What are Non-Recourse (CMBS) Loans? How Investors REDUCE RISK - YouTube

what's up guys all right today we're talking  about non-recourse loans now before we get into  

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now let's get into non-recourse loans this is a  great subject but this can also be a very very  

deep subject that has a lot of intricacies and a  lot of details that are going to be specific to  

obviously timing and property we want to  talk about this subject and understand how  

you can access it and how you can use it to your  overall strategy when dealing with self-storage  

it is one way that we have been able to grow at  the pace that we're growing and able to reduce  

risk able to take on more debt and also just to  sleep better which a lot of people care about  

at the end of the day we buy great properties that  we don't think will ever go under ever but we know  

we don't have control over everything and we don't  know what the future holds now when you're dealing  

with regular single family homes lots of this  is predicated on your your individual income  

because it's not important necessarily what the  overall market does with the house as it is that  

you're able to afford it that's actually how i  think everyone should buy homes meaning what the  

price of that home does should be irrelevant to  why you're buying that home you should buy that  

home based upon what your needs are and what you  can afford and what is responsible for you to be  

purchasing commercial real estate's not like that  commercial real estate is a actual investment that  

is utilized within society and is infrastructure  the government needs commercial real estate  

right we need office space we need housing  like multi-family we need industrial we need  

self-storage we need all of these different types  of asset class just so society can work we have to  

have big buildings we have to have major retail  centers where businesses can operate out of and  

they can sell their products all of this is  absolutely crucial for our society to function  

but because the use of it is changing as we've  seen in retail and because the loans and the risks  

are so large they've had to figure out a way that  we could develop products to loan on this as it's  

more like a business meaning it's not based upon  that person's income if that was the case we would  

be capped at far very small assets these assets  cost hundreds of millions of dollars sometimes  

billions of dollars building stadiums and  skyscrapers of course traditional financing makes  

no sense when you're dealing with products like  this that is a massive advantage in commercial  

real estate and one we get to take advantage of in  self storage a lot of people don't even know that  

this advantage exists in fact i've talked about it  online you can check out my instagram where i talk  

about some of these things and a lot of people say  this is either a ponzi scheme or you're tricking  

investors or something weird and it amazes me  the lack of knowledge surrounding this product  

type the reason being is we're so accustomed to  traditional financing meaning a 30-year mortgage  

or a credit card that's not how the majority of  the market actually works the real market which is  

the bond market or the debt market is ginormous  it is way bigger than the stock market or  

any other market on earth it is where companies  go to get debt so they can grow their company it  

is where everything happens real estate but the  bond market functions differently than just a  

traditional bank how it works is this the bond  holders are investors now where does a bond come  

from so if i want to get a non-recourse loan i go  through a bank but the bank isn't actually the one  

that is lending the money they are the ones that  are collateralizing the debt meaning they take my  

debt and they take other people's debt they put it  all in a package together and they sell it on the  

bond market i make my payments the payments go  to the bondholders or the investors that's how  

the debt works now because mine is packaged in and  collateralized with other assets the likelihood of  

that bond failing is way way lower so investors  take the risk not me the bank doesn't hold the  

debt none of our originators actually hold or  administer they don't hold them but administer the  

bonds at all their package sold off investors have  it and now it's another party that's administering  

it the point being is this is a transfer of risk  from banks to willing participants that hold bonds  

it's a safer way for the end user and the investor  to get a return and take out and hold debt now a  

lot of people you start talking about this this  is a ponzi schemer this is going to be the big  

collapse this has been going on forever this is  actually a concept that started in europe a long  

long time ago hundreds of years of debt and risk  analysis have been based on this is not something  

new this isn't something that was just rolled  out and i think a lot of the negative correlation  

comes from the housing market what happened with  collateralized debt obligations or packaging up  

loans and selling off the insurance to those loans  and then when they defaulted all at the same time  

it caused massive crisis this is very different  they're not collateralized in the same way  

we don't have cdos we don't have the same types of  structures or investments this is the same thing  

that has been going on for a long long time this  makes it so me as an investor i can buy a property  

invest my capital in it i can improve it then  i can refi out i can take my money out i can  

move it into non-recourse loan and i still own  it i still own the wealth and the income from it  

for an investor this is like magic that means i'm  getting all my risk out not all you can never get  

