The Janover Ventures CEO Was Interviewed On William Weidner’s Realty Speak Podcast

Last month, Janover Ventures CEO Blake Janover went on William Weidner’s Realty Speak podcast to discuss the current state of the multifamily financing market, as well as to talk about how he got his start in the multifamily business. Listen to the podcast here, or read this condensed version of the interview for some of the highlights.  

In part one of this extensive interview, Blake discusses subjects including:

  • His start in the capital markets industry in the early 2000s
  • The importance of transparency in sales
  • The lessons he learned in the aftermath of the 2008 recession
  • The definition and importance of a commercial real estate capital stack
  • The difference between a direct lender, a broker, and an advisor in the multifamily business
  • Why working with an advisor could get you better terms on your multifamily loan
  • The incredible benefits of HUD/FHA-insured multifamily debt, including the HUD 223(f) and HUD 221(d)(4) loan programs
Janover Ventures CEO Blake Janover discusses capital stacks, the differences between lenders, brokers, and advisors, and why HUD/FHA multifamily loans are some of the most underrated products in the industry.

*The following interview has been edited for length and clarity.

Hi Blake, great to have you on the podcast. When we initially spoke, you told me that, while tech has evolved in regards to commercial and multifamily real estate financing,  there’s no substitute for in-person advice and execution. I think you also wanted to share a bit about how you got started in the industry.

It was an exciting start, to say the least. We actually started by selling leads and doing digital marketing in the early 2000s. At one point, I sold a lead list of one million mortgage leads to a company for $10,000, which seemed like a lot of money at the time. After, I went to work for the company, and later, broke off and started my own shop-- which is exactly what I told them I would do when I went to work for them in the first place. Throughout my entire time in the industry, I’ve found that extreme transparency and honesty work best, whether you’re selling something or being sold to.

That’s true. Everyone’s in sales, in some respect. Even if you're working 100% internally, you’re still representing the product or service in some way.

I agree. The best CEOs are salespeople, whether you're an engineer or actually in sales. Steve Jobs wasn’t the best engineer, but he created a reality distortion field around his products and became an enormous success.

In fact, if you aren’t fully transparent in the multifamily financing business, you let your client’s creativity take hold, which can be really dangerous because they’ll naturally go to the worst-case scenario. If I’m talking and I say we can close in a couple of weeks, they will create a scenario where we won’t close for 6 months, or might not close at all. Instead, if I’m realistic and say that we might close in 30 days, but 60 days in a worst-case scenario, there’s no room for the client to create a three-headed dragon.

But, back to how I got my start. When I went out on my own, it started with my buddies and I working together in an apartment. After a while, we built a pretty big shop together and eventually had warehouse lines of credit, which lead to my first major commercial real estate deal. It was pretty challenging. The project involved acquiring recapitalizing and converting an office property to office condos, and while it was complex, I was really proud of the work I did. There were tons of tenants, and I arranged a $20 million senior loan, along with preferred equity and LP equity.

You really enabled those people… and I’m sure they made a handsome profit.

Yes, it was really exciting and complex. However, as we got bigger, I had a lot of loans on my books, and it eventually all came crashing down...I can still taste the heartburn from 2008.

When a tidal wave comes you don’t try to fight it, you either go with it or get out of the way, and in this situation, it was really hard to get out of the way. I was the sole owner and I personally guaranteed all the debt-- and I thought I was invincible. Basically, we shot up quickly and then crashed hard.

We were talking about transparency, and I really appreciate you sharing this part of your story and your evolution with us. That’s a great example. What happens next?

When the credit markets fell apart, I spent many years in a consumer advocacy and debt negotiation business. I built a large company in the Dominican Republic and ended up building one of the largest call centers in the Americas. The construction and acquisition market for commercial real estate was meaningfully frozen for a long time…. so I built a lot of companies, I sold one of them and spent a year or two sitting in a fishing village.

That’s when I reconnected with Brad, one of my first mentors. I was still really intrigued and passionate about capital markets and digital media-- and, it was at this time when NTLDs (non-top-level domains) started becoming popular-- for instance, websites that don’t end in the basics like .com or .org.

I bought and built it while sitting in a hammock in the Dominican Republic. As a result, people started calling me and saying “Hey, can I get a $30 million HUD 232 loan for a healthcare property?” Meanwhile, I told them where I was-- there were chickens and roosters making noises in the background, so a lot of people didn’t really take me seriously. After a while, I was engaged as a general partner in a deal to acquire land and build a 133-unit apartment development in Miami, and I used that as an excuse to come back to the States.

So tell us, Blake, what is a capital stack, and how does it work?

Think of it as a stack of legos. For a simple stack, the first part is senior debt, and the second is equity. A more complex capital stack could be senior debt on the bottom, followed by mezzanine debt and finally, equity. An even more complex stack could be senior debt, mezzanine, LP equity, and finally, GP equity.

For a construction project, a capital stack equals all hard and soft costs… the total accumulation of capital, basically, the sources and uses. Equity can be straight equity, debt-equity, or something else.

What do you do, Blake? Do you do it all? Do you do mezzanine and other forms of capital?

In general, we’ve really been narrowing our focus to providing senior debt, however, we do, on an extremely selective basis, help provide mezzanine and LP equity to projects.

But if someone came in for a senior loan and asked about LP equity or mezzanine debt, you could point them in the right direction?

