How to Attract Lenders: Insights from Real Estate Financing Expert

Stephen S. (00:02.76)
Welcome to the show where we interview the nation’s leading real estate entrepreneurs. It’s your host Stephen Schmidt Welcome back if you’re joining us for a second third or a hundredth time and welcome if it’s your first time you’re in for a major treat today I’ve got James Mendelsohn in the studio with me and We’re gonna get rocking and rolling talking about all things money today James’s a very colorful career over 30 years in the financial space coming from private equity and

now focuses on lending and so we’re going to talk all things money for ideally operators that are somewhere in that $10 million range. So before we get started in that, just remember at Investor Fuel, we help real estate investors, service providers, and real estate entrepreneurs, two to five X their businesses to allow them to build the businesses they’ve always wanted to allow them to live the lives they’ve always dreamed of. With that being said, James, welcome to the show.

James Mendelsohn (00:54.446)
Hey, great to be here. Thanks again for having me.

Stephen S. (00:57.59)
You bet. I’m excited to get into our conversation for today and talk about our topic. Before I do that, can you just give us a little bit of a background on really how you got to where you’re at today? What got you started in this space and how did you get to where you’re at now?

James Mendelsohn (01:13.836)
Yeah, no, happy to. Started off as a statistical analyst working in credit, so spent a long time in consumer credit and mortgage. And then was…

one of the big consulting firms, and then spent a bunch of time in private equity, mostly focused on lending and using credit data to build better lending models. Got out of private equity and started advising lenders on acquisition, &A, some other pieces, and where they really needed help with raising capital. So started focusing on that, bringing more debt and equity capital to bear on the market. Worked pretty well.

bit of a shift during the pandemic. Did a bunch of work with the PPP loans and that really opened my eyes to all the different smaller companies and operators that needed better access to capital. So in 21 refocused my company to really try to deliver service to that segment and bring capital to those companies and then in parallel discovered a ton of unmet needs in real estate both for debt and equity capital.

So started working with operators in the real estate space and so we do direct lending up to about 10 million and then above that and in other situations we work with a number of big partners. whatever the situation is that comes to us we can usually figure out a way to get the deal done.

Stephen S. (02:50.2)
Yeah. Now, so what types of investors do you primarily work with? Because I guess maybe I misunderstood when we were talking. You said up to 10 million. I was thinking somebody doing like 10 million a year. So like what types of investors do you primarily work with? Or most of them like fix and flippers, buy and hold developers? What’s kind of the typical mix you see?

James Mendelsohn (03:07.074)
Yeah.

It’s really all over the, it’s all over the map. mean, we’ve been really fortunate in that a lot of our, almost all our deal flow comes as just referrals, people that know me or one of my team. And they come, they come in. we’ve done, you know, small sub 1 million deals to 250k fix and flip or a 500k bridge. We’ve done a 10 million portfolio refinance or 5 million of rental property. And then we’ve done bigger stuff, you know, 50, a hundred million, same things, portfolio.

subdivision developments, land acquisitions, and for those obviously we work with bigger partners, people that have the balance sheet, but we’ll work to source the capital, structure the deal, figure out how the economics make sense for everyone.

Stephen S. (03:54.48)
Yeah, for sure. Now, I know you hear a lot about Bridge Loan’s DSCR. I we could go into all that. I think most of our listeners are pretty familiar. But is there any newer niche loan options you’re seeing like really gain traction in the space other than like DSCR? Because I know that’s still kind of taking a stride too.

James Mendelsohn (04:14.093)
Yeah, I mean.

Yes and no. I think we’re finding some higher leverage options. I think that tracks with sort of that sweet spot of what’s a good deal and that can be size, geography, asset class, and the other dimension is what’s the good operator? Someone who’s got either experience, a good team, they can

There’s no operator risk or operational risk that the deal is not going to happen

And so when you can put those things together, we’re able to get higher leverage, which I think is a really important variable because it can be the difference for some, especially on the smaller side, higher leverage can be the difference between doing a deal and not doing a deal. And if it’s a good, like I said, we usually try to figure out a way to get it done. But that’s one of the things that we’re seeing is with that intersection of the quality of the deal and the quality operator, we can bring more leverage to the

able.

Stephen S. (05:22.65)
Sure. Speaking of the operator, what’s one financial structure you’ve seen recently that made you think this operator really knows what they’re doing?

