J Darrin Gross
I'd like to ask you, Kevin Swill, what is the Biggest Risk?
Kevin Swill
Right now the Biggest Risk that we have our borrowers that are out there that either need to sell their asset, one because their partner is a fund, and the fund will only hold an asset for five years. And their underwriting and their performers over the last. You know, look, we've been in a great situation for the last What 10 to 12 years where interest rates have been historically low. But again, people that have been in the industry for 20 years know that you know, the average loan should be on a commercial real estate should be anywhere between Let's say six and a half to 9%, based on the asset class, but people have forgotten that. So for me right now, where I see the greatest risk are people that were involved with partners that have a hold period, and are now in a situation right today, as we speak today on this on this call, that have no choice but to sell their asset, or refinance to buy their partners out. And they're in an environment where they may have a loan that they were only paying two and a half 3% on when they got that loan. But now, they're looking at paying almost 6%. And the question is, who's gonna buy that? Who's gonna buy that if you understand the market, but to understand the underwriting of the asset, it can become cost prohibitive. So I have, for example, the founder of our company, Rob Finley has a portfolio, and he has put up a couple of his assets for sale, every one of them has now been retreated, and retreated to the point where he's taken it off the market, because it doesn't make sense. Because interest rates keep rising to the point where for buyer, it's almost becoming cost prohibitive. And they're waiting for the markets to really slow down, let's see what happens. You know, everyone talks about recession, where is the risk for the borrower, it's when they're being pushed or forced forced to sell their asset, because they have partners that it's their mandate. That's where I find some risk. Whether or not, it makes an opportunity for someone that is going to buy and be able to renegotiate almost like a distressed asset, they may get lucky. Or the borrower is going to have to renegotiate with that fund, or that, that borrower that partner, and ask for a one year extension, because of where the market is. But that's where I think the risk is, I think the risk is anyone that's trying to sell right now are being forced to sell is going to have a difficult time finding a buyer that makes the numbers work. Until we can really figure out because, again, for the last 10 to 12 years, anyone that owned property, they were making cash. Just it was like a cash cow. And you know, and unfortunately, we're in different times now. And the cash slows down. And it's it's an interesting, it could be an opportunity for some, but it's a very high risk for others. And you know, interest rate risk is hurting everybody in every industry, I think, right now until we can figure out what's going on with the inflation, until we can figure out what really is going on with interest rates. And on top of all of this in commercial real estate, you have no more LIBOR than we've had for almost a century. And now all of a sudden, it is converting to Sofer. So again, it goes back to the floating rate and the bridge loans that were based on LIBOR, come July of 2023. If you're not a sophisticated borrower, overnight, you're gonna get a letter that just said, By the way, by by, by not law, but by regulation, we have to change your LIBOR to sofr. And your LIBOR might have been when you got it very, very low. But in July of 2023, it might be double. And that's a risk you're going to take so we tell everybody, let us help you, or review your loan documents. Make sure that if you have a LIBOR loan, that you call your advisor, you figure out a way to convert it today over to Sofer while they're pretty pretty close in pricing. Because you don't know what's going to happen by next year and July of 23 There isn't any extension to that there will no longer be any LIBOR. That's the risks.