and how to prepare for it, and how you could protect yourself as a buyer/seller in this volatile economic market.
[00:01 - 07:47] What is Defeasance and How Does it Work
- Kevin’s current focus is on helping his clients navigate through the recession
- Pioneering the defeasance space: educating the entire real estate ecosystem on different aspects of real estate
- Differentiating defeasance and yield maintenance
[07:48 - 18:01] On Managing Interest Rate Caps
- Understanding the rising interest rates
- Kevin's company, Thirty Capital advises customers on the best course of action
- What is a “springing” interest rate cap
- How Thirty
Capital Financial is different from other financial institutions,
especially when it comes to interest rate caps
[18:02 - 21:01] LIBOR to SOFR: What’s in it for you?
- LIBOR can negatively impact a borrower if they’re not paying attention
- What are the loan types that will be affected
[21:02 - 25:27] Closing Segment
- Kevin talks about Lobby CRE, and how it could help with your operations and make your property data accessible
- Reach out to Kevin!
- Links Below
- Final Words
Tweetable Quotes
“We're not taking advantage of our clients. We're trying to help our clients, whereas in a large institution, it's literally two separate business units. So they're looking out for themselves” - Kevin Swill
“You don't know what's going to happen between now and July of 2023, where your LIBOR might be at one level, but by then, SOFR might be a lot higher. And now when you go to make that change, you're paying a lot more in interest.” - Kevin Swill
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Want to read the full show notes of the episode? Check it out below:
[00:00:00] Kevin Swill: Being able to negotiate with your lender on an interest rate cap, what you can ask for what you can, whether you're being taken advantage of. To be honest with you, there are so many institutions out there, you know, I don't even mean to name any, but they have their trading floors at these huge institutions. So if you say, hey guy,, I know you have your loan with us, but you need to get an interest rate cap, our trading floor will do it.. Well, guess what? You're about to get scammed for about 25 to 75 basis points, possibly.
[00:00:42] Sam Wilson: Kevin Swill is a C-suite CRE professional with more than 25 years of CRE experience. He's an owner, a broker and equity raiser and a structuring and investor professional. Kevin, welcome to the show.
[00:00:54] Kevin Swill: Nice to see you, Sam. Hey, nice to be here.
[00:00:57] Sam Wilson: Thank you so much for coming on. Certainly appreciate it. There are three questions. Kevin, I asked every guest who comes on the show in 90 seconds or less, can you tell me where did you start? Where are you now? And how did you get there?
[00:01:07] Kevin Swill: Started out in investment banking, immediately starting as a pioneer in the CMBS world for investment banking, then went over to the private equity side and was president of a development company, and then went around the world and raised equity for many of my sponsor friends. And now I'm on the FinTech side. That's it. That's 30 years all wrapped up.
[00:01:32] Sam Wilson: It’s 30 years all wrapped up with a lot of moving parts, you know. Inside of that, what would you say are your major focuses today?
[00:01:43] Kevin Swill: Our most important focus right now is helping our clients navigate through the recession, navigate through development projects that they have, understanding how to change from LIBOR to SOFR. We've always for 22 years have done defeasance, we were the pioneer, the first ones to do it, we also do a lot of interest rate caps and swaps. And then we have a whole other side of our house, which with engineers, developers from around the world. And what they do is they create applications that will help the commercial real estate ecosystem. So it can be a one-stop shop that we can do anything from live real-time cash flows, to forward curve analysis on your real estate, so that you can make an intelligent decision as to whether or not to refi, sell or hold your asset.
[00:02:35] Sam Wilson:
That is amazing. I want to hear
more about that. You mentioned something there that you guys have
always done and you pioneered the defeasance space. What does that
mean?
[00:02:46] Kevin Swill: Well, you know, back in the early, I guess, early 90s, when CMBS came around, or even before CMBS, which is the commercial mortgage-backed securities, you know, borrowers were allowed to prepay their loans, you know, very similar to like a house. On a house, there isn't any prepayment penalty. But in commercial real estate either have these 5, 4, 3, 2, 1, meaning in the fifth year, you pay 5% of the outstanding balance, and it goes down. You also have yield maintenance. And then all of a sudden, jumping onto the scene in the year 2000 was this defeasance formula, which people and lenders really enjoyed and liked it. It was very complicated. But it seemed to be an alternative to yield maintenance. And Thirty Capital, which its predecessor name was Commercial Defeasance was the first one out there and we pretty much covered the market for the first seven years.
