One of my favorite new commercial products is designed for all of those investors out there who have been buying and buying properties ever since the 2008 mortgage market collapse.
It is a simple concept really. One big commercial loan is created, and it pays off all of your existing loans – even hard money – on all or at least most of your properties. Each of your properties then becomes collateral for the new loan. Since the rates for this loan can be in the fives, you usually end up well ahead.
If you have a property already financed at a low rate, then just leave it alone. It is your choice which properties to finance with this loan, and which to leave out.
The loan requires full documentation, personal financials, leases, tax filings, appraisals for every property, and possible safety inspections as well.
Once the new commercial loan is in place, if you then later sell a property that is encumbered by the loan, the lender will do a partial release so you can complete the sale. If you find a new property then just let us know and we can expand the existing loan to help you bring this property into the existing portfolio.
We have one client closed, and another almost closed – in each case the savings are in the thousands of dollars every month.It is a very exciting product, and most folks have never heard of it.
Construction loans in our current tight financial market are very challenging. Most banks won’t touch them. Some banks may claim to offer construction loans, but with terms so severe and demanding that most clients quickly realize that it’s not worth the effort. I have heard horror stories from clients who came to work with our company, after first trying to work with local banks such as First Republic, Boston Private, and Wells Fargo. Typically, these banks require either large depository relationships, or large reserve accounts, that are so ridiculously excessive that it almost makes the loan pointless; as one client said, “if I had all that money for reserves I would never need the loan in the first place”.
One of the most difficult aspects of construction loans these days is the subset of “construction completion” loans; these are loans which complete a project that has been started already. Most banks will automatically pass on any project that has already started construction, and only a couple of banks that I know of will consider a project that has already broken ground.
Their reason for this attitude may not have anything to do with you, or the strength of your project. A project that has been started before the loan is created is considered to be a "broken priority" situation, and this refers to potential risk from mechanics liens.
This may seem like a problem with the lenders, but actually it is not. The problem rests with the title industry. Title companies of course provide title insurance, and banks and even most private lenders will always want a full policy of title insurance.
Once a project has broken ground, it becomes apparent to title companies (who require an inspection) that work has begun, but it is of course impossible to tell how much work has been done, and to verify what has been started, and to identify which company or subcontractor has or has not been on site, and has engaged in any labor that could result in activities that require compensation.
So here is the complication for a project that has started work already. You can keep immaculate lists of all work on the property, you can have all of the subcontractors sign unconditional releases, and you can ask the contractor for indemnity, but when it comes time for a title company to issue a title policy there is no way to “prove” that your list is complete, and there will always be (to a title company) some risk of some unknown subcontractor filing a mechanic’s lien against the property.
The priority given to mechanic’s liens create a high level of risk to all banks and construction lenders, and to title insurance companies. a very common “workaround” that a title company will offer will be to add an “exception” within the policy that excludes mechanics lien risk. This is a solution only for the title company – no lender that I have ever worked with will accept mechanics lien exclusion.
A very common method to resolve this issue is a costly and painful “shutdown” of the project, and a filing and recording of a notice of work stoppage on the project, and then waiting typically six months for the risk of mechanics liens to go away. Once mechanics lien risk has been managed, then a full title policy can be issued, and work can be resumed until completion.
New products available as of June 2013.
Transitional / Bridge Product – non hard money
This is not a bank product –
banks do not have this program. The loan far less expensive than private or
hard money and it is perfect for investors who desire a reasonable rate and
cost structure during a period of transition, or for investors who wish to
avoid the banking industry’s need for personal guarantors. The most powerful
aspect of this program is that properties can receive funds to help with rehab
costs and construction costs, and – once completed and stabilized - this loan
will (usually) automatically transition into permanent commercial financing
programs with competitive rates without added fees, appraisals, and title
costs. Available in entire USA. Eligible
asset classes include multifamily and apartments, office, retail, hotel and
hospitality, student housing, some industrial.
This is a very powerful product for investors with property that does
not meet the strict guidelines of the banks and Fannie Mae for issues that
Rates and cost can vary, depending upon class of property, strength of
property performance, and strength of sponsor; however rates can be as low as
4% and generally are not higher than 10%. The fee structure is usually 2 points
total (1 lender 1 broker), with a lender exit fee of 1 point that is waived if
the client converts to permanent financing with this lender.
