First, I will offer a few pointers on debt. Contrary to much of the popular literature, few properties can be bought for no cash down toward the purchase price. For regulatory reasons, banks are generally prevented from doing this. For practical reasons, no lender should do this. If the investment goes badly, the bank needs to be able to assume ownership at a level that should protect their invested capital. In general, projects can be planned as follows:
70% to 75% of Loan to Value, 1.30-1.35 Debt Service Coverage Ratio(DSCR),
Esa
However, given recent events, I advise setting up your project with more conservative ratios than these as well. I recommend a 60% Loan to Value and a 1.4 Debt Service Coverage Ratio. This level of conservatism protects assets from banking risk, cash flow risk, etc. and therefore protects all the equity and bank debt involved in the project.
Also, many sellers and brokers will attempt to close a deal on projected pro forma. The wise buyer only buys on the basis of actual income and expenses and then seeks to achieve pro forma. There are exceptions in cases where the buyer has identified immediate actions placing the project on the correct footing for his post closing financials. However, purchases based on appreciating rents into an infinite future ignore that financial cycles often create issues for these purchases.
Loan Brokers
A loan broker working with the banks or other sources of capital can be invaluable. The main questions to determine whether a specific broker can be an effective member of your team are:
What relationship do they have with the likely appraisers and engineers that the loan source will use? Will the loan source prevent their involvement with the appraiser or engineer? What loan sources do they have and what volume of business have they closed within the past 12 month period per source? How long have they worked with each source? What portion of their loan application close? Of those that don't close, why not and when in the process was this determined?
A strong loan broker significantly streamlines the process and effectively assures a much greater probability of success. Because of their easy access to the lender and supporting financings routinely, they can facilitate legal, financial, and report completion supporting preparing and completing the total loan package.
Over time as your company develops strong banking relationships, the need for loan brokers may become negligible, but as an entity with more limited asset brokers can be a strong addition to your staff capability.
For sources of loan brokers, most property brokerages can offer a list of active loan brokers for any given market. In some cases, the property brokerages offer loan and equity brokerage services directly.
Institutional Capital
This capital is normally not available without access through a brokerage with major fund contacts and generally is reserved for larger projects. The typical sources of funds are large hedge funds, pension funds, large corporation, and some investment funds. Generally, an investor's business plan will have to mature to a scale that attracts this capital.
Agency Debt
Agency debt refers to guaranteed programs from FHA, Fannie Mae, and Freddie Mac. FHA provides some loans directly to the borrower. Fannie Mae and Freddie Mac do not.
Terms from these sources are typically:
Personal guarantees not required (generally no spousal signatures) with the exception of "bad boy clauses" related to fraud situations. Normally these loans include lock out periods followed by expensive penalty periods for early payoff. These loans are usually assumable Rates are usually 90 to 200 basis points above the 5 year treasury, erm is normally 5 to 20 years, Bridge loans with interest only terms and with construction allowances are often available. Initial purchase loans are normally 75% Loan to Value (LTV) Debt service coverage (DSCR) is normally 1.3 to 1.35.
Normally the borrower must provide:
A Property Condition Report (PCR)-or engineering study A Phase I environmental study (ESA) - or environmental report A property appraisal UCC search for liens and other encumbrances An Alta Survey (with some exceptions allowed) A full title search and bring down Insurance at closing
Additionally, the borrower generally provides:
Organizational documents including OA and articles of incorporation. Certification of EIN, Past Tax Statements, YTD and past year financials, Property tax records, Personal financial statements for the partners, 2 years past tax returns for the partners, Pro Forma Financials, A business plan
Fees are usually 1.25% to 2.25% to close.
Regional and National Banks
These are the typical sources of capital for commercial projects. In fact, for multifamily, they are often better sources than local banks as they have groups specializing in agency loan tools and organizations tooled to support multifamily specifically.
Terms from these companies are typically:
Personal guarantees required (generally no spousal signatures), Rates are usually 200 to 350 basis points above the 5 year treasury, Term is normally 3 to 5 years, Bridge loans with interest only terms and with construction allowances are often available. Initial purchase loans are normally 75% Loan to Value (LTV) Debt service coverage (DSCR) is normally 1.3 to 1.35.