[00:03:39] Sam Wilson: What did you do in the market? What was the need in the market that you guys were or the problem may be in the market that you guys were solving?
[00:03:47] Kevin Swill: It was definitely not a problem. What was happening was, you know, from as we all know, before the crash of 2008 market valuations were just going through the roof, very similar to what we've had the last three years. And as such borrowers wanted to sell, and in order to sell, you know, you have to get out of your collateral and with the CMBS, which is a very complex structure, which we don't have to get into today. But those end users, the end buyers, they want their interest payments for the full 10 years. So you know what, I just felt that my property just doubled in year seven, my valuation. I want to sell, great, go read your loan documents, your loan documents, say yes, you can sell, you can either have them assume the loan, or you can have pay a defeasance fee, we’ll structure it, we’ll you know substitute securities for your collateral and you're gone. And you know, a lot of borrower was understood it and they did it because they were making so much money on the profit or the capital gains from that sale that it was worth it for them to pay the defeasance cost and move on. That's the way it worked.
[00:04:53] Sam Wilson:
So what did you guys, what was your
role in that?
[00:04:57] Kevin Swill: We were the advisors. You couldn't do a defeasance without having an advisor. And we were the only ones out there that understood that methodology. And we were the ones who perfected the system.
[00:05:09] Sam Wilson: So I would call you, I'd say, Hey, Kevin, you know, I got this property, we bought it for 20 million, we're selling it for 40 million. I'm in year seven, I'm about to sell. And I'm getting hammered on whatever this defeasance is, how do you help?
[00:05:23] Kevin Swill: Well, we walk them through the calculation. So we have on our website, for example, a defeasance calculator. You'll put in certain aspects of the loan, and things of that sort. And then we'll come out with whatever that number is, which are, which really is the cost of securities, the substitute for those more monthly payments that you were making as the borrower. So we're that advisor to help you go into the marketplace and unload your collateral.
[00:05:51] Sam Wilson: Got it. It's a complex series of steps that have to happen in order for you to get out of a property early.
[00:05:57] Kevin Swill: Right. Yes. And that's one of those things that some borrowers especially Mamas and Papas, need to understand, that when they're reading loan documents, you know, you don't think about when you're going to sell and you don't think about prepayment rights. But you know, there's very something very important that you need to read and understand. And part of our business, quite frankly, is we educate. We educate all the time, we have an academy at Thirty Capital Financial So we're educating the entire real estate ecosystem on different aspects of real estate, especially defeasance, especially for students that are just getting out of college and starting their careers.
[00:06:34] Sam Wilson: Yeah. That's really, really interesting. Let me ask this question because this is a question I've probably had for too long and haven't answered what's in between defeasance and yield maintenance?
[00:06:45] Kevin Swill: It's all formulaic. It's all formulaic. It's easy to get into that I could, but it becomes very complicated. And I'm not sure if your listeners really want to know the differences.
[00:06:55] Sam Wilson: Probably not, I guess so. So for all intents and purposes, are they essentially the same, just with different than function differently, or?
[00:07:03] Kevin Swill: For the most part, but I think that, you know, a lot of people, once they understand the defeasance calculator is very simple and will explain to them I mean, there are loan documents that say, you have a choice of yield maintenance or defeasance. But I think since the year, probably 2003, it's only been defeasance. They took away yield maintenance.
[00:07:24] Sam Wilson:
Got it. Okay, hey, see, I learned
something new every day. And this is why I'm doing a podcast is
because I get to ask you all the questions and learn myself. So
this is fun, absolutely fun.
[00:07:35] Kevin Swill: Like, I'm in class, I feel like I'm in class, you know, taking a normal exam.
[00:07:42] Sam Wilson: Well, let's not do that. That's no fun. I love to learn, but I hate school. So let's not do class. Tell me this where we are on interest rates right now. I mean, one of the big conversations, obviously, there's fear of where interest rates are going, we're seeing kind of things cool off, or at least the market shift slightly because of the interest rate changes. What's happening? How are interest rate caps being affected? What's that whole market looks like in the marketplace that surrounds it?
