“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.
“Long Term Commercial Mortgages Are Provided To “A” Credit Borrowers By A Wide Assortment Of Lenders”
There can be some instances where subprime lenders will extend financing terms three or more years, but this is the exception not the rule.
Long term commercial property financing is very prescriptive in nature with virtually all lenders fitting into similar lending and funding requirements.
These lending and funding criteria are centered around debt to equity ratios, debt service coverage ratios, property age and type, and the credit profile of the business and the business owners.
That being said, there can be a healthy range for each criteria set, creating ample opportunity for lenders to differentiate themselves and their lending programs.
Commercial Funding Criteria For Long Term Mortgage Financing
Starting out with debt leverage ratios, the average debt to equity for a long term commercial mortgage is around 65%. This can also vary from 50% up to 100% within the “A” credit space.
Higher loan to value ratios are typically offset by strong cash flow and balance sheets that provide lenders with other forms of security either directly or indirectly via guarantees.
Each geography, property type, and industry niche will have their own financing criteria so its important to understand how property you own or wish to acquire can be leveraged in any given market place.
Debt service coverage ratio, calculated by dividing the annual debt servicing requirements by the available cash flow, can range from 1.20 to 1.60. Once again, individual lender risk assessments and property financing applications will receive different servicing requirements.
Longer term mortgage commitments are supported by several years of historical cash flows generated by either the property itself, or the business that owns the property. Having up to date and accurate financials are key to any commercial mortgage application success.
And as the amount of financing increases, stronger third party accountant reviews are required to provide the lender with the confidence required to make a funding decision in the applicant’s favor.
The Application Process Takes Time And Costs Money
From the time of application to the time of funding, it typically takes 60 to 90 days to complete a commercial mortgage application.
This of course can vary with deals being completed in shorter periods of time and deals completed in much longer periods of time.
Complexity of a deal and the amount of financing required in typically increase the length of time to cover off both the required due diligence and the funding requirements.
Most long term commercial mortgage applications do not have applications fees per say, although there are some lenders that will charge work fees to cover the cost of the lender’s due diligence.
But even if there is no application fee, all the related due diligence costs outside of the lender’s own time will need to be covered off by the applicant.
This will include the cost of commercial appraisals, environmental assessments, third party accountant financial statements, other consultant reports, and so on.
The third party reporting requirements, and their review, is ultimately what takes up the most time in the process.
If a third party provider cannot get at the work for several weeks or even months, then the process will be delayed. And if the lender requires certain third party agencies to be used, which is very common, then it may not be possible to find another service provider to complete a certain element of work sooner.
In an effort to reduce the time required, borrowers can make sure that financials are completed ahead of time and all property related issues are in order.
And while getting an appraisal completed ahead of time from a certified appraiser may speed things up a bit, it can also lead to more cost if the appraiser selected is not on the lender’s approved list which can mean that work will need to be redone adding more time and cost to the process.
Keys To Long Term Commercial Mortgage Application Success
One of the major keys to getting a long term commercial mortgage in place for the terms you desire and the time you have to work with is to be applying for financing with a commercial lender who can fund your deal when you require the financing.
Because the process can be quite involved and time consuming, focusing on a lender that has a lower probability of being able to fund your deal can result in a significant loss of time and money if you cannot get both approved and funded.
Lenders are also “in and out” of the market depending on their overall portfolio concentration in different property and industry types so working with a lender that has the ability to fund your deal type right now is also going to be important.
Another key is making sure you have your financial statements in order including recent completion of historical financial statements and up to date interim statements. Financial statements that are more than 6 months old will be less relied upon that ones that have been completed more recently.
In addition to the financial statements, all other potential documentation requirements of a lender, outside of third party reports that each lender may demand from pre-approved sources, should be up to date and readily available.
Because of the amount of time the process can take, and the variability in both lender criteria and ability to fund, it can also make a great deal of sense to work with a commercial mortgage specialist who can not only help identify the most relevant lending sources to you, but also assist in putting together a proper application package that will proactively answer the key questions likely to come from a particular lender.
Business financing consultants can be invaluable in managing the application process with all required third party information providers and the lender.
Unless you have the ability to be able to devote a considerable amount of time to the financing process, a financing expert can be invaluable in not only getting financing in place, but also to complete the process in the shortest time possible.
If you’re looking to secure a long term commercial mortgage and would like to better understand your options, I suggest that you give me a call and we can set up a time to over your requirements in detail and review different available financing approaches.