“Financing Multi Unit Family Buildings Is Primarily About Cash Flow”
Multi unit properties are also divided into two categories for lending purpose.
Properties with 4 or less units are typically financed through residential mortgage financing programs while multi unit family structures of 5 units or more are financed through commercial mortgage programs.
The focus here is the larger commercial buildings in this category.
Like most commercial financing applications related to property, the land value for these apartment buildings are determined by commercial appraisal and the loan to value offered by the lender will be specific to the structured of the program that the lender is providing.
Multi unit family building financing programs will tend to fall in the 50% to 85% loan to value range range. Many programs will require qualification for mortgage insurance to cover off the lender risk of default. The cost of financing will be impacted by whether or not mortgage insurance is required and the amount of the financing required.
So Now back to cash flow.
Longer term commercial mortgage agreements require proof of established rental incomes in order to secure lower cost interest rates.
There are a number of different revenue and cash flow items that are reviewed at the time of application to validate cash flow.
These include 1) rental rolls; 2) vacancy rates; 3) rental contracts or agreements; and 4) financial statements.
The longer a period of time this information can be provided, the more credibility it has to supporting the cash flow available for debt servicing.
Calculating Debt Servicing Capacity For Multi Unit Financing
Each commercial property financing program for multi unit family buildings will have prescribed debt service coverage ratios that describe the relationship that needs to exist at a minimum between required annual debt repayment and the annual net cash flow generated by the property.
Once again, depending on the property, this ratio can range from 1.2 to 1.4.
The process for coming up with net cash flow is to take the income from the financial statements and add back non cash items, primarily depreciation. There can also be other add backs or reductions to the cash flow calculation depending on the lending program.
If you have a low vacancy rate and solid market rents, then its more likely you will be able to qualify for the higher end of the loan to value range. If this isn’t the case, then the amount of equity that needs to be invested will increase.
This is common in situations of acquisition where the buyer can secure a good purchase price for an under preforming asset and realizes that rents can be raised with some work and vacancies reduced.
The challenge with this from a financing perspective is that while the lender will want to see your projected cash flow over the period of the proposed loan term, the debt servicing calculation is going to be based on existing and historical cash flows with some programs opting to consider a three year historical average.
This can make it difficult to qualify for financing with lower cost lenders until such time as the cash flow has been increased.
If the cash flow requirements of the “A” lenders cannot be met, then more equity based lenders will need to be considered to provide a higher loan to value, but that will also come with a higher cost of borrowing.
The point here is that the cash flow that has been generated by the property in the recent past and the present is the most important aspects for financing a multi unit family building.
Especially in situations of acquisition, its recommended to get enough basic financial information from the seller to roughly assess the amount of financing the property can service.
This can save a lot of time purchase and financing process as by doing some preliminary math you can better determine how much capital you will need to invest of your own money and if the financing request you are making is likely to be approved and funded.
Failing to do this can result in waste of a considerable amount of time and money trying to secure financing that will not hold up under cash flow due diligence.
If you’re looking for financing multi unit family buildings of 5 units or more, then I suggest you give me a call so we can go over your requirements together and work through the different commercial mortgage scenarios that are available to you.
“A Commercial Property Loan Can Be Secured On A Wide Range Of Real Estate Types By A Commercial Mortgage”
A commercial property loan can be arranged for acquisition, construction, or debt refinancing of a commercially zoned real estate property, or it can be acquired to finance other commercial activities within the business entity that owns the property.
Financing is in the form of a registered mortgage in first, second, third, or further subordinated position.
There really is no such thing as a commercial property loan where the real estate itself is not offered as security to the lender.
There are basically three different categories of commercial property lenders. Within each category are sub categories to provide for the many specific types of commercial real estate that exist in the market place.
Types Of Commercial Lenders
The three categories we are about to go over are set up primarily based on the combination of cash flow, credit, and collateral that is offered by a potential applicant or borrower.
The first category is the “A” credit lending space which is made up of banks and other similar institutional lenders. While there will be different programs and lending focuses around each source of financing in this class, all members will have a similar standard when it comes to the minimum credit, cash flow, and loan to value requirements.
The “A” lending classification also offers the lower available cost of financing with some tradeoffs within the class for different loan to value ratios, reflecting the cost of lending risk for each transaction.
And while all properties owners aspire to secure an “A Lender” deal, the reality is that there is a significant portion of the market that cannot qualify for this class of financing at any given point of time with some geographies and/or industries seeing less than 50% of their commercial debt financing provided by “A Lenders.
If a property owner or business cannot qualify for an “A” commercial mortgage, then they must next look to the subprime commercial market which is basically split into two different groups, those being subprime institutional lenders, and private mortgage lenders.
The subprime institutional lenders are after commercial property loan deals over 1,000,000 that just can’t get qualified by a conventional lender such as a bank.
This type of commercial mortgage provider can take on many different forms such as a merchant bank, investment fund, hedge fund, and so on.
These financing targets still have fairly strong cash flow, credit, and collateral, but still score out slightly below the “A” lenders.