[00:08:09] Kevin Swill: Well, I'll try to put it into a nutshell because we don't have the whole day here. But you know, I think anyone that's in commercial real estate understands the volatility that has gone on this year based on inflation, based on what's going on in the market. I mean, you know, I live down here in the southeast of the United States during COVID. I mean, a house wasn't on the market for more than a day, right? And the same thing happened on commercial real estate, people were buying condos left and right before the construction even started. My particular home that I live in, is now doubled in value just in the last two and a half years, which is absurd, unheard of. But it's there and very similar to what happened in 2006. It's not that different. But now you have the inflation factor, you have, you know, a lot of issues with construction, with, you know, the chain blocks, and what's going on there and getting your supplies. So that's created a problem. So you put all that together, and people are nervous. So at the beginning of 2022, everyone was selling. 2021, everyone was selling, I think there was $78 billion traded in the year 2021. And it's gone up in 2022 from that. So where we're stuck right now is interest rates are rising. We know that. We understand that. For the older folks out there, we understand that the average rate should be 6 or 7 or 8%. Because that's what we lived with normall. It's unprecedented at 2 and 3%. And it can't last. So now we're at this crux where we have so many investors out there that either wants to sell their assets or buy, you know, or buyers out there, and what we've seen is up until 2022, it was easy as can be. Everything was above asking price. Now, what we're finding is people being unrealistic based on where cap rates are, based on what the inflated value of an asset really is. So now you're finding a lot of these transactions are dying, and people are getting stuck, the sellers either now have to make a decision. I can't sell it because there isn't a buyer at the price I want. So do I refinance it? And if I refinance it, do I do it short-term, just until we get through this crisis? And if we are doing it short term, do I get interest? Do I do a floating or bridge loan? Or do I get a short-term fixed-rate loan? And that's the dilemma that a lot of owners are in. And what we do at our company is we try to advise our clients, which way is the best way for you to go and how to execute that. And I know there are a lot of intermediaries that do that. And we're not an intermediary. But we want to make sure that our clients understand that if they're going to do a short-term fixed rate, you're counting on the market changing in that period of time. And it's going to be to your advantage to be accretive to you. If you do a floating rate deal, you're giving yourself that flexibility because you don't have any exit penalties and things of that sort, prepayment penalties. But what we've noticed is that, in order to do a floating rate, almost every lender out there today is requiring an interest rate cap. And the reason for that is they want to protect the institution. But also it's a protection for the borrower. So there's an insurance policy in play. And like with normal people that have you know, personal life insurance, you pay monthly to keep your term or whatever it may be, that you have. In real estate, the one challenge you have is on an interest rate cap, you're paying all of it upfront. So if you're going to do a three-year bridge loan because you're building a new condo, right, they'll say, Okay, fine. It's you know, it's a $65 million dollar project, it's for three years, we want you to get an interest rate cap, we want you to purchase it. Now, that's literally throwing away money the way people look at it. But it's also an insurance policy because, at the end of the three years, you can be in the money. So you might want to start selling and replacing it with something else. But what's most important is people are saying in the last three or four months, I should say, what the hell's happened. Because if I bought this interest rate cap seven or eight months ago, it might have been 20,000. Now we're talking about 400,000. And it's just money out the door. But I like to say to those people that you have to look at your investment, what is it that you're looking to do, you're looking to get through this issue of the economy with the inflation and interest rates, and then hopefully be able to build your condominium, and then be able to sell you know, those units at enough margin, that you don't have to worry about the interest rate cap. And for some of these large institutions, if you think about it, if they're building four or five projects right now, or they're refinancing, four or five projects at $400,000 a clip, that's a lot of equity that you need to throw out. But it's important, you have to have it if you want to work with some of the larger institutions. So there has been a new thing that came out, which is called springing interest rate caps. And we do a lot of that at our shop. And really what you're saying is okay, I need it for three years, the lender is telling me I need a three-year cap. So what am I going to do? So you negotiate, we help you negotiate with the lender, and we say, Look, why don't we do this? Why don't we agree upon a strike price, and let's just do a one-year interest rate cap, it's going to save me a hell of a lot of money in year one. The risk you take is, is that at the end of year one you have to renew, then you either renew for a two-year or a one-year. And that's the risk you're going to take, you know, where is it going to price out in a year from now. So you have two schools of thought, do you just buy the three-year, bite it, say goodbye and just deal with it and move on and hope that, you know, you build a successful project and you make a lot of money. Or to just put a little bit of the money in now and take a gamble on what's going to happen in the future. So those are the things that we help you figure out and help you through that process. Because for a lot of borrowers, it is complicated and something that they really don't want to spend too much time thinking about. Because at the end of the day, they can just say, you know what, we're going to put the whole project on hold, or we're not going to do any value added to the property for another year. We're going to keep it as is and keep raising rents. But eventually, you get to the rent point, a threshold where people are saying, I can't even afford to rent anymore. Right now we're seeing a lot of now.