James Mendelsohn (05:32.825)
yeah,

I’m trying to think, here’s a big one. This is gonna be probably all in, over 100 million of capital deployed. Commercial property, the guy is not over levered, so he’s coming to us for accommodation of refi on an existing note, and then some development capital to do all of the entitlement and pre-development work.

Then the next phase of doing the the rest of the horizontal and vertical so it’s just he’s got a very good methodical approach very strong balance sheet Excellent know-how and and that’s that’s it down the fairway deal. You could do that all day long, right? See a smaller scale, you know similar Guys doing It’s a two million dollar buyout so smaller right but but similar like good operation

Stephen S. (06:22.512)
Yeah.

James Mendelsohn (06:36.66)
a good track record. He’s taking over project from a guy who just wants out of it. And again, quality project. And being geographically agnostic. So it’s not necessarily at a hot market, but it’s a good project. So the economics makes sense. And strong operator. So that’s been one where we’ve been able to come in and get that one done too.

Stephen S. (07:02.436)
Yeah. How do you recommend investors position their financials to appear more attractive to lenders?

James Mendelsohn (07:11.978)
um… i think uh… you know i’m trying to remember the old joke like tell the bad part of the story early

Stephen S. (07:19.824)
Mm-hmm.

James Mendelsohn (07:19.852)
Like there’s nothing, nothing is a deal breaker as long as you know about it. Right. I mean, we’ve been able to do financing for people that have bankruptcy, have unprofitable deals, have an underwater balance sheet. Like none of that would stop me upfront. But if I don’t know about it upfront, then if I find out about it and it’ll spike the deal, because the more you know upfront, the better. So I would just, I wouldn’t

ever try to like whitewash or sanitize something. I would just like tell me everything and that’s just me whoever’s repping you or ever trying to source your capital will probably tell you the same thing. The more we know upfront you know the better it is and sometimes I mean we had one guy I mean I felt bad for him because he had gotten himself in trouble and he was in receivership and the best thing we could do with him was get him out of it but that’s a distress sale and we we can still bring that to the table for him right but we

Stephen S. (08:16.176)
Mm.

James Mendelsohn (08:19.652)
everything up front.

Stephen S. (08:21.646)
Right. Are there common red flags that like instantly make you decline a loan request or what does that look like?

James Mendelsohn (08:29.174)
I always hate saying no right away, but I think the combination of if you have like zero experience doing a deal and you have zero of your own money, like there’s just no way to move forward.

Stephen S. (08:43.012)
Mm.

James Mendelsohn (08:44.462)
And so then my advice is usually like find a partner that knows what they’re doing and or figure out a way to raise even a tiny bit of your own money, know, friends and family or some kind of other asset. And if you’ve got collateral, I mean, that works like you can put up if you own be a personal, your residence or something like that, anything that works for a collateral standpoint. But that sort of like no experience, no capital is a real dead end.

could be good projects. mean we had one where the guy had a great idea and his background was in architecture and I said look this is a great idea but you aren’t going to be able to pull this off. You just don’t have the experience to do it. It was a pretty big subdivision right so it’s just you’ve got a you’ve got to partner up with somebody who knows what they’re doing and and and you could we advise them like find that person form a JV and you can still be your vision but now you have some

else to be a partner who has the operating credibility and that will satisfy you know a lender or an equity investor.

Stephen S. (09:52.002)
Right, because ultimately, like at the end of the day, when you’re using other people’s cash, they’ve got to have a solid bet that they’re going to get it back and some, right?

James Mendelsohn (10:02.273)
You

yeah, I this is the thing, I always tell operators, look…

It’s a very simple equation, right? You want to take X dollars of somebody’s money, you’re going to do something with it and you’re going to return it to them with yield. so it becomes a question of is that yield sufficient in the market, whether it’s debt or equity, you know, those are different numbers, but different investors have different targets. So that’s part one. Part two, what assurity do they have that you’re going to deliver the goods, right? And that goes to your experience, quality of the deal, you know, a good operator and a

market is sometimes better than a bad operator in a good market. And then third thing everyone wants to know if the sky falls and the comes to an end, what happens? Right? So what kind of security collateral? You the doomsday scenario is never a good one but it’s one that we always have to look at.