all your risk but the vast majority i'm not liable  for the debt anymore my risk of capital i've now  

taken out right so if it goes under i hand the  keys i walk away after that refinance point i  

already had my money back this is a method that  we coined the bird you may have heard the burr  

method but the bird means we buy we improve cash  flows we reduce risk through taking our money out  

and refinancing it into non-recourse and then we  do it again and because of this debt product and  

the way that it's formulated we can do this over  and over and over again so who does this debt  

work for generally speaking right now the  market and the transaction that i explained  

is done on the cmbs market there's also insurance  companies or investors that may offer privately  

to do this so non-recourse loans you can get from  major insurance companies insurance companies have  

what they call float this is money that has to  be invested that secures the insurance from the  

premium payers so if there's an insurance claim  they have to have a certain amount of money right  

that's able to cover them in case they have lots  of losses insurance companies reinvest well they  

do this in the same way that you may do when you  go to a bank and they collateralize your debt into  

the bond market they'll do it on their behalf  they take out the debt generally speaking we  

see that insurance companies want you to put  more down now is there some drawbacks to doing  

this type of debt of course there are because  the debt is only secured by the asset the lenders  

are going to look at the asset very differently  they're going to want large reserves they're going  

to want certain things like reporting and they're  going to want to monitor that asset to make sure  

that the asset's okay so in some of our assets  that we have we have to have a lot of money on  

hand just in case things go wrong this may not  be right to start out with but at the end of the  

day in markets that we're at today the tighter it  is meaning the more money there is the more debt  

products have to compete to take out debt the  better the terms get so right now where we're at  

in the market cycle which could change any minute  due to large inflation and what we're seeing with  

interest rates it's very competitive market and  the terms associated with non-recourse loans are  

much better than when we started taking out  non-recourse loans back in 2010. before that  

we did it all personally i didn't even know that  there was such thing as a non-recourse loan we did  

it personally for a long long time i still do it  personally but we do it personally guarantee the  

loans to get them to the point where we put them  into non-recourse loans because the other drawback  

with non-recourse loans is the prepayment penalty  schedule now the prepayment penalty schedule  

is in there because remember it's part of a bond  if you want to pay it off it's not just like the  

bank pays it off and walks away they actually  have to use the money to pay off the holders  

of the bond this can be a benefit as well as a  negative one of the reasons it can be a benefit  

is because the bondholders it's paid off a spread  of the interest rates so actually locking in  

non-recourse loans at a low interest rate as  interest rates rise that debt is assumable in  

lots of cases meaning the asset is more valuable  because whoever wants to buy the asset can assume  

that loan at a lower interest rate but if it's  the opposite way high interest rates go to low  

interest rates the bondholder's getting a payment  at a higher amount so if you want to refinance it  

and now we have a lower interest rate you've  got to pay the investors the difference that's  

the prepayment penalty so because of the lack of  simply being able to pay it off and move it around  

we wait till we've improved the asset up and  we've got a lot of that yield out and that we  

can refinance getting a huge return and taking  all of our money out we don't do it immediately  

the only way that we would do it immediately  is if we knew that it was a stable good asset  

and we weren't able to extract high yields moving  forward another problem that you may have because  

it's dependent very much on the asset it's also  dependent on the operator meaning whoever's giving  

you the non-recourse loan wants to make sure  you're not going to screw that up they're going  

to want a track record they're going to want  to see what you're going to do with the asset  

that's easy to overcome if you don't have it  because you can just have a sponsor come onto the  

deal with you that does i don't know when you're  watching this video and the terms conditions of  

non-recourse loan like all that may have changed  the point is though it's a great tool to have and  

one that differentiates commercial real estate  in general but for storage facility owners it is  

immensely powerful it allows you to scale up in  ways that you just couldn't otherwise while not  

taking on incremental risk as you scale all right  i hope you understand a little better at the pros  

and cons of non-recourse loans and how they're  used it's a subject that i talk about a lot on  

the podcast go to the podcast self storage income  and check it out where we've actually interviewed  

experts that are collateralizing these debts it's  a wonderful episode there's a link in the show  

notes check it out go to my instagram and see  the properties that we're doing it and please  

like and subscribe continue to support us so  we can put this content out thanks everybody