[00:15:01] Sam Wilson: Right. Thank you for taking the time to kind of break down some of it's some of the intricacies of that. I mean, it's got to be on a project by project or a borrower by borrower basis that these are these options are analyzed and you know, then integrated into the projects. That's crazy. You guys are also running a interest rate market and interest cap marketplace. Is that right?
[00:15:25] Kevin Swill: That is correct. That is correct. So we are at the forefront of being able to help with the clients with that. We have an entire trading floor that works specifically with clients, advise clients, advise brokers, and advise even lenders on you know what it is that they need to do to execute a transaction with interest rate caps, you know, that's part of it. And our trading floor also does a lot of education on what's going to happen in July of 2023, which is the conversion of the last day of even hearing about the word LIBOR. So right now, if you have a LIBOR loan that you got two years ago, and you have two more years left, and you're not thinking about today, how to convert it to SOFR, we're actually doing it SOFR before the rates go even higher, you know, you're doing a disservice for yourself, and we'd like to make sure that our clients are informed and make the right decisions.
[00:16:21] Sam Wilson: There are a couple of questions here, I want to come back to the LIBOR to SOFR. discussion, but on the trading floor, it sounds like interest rate caps. And my understanding, again, I have no experience in this personally. So I'm asking the short position of ignorance. Can interest rate caps be bought and sold?
[00:16:39] Kevin Swill: Yes.
[00:16:39] Sam Wilson: Is that what's happening on your trading floor?
[00:16:43] Kevin Swill: You know, we're not in the business of really trading, that's for someone else in some other organization to do. We're just really helping them through the process of securing an interest rate cap, being able to negotiate with your lender on an interest rate cap, what you can ask for what you can't, whether you're being taken advantage of, I mean, to be honest with you, there are so many institutions out there, you know, not only need to name any, but they have their own trading floors at these huge institutions. So if you say, hey, guy, I know you have your loan with us. But if you need to get an interest rate cap, our trading floor will do it. Well, guess what? You're about to get scammed for about 25 to 75 basis points, possibly. Our shop at Thirty Capital Financial, we go as far as willing to share the screen of our Bloomberg to show you that we're not taking advantage of on basis points, we have a flat fee that we charge. And then the rest is just all formulaic. And we don't make any basis points on that we're not taking advantage of our clients, we're trying to help our clients, whereas in a large institution, it's literally two separate business units. Sothey're looking out for themselves.
[00:17:54] Sam Wilson: For sure. Got it. That gives them some definite color to that, you know, that question. Thank you for this. LIBOR and SOFR, so tell me how that could negatively impact a borrower if they're not paying attention today?
[00:18:09] Kevin Swill: Well, you know, it's interesting, because today, they just coincidentally, they happen to be right about at the same level. So now's a good time to transition, where the rates are for SOFR, and let's say, the 30 day LIBOR and where that is, it's fairly close. But you don't know what's going to happen between now and July of 2023, where your LIBOR rate might be at one level, but by then, SOFR might be a lot higher. And now when you go to make that change, you're paying a lot more in interest, a lot more. So what we try to tell our clients is watch the LIBOR, watch the SOFR and interestingly enough, when we do these interest rate calculations for caps and stuff, or if we're trying to do a transition of SOFR and LIBOR, our calculators on our website actually tell you that if you do it in LIBOR, or if you would have if you have a LIBOR, this is what the rate is. But if you had SOFR, this is what the rate would be. So you can make an intelligent decision. And we post every week, where SOFR is where LIBOR was, and so forth. And then you can plug in your deal.
[00:19:21] Sam Wilson:
What are the loan types that are
subject to this that it would make a difference? I'm thinking on a
30 year again, I'm just throwing out, you know.
[00:19:30] Kevin Swill: Well typically, it's all on floating rate loans. Yeah. SOFR and LIBOR, only based on SOFR, you know, so that's really a construction loan, a value add loan, you know, a small bridge loan, things of that sort.