Because “A” lending criteria can be hard to qualify for at times, depending on the strength of the economy and overall global financial market place, a large portion of he market can fall into this subprime category.
Sub prime institutional lenders are typically interested in providing financing for a one to three year period, allowing the borrower the time to strengthen their borrowing profile which will allow them to eventually refinance the debt with an “A” lender in the future.
The third category of commercial property loan provider is the private lender.
Private mortgage lenders collectively will look at any size of deal, but for the most part, 90%+ of this group will consider deals under $3,000,000 only.
Private lenders are mostly made up of individual investors but can also include syndicates, joint ventures among investors, and mortgage investment corporations.
Private money or hard money as some will call it, is more focused on the equity value in the property and the potential resale value of the property in the event of mortgage default.
While cash flow and credit are still considerations, the security value of the property is the most important aspect of assessing an application request for financing.
A commercial property loan from a private financing source can be priced in a wide range depending on the perceived risk of default by any particular lender.
Most private mortgages are for a period of one year and therefore provide very short term bridge financing to the business or property owner.
Commercial Property Loan Market Challenges
The commercial property loan market is a vast landscape of financing sources and programs.
Because of the differences that tend to exist from one property, industry, geography combination to another, it can be difficult to locate and secure a debt financing solution that will meet your particular requirements by the deadline you have to work to.
Even if you’re correctly focusing on the appropriate lender class for a specific deal, it can still be difficult to determine who can actually lend you money when you need it.
One of the best ways to try to get a commercial property loan in place is to work with a financing specialist with experience in this type of lending.
If you’re in need of a commercial property loan for acquisition, construction, refinance, or some other form of capital deployment in your business group, then I recommend that you give me a call so that we can go through your requirements together and discuss the most relevant options available to you in the market.
“What Is Subprime Commercial Mortgage Lending”
Some people will call subprime a secondary financing market or second chance funding that is available to those borrowers with a combination of cash flow, equity, and credit provides the basis for a lender to advance a mortgage at a higher rate of interest due to higher risk.
In the commercial mortgage financing market, depending on the geographic location, only about 1/2 of the market is funded through banks and institutional lenders with the balance capitalized by subprime lenders and borrower equity.
While there are many that hold the opinion that subprime is more of a lender of last resort, this is not necessarily the case and in fact this can be a lending vehicle of choice, especially if you have shorter time lines than what a bank financing process will require.
Subprime commercial mortgages can be placed for purchase, refinance, debt consolidation, construction, and bridge financing applications.
And there are lots of subprime or secondary financing sources, each working to carve out a niche in which to operate.
Even though there are many different sub prime lending sources and lending models, on the whole all of these sources of business property financing can be categorized in to 1) subprime institutional lenders; and 2) private mortgage lenders.
Subprime Institutional Lenders
Subprime institutional or quasi institutional lenders can include trust companies, merchant banks, pension funds, investment funds, and so on where funds are targeted towards a certain type of real estate, rate of return, and risk. The lenders are formalized organizations that directly or indirectly work with investor capital to place real estate mortgages on commercial property.
There are large capital holders in the global market place that seek to diversify their holdings through into real estate and do so through these quasi institutional lenders that can be wholly owned or outsourced.
While there can be considerable variability in what is offered from one of these lenders to the next, the commonality would center around what we would refer to as “near bank deals” where the borrower has not quite been able to get qualified at a bank, but is close enough to evolve into “A” credit financing in the near future.
Rates are higher than bank deals due to the higher inherent risk.
The terms tend to range from one to three years and can include prepaid interest, interest only, and amortized repayment.
One of the key aspects of subprime institutional lending that differentiates it from most of the private lending is the size of the deal that can be considered. Minimum deal sizes are typically $1,000,000 or higher with upper limits in the 10’s of millions.
Due diligence also tends to be more straightforward and streamlined as compared to a bank or institutional deal with funding timelines from application to advance of 30 to 45 days.
Private Commercial Mortgage
Private mortgage lenders are also part of the subprime commercial mortgage space.
While subprime institutional lenders will focus on cashflow, credit, and equity, private lenders are mostly concerned with the equity of the property, making them still higher risk lenders in most case.
That being said, there are lower risk private lenders that would overlap with the subprime or quasi institutional group.
Some of the bigger differences with private lending is deal size and lender profile.
Private lenders are primarily individual investors placing their own money, or working in small syndicates. There are also mortgage investment corporations or MIC’s that place investor money into mortgage investments.
90% of private money has a deal size of under $2,000,000 and a term of no more than one year.
Larger deals are more confined to MIC and larger syndicates.
One of the major benefits of private lending is the speed of deal completion which for smaller deals can be accomplished in a matter of days, and for larger deals, a matter of weeks.
So on average, private lending focuses on smaller loan size, faster placement, higher risk, higher rate lending than sub prime institutional.
If you can’t qualify for a commercial mortgage with a bank or institutional lender, or don’t have time to invest in their process, then the subprime commercial mortgage market is likely your next best option.