Yes, of course, and that’s where a lot of our value lies. We understand commercial real estate capital structures, and we know what the market is. We had a client recently, and the deal he was doing wasn't a fit for us. In essence, it wasn’t our highest and best use, but it was something we understood really well.

I said, “Listen, no charge, no money, if you get quotes or get term sheets, I will give you honest and valuable feedback.” I’ll say this: the list of things I don’t know is really long, but the things I do know I’m really good at and am happy to help with.

You mentioned closing loans in your own name. What’s the difference between a direct lender and a mortgage broker or advisor?

A lender in multifamily generally makes a loan and securitizes it. This is generally the case for CMBS, Fannie Mae, Freddie Mac, and HUD/FHA multifamily loans. Fannie and Freddie are widely known for residential loans, but they’re also the largest providers of multifamily loans on the market. CMBS loans are originated and are then pooled together and sold to investors on the secondary market. CMBS stands for commercial mortgage-backed securities. Big banks, like Deutsche Bank, do this, but so do specialty CMBS originators, like Ladder Capital, Rialto, and Benefit Street Partners. They can sometimes be easier to work with because all they do is CMBS, all day, every day.

CMBS, Fannie Mae, Freddie Mac, and HUD/FHA multifamily loans are generally securitized by lenders, while bank and life company loans are typically kept on a lender's balance sheet.

So then they're making that pool, securitizing it, and selling it to investors that want to buy into that yield?

Yes, in a nutshell, The key is that not all lenders are making and keeping loans. Balance sheet lenders include banks and life companies, and they’re keeping loans on their sheets, but a lot of other lenders aren’t.

But I’ll return to the original question-- the difference between a lender, a broker, and an advisor.  Lenders have specific pools of products and sub-products. But, speaking broadly, each lender may only have a small pool of products overall. A broker, a good broker, has a lot of relationships, and a big Rolodex, so to speak, and, in an ideal situation, they’ll find you a lender that has the product you need.

An advisor is the best. They’ll ask smart questions, such as: What’s the story behind your investment strategy? What are the goals? What do you want to achieve? What are your pain points? From there, they’ll find the product that’s best.

An advisor will also do hand-holding, not just closing eyes and forwarding emails. An advisor isn’t transactional, they’re in it for the long haul. Plus, a good advisor doesn't cost you anything-- they’ll generally have a fee-share arrangement with the lender. Basically, the lender gets more volume and makes less per transaction.

So, you’ll be getting a better deal by going to an advisor?

Yes, a good advisory shop will get you lower fees and lower rates than going directly to the lender, and should also be able to help with prepayment penalties and amortizations. In essence, if you can’t add deep value as an advisor you shouldn't do it.

So, a broker and advisor may be the same thing but with a different outcome?

Yes-- and if you don’t mind, there are a few multifamily financing products that are really worth discussing. First, I’d like to address the misconception that FHA/HUD-insured debt is only for affordable properties. In reality, it’s one of the most competitive platforms for financing market-rate multifamily properties in the world.

The HUD 223(f) loan insurance program is one of their most popular options and is specifically designed for stabilized, market-rate multifamily properties. Loan amounts are flexible, but with fees, loans of $2 million-plus generally make sense. It offers LTVs up to 85% and a 35-years fixed and fully amortizing loan term. Now, these loans do take longer to close, about 150 days, on average, so they might not make sense for purchases but are great for refinancing.

For long-term multifamily construction debt, there’s really nothing that beats the HUD 221(d)(4) loan program. It’s by far the most competitive product to build market-rate properties, but it’s best for those building and holding properties. It’s generally not the best for merchant builders, who often want to flip a property right away (or just a few years after) they build it.

The HUD 221(d)(4) loan is non-recourse, rates are super competitive, and it offers 40-years fixed and fully amortizing financing, plus 3-years of interest-only construction debt. It’s really the ultimate mitigant for future interest rate risk, recourse risk, and the risk that you’ll need to put more equity in the property later.

Now, HUD 221(d)(4) loans may have a bad rap among some, since they used to be known for taking 24-36 months to close (or not closing at all). Now, if you have a good broker, they can close in between 7-10 months. That’s not too bad, especially since it takes a long time to execute a lot of the other parts of the construction planning and approval process, such as getting permits, going to review meetings, and the like.

So a developer can take out a separate land loan to purchase the land and then use the HUD 221(d)(4) loan to finance the rest of the project?

Actually, you don’t need to acquire the land with separate financing. You can tie down the land with a deposit and then use the HUD loan to buy the land. When it comes to situations like this, options abound.

So, developers would require a land seller who was willing to wait through the entire loan closing process?

A lot of HUD 221(d)(4) loans happen in secondary and tertiary markets. Due to some of the wage requirements these loans have (as well as other factors), HUD construction loans generally aren’t ideal for large urban infill markets like Manhattan. In smaller markets, we find a lot of off-market deals, and bidding wars over land aren’t really as intense. So it’s usually not a huge challenge to find someone willing to take a deposit, but of course, the seller does need to be willing to play ball to some extent.

Part 2 of this interview can be found here, and covers topics including:

  • Recourse vs. non-recourse loans
  • How prepayment penalties work
  • CMBS vs. Fannie Mae vs. Freddie Mac multifamily loans for small-balance borrowers
  • How closing costs work for multifamily loans
  • The most important questions a borrower should ask before they start searching for a lender