[00:19:45] Sam Wilson: Okay, that answers the question is if you have floating rate debt and you're not paying attention to it, so what are the action steps that someone takes then? Okay, hey, you know, Kevin, I was on your way on your site, I did the calculation and I see that I should be converting this now, I guess, if I’m even using the right terms.
[00:20:02] Kevin Swill: No, that's fine. And quite frankly, what it is, is it's whether or not the borrower was knowledgeable. Some borrowers don't even know what their finance department put in place. But we tell everybody to go through your portfolio, see which ones are floating and if they're floating, what are they based on? If it was in the year of 2022, we already know it has to be in SOFR. If it was prior to that, it could still have been a LIBOR deal and you're still on the LIBOR. So we tell you look at that closely. And if you need assistance understanding it, we can help you. But it's time for you to go speak to your borrower, I mean, your lender, i.e. your servicer and saying, Hey, look, we have a LIBOR legacy loan, we think that it's time for us to convert it to SOFR. And that's it, we don't do that. That is between the borrower and and the lender or servicer, but we'll give you the tools and the ammunition to help you with that transition.
[00:21:00] Sam Wilson: I love it. I love it. Kevin, thank you for taking the time to break down some of the some of the more nuanced portions of that, certainly appreciate it. One last question for you here, you guys are building prop tech called Lobby CRE. Can you give me a 30-second overview of what that is, and where our listeners may be, you can start looking out for that when it goes live?
[00:21:21] Kevin Swill: Yes, it is live now. And in the few months that we're live, we have over 10,000 units. And really what it is, in a nutshell, is very simple. And I like to do it from 30,000 feet, you're a CEO or a COO, you wake up in the morning, and you want to know because you have 100 properties. And you want to know, hey, what's my occupancy since yesterday or last week on my whole portfolio. In real time, we will tell you to the decimal what your occupancy is, you can then touch that little circle on your screen, and it'll break it down either by region by state or by property manager or regional manager. So you'll know where the problem is. And then you can get all the way down to every single line item in your financial statement that you want to compare to your other properties or to your comp properties, whatever that may be, you can say so. So from that standpoint, you can see that in a second. Also, you have 100 properties, you want to do a financial statement. Usually you go to your regional property managers where your regionals you, hey, give me your cash flows. And then someone in your main office puts it together, five seconds, we can give you a whole portfolio,. We can give you your portfolio, cash flows by you know, one property, that's only one aspect. Now we're including debt management. So you can analyze your own debt on your portfolio, or on your assets, all done for you all automated. Same with equity. How is your equity, how the waterfalls coming? We can do all of that. And the biggest thing that we just started now that we talked about ESG in the world, is we have really legal entities. So you can actually put all of your loan documents into the portal, we will remind you every year, your registered agent, because every state is different. Your registered agent is due, would you like us to go do it for you? All automated, everything is automated. You want to go sell your property, you tell your lawyer, hey, it's not going to take you hours that you charged me $1,000 an hour, go into the portal, here's the property, every document you would ever need, including financials, tax return, anything, it's all in the portal, and that can be done. So this Lobby CRE is a way to have any borrower or any company's ecosystem all wrapped up into one and to be live. You're getting real-time data.
[00:23:43] Sam Wilson: That is fantastic. Kevin, thank you.
[00:23:44] Kevin Swill: As you can see, I'm a big cheerleader. I'm a cheerleader of our business.
[00:23:49] Sam Wilson: I love it. I absolutely love it. That's really cool. Look forward to checking, certainly, checking that out. Kevin, if our listeners want to get in touch with you, learn more about you your defeasance services, your Lobby CRE, any of those, what is the best way to do that?
[00:24:04] Kevin Swill: You can come visit us at thirtycapitalfinancial.com. Or you can go right onto lobbycre.com. Any one of those will take you to whatever you need to say if you go to thirtycapitalfinancial.com, that's where our defeasance that's where our SOFR, that is where all of our financial stuff is. Lobby CRE allows you through technology to grasp all of your stuff. And the last thing is we have an academy that we set up last year, which is accredited and it's really serving the entire industry for young people that want to learn about real estate that don't have the experience but want to get a job and they get their job and they say boss, you don't have to train me. I can go to this class one hour a week for eight weeks, and I'll be as good as a two-year underwriter for you.
[00:24:45] Sam Wilson: That is very cool. Kevin, thank you so much. I certainly appreciate it. Thank you for coming on today.
[00:25:00] Kevin Swill: All right. Thank you, Sam.