Stephen S. (10:57.412)
Yeah. How would you say, like especially, especially in the last few years, interest rates rising for the first time in a long time, you know, all those different types of things, right? How would you say the current lending environment has shifted in the past? Let’s just let’s just be fair and go 36 months, especially for like value add or short term deals or just specifically related to what you you kind of focus on.

James Mendelsohn (11:05.688)
Thank

James Mendelsohn (11:14.146)
Yeah.

James Mendelsohn (11:25.774)
Yeah, I mean, my tongue-in-cheek answer is it takes twice as long to get half as much done, right?

Stephen S. (11:32.432)
Sure.

James Mendelsohn (11:33.102)
So, I mean, part of the problem with rising rates, a lot of people haven’t been used to them. I mean, I’ve been around long enough that rates are now about what they were when I started in this business. But if you’re not used to, you know, like a seven and a half prime, that could be eye opening. And what it also does is it lets people sit on the sidelines because you don’t have to go after deal flow when you can make seven to 10 % doing almost nothing.

Stephen S. (11:45.604)
Yeah.

Stephen S. (12:03.354)
bright.

James Mendelsohn (12:04.021)
So it raises the bar for the quality of the deal and quality operator. And I think it, you know, we’re always trying to make sure that we’re, you know, obviously good stewards of our own capital, that we represent good packages to the marketplace. And, you know, one of the guys that was a better to me when I was starting out, he used to say that the second worst thing that happens to you as a lender is you get paid

Stephen S. (12:09.625)
Mm.

James Mendelsohn (12:33.296)
back.

Stephen S. (12:34.704)
Right.

James Mendelsohn (12:35.342)
always trying to make sure that, we’re, we always like, you never want to lean into a, you know, a marginal credit situation because it’s always going to get everybody in trouble. Um, but I think, I think rising rates of rich is really tight and scrutiny, um, on, on deal quality on execution. Um, because that, that sort of operator risk is not small. I mean, in some of these deals. So that’s where, again, the guy who’s done 20 or 30 fixing flips is going

have lot easier time than the guy who is starting out with his, you this is his first or second. And that’s always a little bit of that, you know, that we were talking about this before the show about that, that sort of paradox of, you know, you can’t get, you get a deal done without any experience, but you can’t get any experience if you get a deal done.

Stephen S. (13:12.144)
Yeah.

Stephen S. (13:24.932)
Yeah, for sure.

James Mendelsohn (13:25.518)
So rising rates hurt that just very candidly. And I think we’re in this interest rate environment is not changing anytime soon. So we’re going to get used to it for a while.

Stephen S. (13:28.708)
and

Stephen S. (13:32.527)
Right.

So you expect rates, lending criteria to pretty much stay the same for a while is what you’re seeing.

James Mendelsohn (13:42.318)
Yeah, look, my crystal ball probably isn’t better than anyone else’s, but I mean, don’t think we’re going to see like a 2 % know, well.

private Fed rate anytime soon. I think we’re in the high signal digits for a while. Whatever the usable future is, you one, two, three years. And I think credit criteria are going to stay pretty sticky. don’t think that I think there’s there’s enough good deal flow that you don’t have to go chasing marginal deals to fill the pipe. And that’s part of part of our job. And we spend a lot of time educating people on what

means to go to the capital markets, you what does it mean to go through our lending process. And we’re pretty streamlined, you know, but that doesn’t mean we aren’t bundled up, but we don’t kind of look under the covers to figure out what’s going on.

Stephen S. (14:35.76)
So with all that being said, like things staying the same, how are you seeing investors adapt to tighter capital, still get deals done?

James Mendelsohn (14:44.686)
Well, so I think one more syndication. So I think we’ve done blended capital stacks where instead of having one person write one check, we’ll get four people and we’ll do LP structure on the equity and maybe syndicate the debt. you’ve got sort of the capital sources are sort of hedging the debt a little bit and spreading out the risk. I think we’ve done more stage capital.

So let’s bring in a different style of investor for pre-entitlement or horizontal than someone who’s going to do the vertical or the late stage. I think we’ve done a little bit of…

a candidly more diluted valuation for the operator. So the capital investor gets a little bit better return and there’s some downward pressure on promote. But all those things happen and you can still get the deal done.

Stephen S. (15:49.668)
Yeah, now, so let’s let’s maybe go in because I do want to talk. I know we mentioned a couple, you know, talking points when we were talking before the show, but I want to ask like a few questions specifically, you know, about like actual like products. So like bridge loans, DSCR, et cetera. I mean, let’s just start with bridge loans. Like what exactly are they for somebody that might be a little bit newer? And like when should an investor consider using one?