Normally the borrower must provide:
A Property Condition Report (PCR)-or engineering study A Phase I environmental study (ESA) - or environmental report A property appraisal UCC search for liens and other encumberances An Alta Survey (with some exceptions allowed) A full title search and bring down Insurance at closing
Additionally, the borrower generally provides:
Organizational documents including OA and articles of incorporation. Certification of EIN, Past Tax Statements, YTD and past year financials, Property tax records, Personal financial statements for the partners, 2 years past tax returns for the partners, Pro Forma Financials, A business plan
Fees are usually 1% to 2% to close.
Conduit Lenders
These loans are typically long term and low rate. However, they considerably restrict the flexibility of the borrower to refinance or sell the project.
Terms from these sources are typically:
Personal guarantees not required (generally no spousal signatures) with the exception of "bad boy clauses" related to fraud situations. Normally these loans include lock out periods followed by expensive penalty periods for early payoff. These loans are usually not assumable. Rates are usually 90 to 200 basis points above the 5 year treasury, Term is normally 5 to 20 years, Bridge loans with interest only terms and with construction allowances are often available. Initial purchase loans are normally 75% Loan to Value (LTV) Debt service coverage (DSCR) is normally 1.3 to 1.35.
Normally the borrower must provide:
A Property Condition Report (PCR)-or engineering study A Phase I environmental study (ESA) - or environmental report A property appraisal UCC search for liens and other encumberances An Alta Survey (with some exceptions allowed) A full title search and bring down Insurance at closing
Additionally, the borrower generally provides:
Organizational documents including OA and articles of incorporation. Certification of EIN, Past Tax Statements, YTD and past year financials, Property tax records, Personal financial statements for the partners, 2 years past tax returns for the partners, Pro Forma Financials, A business plan
Fees are usually 1% to 2% to close.
Local Banks
Terms from these companies are typically:
Personal guarantees required (generally no spousal signatures), Rates are usually 200 to 350 basis points above the 5 year treasury, Term is normally 3 to 5 years, Bridge loans with interest only terms and with construction allowances are often available. Initial purchase loans are normally 75% Loan to Value (LTV) Debt service coverage (DSCR) is normally 1.3 to 1.35.
Normally the borrower must provide:
A Property Condition Report (PCR)-or engineering study
A Phase I environmental study (ESA) - or environmental report
A property appraisal
UCC search for liens and other encumberances
An Alta Survey (with some exceptions allowed)
A full title search and bring down
Insurance at closing
Additionally, the borrower generally provides:
Organizational documents including OA and articles of incorporation.
Certification of EIN,
Past Tax Statements,
YTD and past year financials,
Property tax records,
Personal financial statements for the partners,
2 years past tax returns for the partners,
Pro Forma Financials,
A business plan
Private Debt
Terms from these sources are typically:
· Personal guarantees are required often with spousal signatures. · These loans are usually not assumable. · Rates are usually 250 to 450 basis points above the 5 year treasury, · Term is normally 1 to 2 years with an additional 6 months to 1 year option, · Bridge loans with interest only terms and with construction allowances are often available. · Initial purchase loans are normally 60% to 65% Loan to Value (LTV) · Debt service coverage (DSCR) is normally 1.3 to 1.35.
Normally the borrower must provide:
A Property Condition Report (PCR)-or engineering study A Phase I environmental study (ESA) - or environmental report A property appraisal UCC search for liens and other encumberances An Alta Survey (with some exceptions allowed) A full title search and bring down Insurance at closing
Additionally, the borrower generally provides:
Organizational documents including OA and articles of incorporation. Certification of EIN, Past Tax Statements, YTD and past year financials, Property tax records, Personal financial statements for the partners, 2 years past tax returns for the partners, Pro Forma Financials, A business plan
Fees are usually 1% to 2% to close.
Multifamily Debt Factors For Investors Esa
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