I first would like to offer kudos to Mr. Wilhoit on the formation presented in his blog on multi-family properties. Personally, I have enjoyed reading his insights, and his information on financing apartments is spot-on. Which leads me to the question; why does he need me to write an article on financing? I’m hopeful that you will find my insights as useful as his. My name is David Garfinkel and I am with NorthMarq Capital, a nationwide Real Estate Investment Banker/Mortgage Banker, based in St. Louis.
I’m going to start with Real Estate Finance 101, in 2010. Things have changed dramatically in the last 3 years. As a Real Estate Investment Banker, I typically source permanent, non-recourse financing. We represent Blue-Chip Life Insurance Companies, Wall-Street Conduits (at least when they were lending), and the GSE’s (Freddie Mac and Fannie Mae). We also source HUD financing. And finally, we source Equity, Joint Ventures and Mezzanine Financing. When I say permanent loans, this can be short-term floating rate loans, 3, 5 or 7 year loans. But our typical bread and butter loan is a 10-year term and the interest rate is based on a spread over the 10-Year Treasury. HUD Financing can offer 35-40 year fixed rate loans, but that is a different animal.
The main sources of financing for a multi-family property are Freddie Mac and Fannie Mae, along with HUD and then Life Insurance Companies. Freddie and Fannie can lend up to 80% Loan-to-Value (or Loan-to-Purchase) on a non cash-out refinance. If a borrower is looking to pull out cash on a refinance, the LTV drops to 75%. A Life Insurance Company may be able to lend up to 75% LTV, even though that is not the benchmark it once was. HUD can lend up to 83.5% LTV on a non cash-out re-finance. Earlier I stated that our loans are non-recourse, and they typically are. However, the borrower/borrowing entity has taken on a much larger role in the analysis of a loan. Freddie/Fannie will now ask for a Personal Financial Statement up-front.
The Agencies want to know that they are dealing with a borrower that has the financial wherewithal to handle any issues that may arise at a property. They have also implemented minimum liquidity covenants (such as 10% of the loan amount, or 6-12 months of debt service if the loan gets large). My point is that borrower underwriting has become more restrictive, as has underwriting in general. Lenders will also ask for 3-years of historical information, as well as YTD and a current rent roll. Lenders will not look at a proforma – they will only underwrite actual, in-place income. Lenders will also look at trends. For example, they will look at the Trailing 12 numbers, but also Trailing 6 and Trailing 3. If there is a declining trend, this can be problematic unless there is a good explanation. My point is that a loan gets much more analysis today than in the past. Good record keeping is essential.
On the flip side, long-term interest rates have almost never been this low. If you were locking rate today with Freddie Mac or Fannie Mae on an 80% loan, with a 10-year term, the interest rate would be approximately 4.50%. Fixed. For 10-years. If you were locking a HUD loan today, the all-in rate would also be approximately 4.50% Fixed. For 35-years (there are certain advantages/disadvantages of HUD that may affect your opinion on if this is the type of loan you want). For the right property, with the right borrower, in a good location, we will be able to find you an attractive loan in today’s market.
This blog has contained different articles on running a property, maintaining a property, and buying a property correctly. All of these have an impact on the ultimate financing you will be able to obtain. And once you lock the interest rate for 10-years, this number becomes fixed and can greatly influence your cash-flow on a transaction. There are so many variables that can affect your profitability as an owner of multi-family properties. If you can lower your interest rate, the cash-flow increases. Sounds pretty simple. Well, it used to be, but don’t get me wrong, there is capital available for multi-family properties.
I can be reached at firstname.lastname@example.org questions/comments. David Garfinkel is a NorthMarq Capital employee and the views and opinions expressed are his alone and do not represent the official views of the company.