James Mendelsohn (16:04.1)
yeah, sure.

James Mendelsohn (16:16.631)
Well, so I think, I think if you, I mean, classically, right? mean, bridge financing gets you from point A to point B, right? so it’s definitely going to be a kind of a shorter term. So call it, you know, 12, 18 months. and I think it’s, you’ve got a, you’ve got into a property and you’re, on the way to getting out. but either you’ve got an anticipated sale or you’re looking for some sort of permanent long-term low rate financing.

but you’ve got to get out of what you have now in order to have that breathing room to lock in either the permanent financing or lock in the sale. So that’s what the bridge will go to to get you there.

Stephen S. (17:04.633)
Sure. And so let me ask you this, because like one of the questions that that like just naturally comes to me in that moment that I think other investors would have would be like, okay, well, with a bridge loan versus hard money, like when would be the best time to use hard money versus doing a bridge instead?

James Mendelsohn (17:23.992)
So I think, you know,

Bridge can get you, I think, little bit higher leverage than hard money. But I think importantly, you’re going to be at a later stage of completion for bridge work. So hard money will get you through the flip or through the construction. But again, let’s say you’re done, but you haven’t sold it out and or you want to go through

let’s say, I don’t know, you want to do a bank rate finance to get out of the hard money, but know, Bridge can come in and be that instrument to get you from the hard money loan into a sale, right, depending on how long you’re going to want to carry. So you could use that to reduce your debt service and so preserve some yield.

Stephen S. (18:20.474)
how quickly can you typically close a bridge loan? And like what kind of documentation is usually required for that?

James Mendelsohn (18:26.796)
Yeah, I I think we I would say, you know, the fastest is probably two weeks. Average is probably four. And I think the documentation, I mean, it’s going to come three categories, right? I all the stuff about you as the operator, all the stuff about the property and then all the stuff about the financing. So if we’re taking out a hard money loan or we’re taking out an existing mortgage.

What is everything that we’re dealing with? And then on the other side of the bridge, like what’s the takeout of the bridge? So if you’re saying, you know, I want out of my construction financing because I’m going to sell this property, you’re going to sell the, you know, the, let’s say it’s a four unit building or whatever it is. What does that look like? Like what’s your plan to sell it? And then are we sure that proceeds are going to be sufficient to take out our bridge and give you some return?

and we got to handicap that a little bit too. But if we got all that documentation, like again, like what I was saying before, the more we have, the fewer questions we have to come back to and iterate, the faster the process goes.

Stephen S. (19:38.32)
Sure. And so like aside from bridge loans, like what are the loan products do you see commonly being used by investors specifically?

James Mendelsohn (19:48.75)
Yeah, mean, look, we kind of we’re a bit of a Swiss Army knife. We can do just about anything. So, you know, we bridge, fix and flip, ground up, rental portfolio, rental acquisition, multifamily. mean, depending on what the need is. But we’re we’re working all those different types of products, depending on what people are bringing to the table.

Stephen S. (20:11.894)
Right. Let me let me ask you this, because I’ve never had a conversation with a lender that said they couldn’t do something until they couldn’t. Right. So like with you being, you know, in a sea of in a sea of people, like what makes you personally like really stand out from the rest of your competition? Obviously, rates are going to be the rates. The when the companies are going to be the companies like that’s that is what it is. Right. But like what makes James Mendelsohn stand out?

James Mendelsohn (20:42.274)
Yeah, I mean, I think we are, we, one is our team is very creative.

And I think we will also hold the mirror up to the deal. mean, you’ll say lenders hate to say they can’t do anything. And generically, that is true. But we work with deals all the time where we’ll say, this is not a doable deal, right? Either you don’t have the capital or there’s no such thing as 100 % lever financing anymore. We get this one a lot where people are like, oh, I want to buy this apartment building. Great, what’s your equity capital position?

Stephen S. (20:59.737)
Right.

James Mendelsohn (21:21.2)
like, oh no, zero, I want 100 % leverage. Sorry, we can’t do that. For you, especially you’re a novice investor and you don’t want to pledge any equity capital, you can’t do it. And we can do highly levered financing, but it has to be an operator with a very thick balance sheet and a really good track record.

But I think our creativity and I think we’ve got very flexible products. mean, look, we underwrite and I think this is where a lot of lenders, you you converge on a mean because everyone’s underwriting to sort of that same model. Like we can’t have losses in our book above guidance, but we’re still gonna try to get a deal done.

Stephen S. (22:04.174)
Right. Yeah, that makes a ton of sense. What’s something like what’s a big misconception that that you just see most investors having when they come to you?

James Mendelsohn (22:17.198)
i think the biggest one is is they don’t think that they matter as much as the property and so you know i asked you for a p s a credit check and people are sometimes surprised by that because they think the property should speak for itself i think especially when people are

Stephen S. (22:25.422)
Mmm.

Stephen S. (22:37.168)
What do you mean?

James Mendelsohn (22:40.546)
Yeah, I’ve got a great deal, right? But that’s the difference. What I said before, like sometimes if you if you’re on your 30th flip, we that’s a lot easier to get a deal done for you than the guys on this first one. Right. And so I think that’s the most common thing I run into is people don’t understand how much they matter to the lending equation and both their expertise and but also their ability to to collateralize it and not

Stephen S. (22:53.166)
Right.

James Mendelsohn (23:10.56)
Like for example not saying that you always have to PG but I mean if you’re willing to that that actually makes your deal go further faster

Stephen S. (23:18.224)
Yeah, that makes a ton of sense. you had to leave the audience with any last bit of advice, what would that be?

James Mendelsohn (23:28.517)
Get everything out early. mean, the difference between two weeks in underwriting and four weeks in underwriting is really you, not me. Like if I find stuff that you didn’t tell me about, it’s just gonna slow everything down. like, I would rather you spend a week getting all the documents together before we get started, than give me half of it on day one and then make me go back to the well five times. Because it just chews up time.

Stephen S. (23:38.128)
Mmm.

Stephen S. (23:54.861)
Ha!

James Mendelsohn (23:59.136)
if there’s something that we’re because look ultimately we’re going to find it right i mean if if the buildings you know in receivership like just tell us because it changes how we approach the deal it doesn’t kill it nothing nothing is ever an automatic no

Stephen S. (24:03.769)
Right.

James Mendelsohn (24:17.422)
But if we start down a path and we think, for example, this is a pretty typical 30 % levered loan with a strong balance sheet backer, and then we discover that, oh, it’s 90%. That’s not going to work. We have to know upfront what we’re doing, and that’s how we’re going to drive the deal flow.

Stephen S. (24:38.372)
Yeah, love that. If people want to learn more about you and what you’re working on, where should they go for that?

James Mendelsohn (24:47.148)
Yeah, proximalfinance.com will get you the link.

People can give us call, look at the site. We can get a deal ingested and done hopefully within two, four weeks depending on the structure. And always happy to chat with folks. Like I said, we spend a lot of time educating people on how our flow works and what products are available to them. And always happy to do that.

Stephen S. (25:17.808)
Well James, thanks for being here one last one last official question for you because I’m just more personally curious than anything but

What’s next for you? Like what’s really on the horizon that you’re really working on, you’re really excited about? Maybe it’s even just a passion project, not business, but what would that be?

James Mendelsohn (25:33.88)
Yeah, we’re, we’re doing, not business.

Stephen S. (25:38.626)
No, no, no, I’m saying maybe you can take it wherever you want. So.

James Mendelsohn (25:42.19)
I will spare you and your audience me working on improving my golf game. We’re going to launch an equity fund. We’re going to put together what we’re balancing under and that’s been great. But we still work with third party capital for equity. But we’re going to put together our own equity fund and be more of a one stop shop.

Stephen S. (25:50.554)
You

Stephen S. (26:10.991)
Awesome. Well, sweet. Well, folks, go connect with him for more. And maybe you’ll see him out on the golf course with me. I always tell people when people ask what my hobbies are, I tell them hunting. And most people naturally, if they’re not completely turned off by the idea of hunting, they ask the follow up question of, what do you hunt? And then I go golf balls and they never expect that. You just find me in the trees or the pond.

James Mendelsohn (26:12.268)
Yeah.

Stephen S. (26:41.026)
One of the two. Well, James, thanks for being here, everyone. I hope you enjoyed today’s show and looking forward to seeing y’all in the next episode. Thanks again, James.

James Mendelsohn (26:42.702)
Thank

James Mendelsohn (26:49.07)
Awesome, appreciate it.