Multi-family apartment loans with long term financing available,
below market pricing:
This is not a bank product –
banks do not have this program – funding via insurance, pension or hedge fund
sources, via a third party underwriting source. The loan is not inexpensive,
but it is perfect for investors who desire a long term low rate that is immune
from market fluctuation, or investors who wish to avoid the banking industry’s
need for personal guarantors. The most powerful aspect of this program is that
properties can be recently stabilized and do not require the 6-12 months of
seasoned stability required by FNMA and the banks. Available in entire USA.
Rate is approximately 4.25% fixed for ten years (rates subject to
change of course)
Cash out OK to 75% (in general – depends upon
property condition and performance)
30 year amortization
Non-recourse loan (no personal guarantee usually
Fannie Mae requirement for stability is not
Loan sizes $500,000 and up
$5950 deposit at time of LOI execution
1.25 – 2.25 points depending on loan size
Today it dawned on me that the commercial lending market is finally on the move, and improving.
For the last four years the market has been controlled by the mid size to bigger banks, who were only “in theory” lending into the commercial market, but in reality fighting intensely over the same few assets that were performing strongly, at a low LTV, with perfection in both their personal (sponsor) financials, and tenant mix, tenant strength, vacancy, and debt coverage and LTV.
The market has been difficult for so long that I barely remember what a normal market is like. Good files have been turned down routinely over the last few years for all sorts of reasons; the most common reasons being:
· Strength of sponsor (If the building is performing, why is this so critical?)
· Stability (banks want 6 or more months of tenant stability – why?)
· LTV (current appraisal process is flawed badly)
· Cash out (If the building will perform at this loan size, why is this so critical?)
· Foreign National (If the building provides good collateral, where is the risk?)
Recently we have started working with some new commercial mortgage funds. These are massive investors that are entering the commercial lending scene in a big way; with a great deal more of a common sense approach that seen by any of the banks.
We now have established good relationships with five of these funds, and they have aggressive rates and manageable fees. They are not going after the hard money / private money commercial business exactly, but have positioned themselves perfectly so as to be able to compete with the banks, offer some still good options for loans that do not quite meet bank guidelines, and can still manage some decent pricing for commercial loans that are even somewhat “less than perfect” that used to be (over the last several years) forced to consider hard money loan options.
Assets in poor condition, with high vacancy, deferred maintenance, poor debt service coverage, and very poor sponsors will still need to look at hard money and private money……but the field is expanding and we have some very good options now that were not available this time last year.
If you have a commercial loan that was accepted into a bank, reviewed, and yet somehow fell short of their lofty expectations, then we need to talk. We are doing multifamily commercial loans all over the United States.
One facet of commercial lending that gets very little attention is the fact that almost all commercial lenders look for their clients to have a certain amount of net worth. Generally this net worth needs to be approximately the same in size, or more - relative to the loan amount applied for. Some commercial lenders take this further and want double or even triple the loan amount in net worth.
We are seeing a high percentage of foreign investors coming in to the US looking for good investments, with multifamily apartments being of particular interest. Recently we have dealt with investors from Germany, France, the United Kingdom, China and Japan. What is not widely known is that most commercial lenders do not have any appetite for making commercial loans with foreign investors. The rationale for this is related to the net worth requirement mentioned above, and the on-going need for commercial investors to look for US collateral in a full recourse loan situation. In other words, an investor from Europe may not have much collateral in the US, and this defeats the purpose of trying to have the borrow act in a meaningful way as a guarantor. A foreign investor is any individual here on a visa, without permanent residency, with no green card. Foreign investors will help themselves greatly in terms of loan approval by having filed 3 years US taxes, having US bank accounts, some US credit, and possibly holding other US real estate assets.
Currently we have maybe four good commercial lenders (and two residential) who will work with foreign investors, under certain circumstances (see just above) and with a reasonably strong down payment (at least 30% down) in situations involving cash flowing stabilized investment properties in reasonably good condition in major US metropolitan areas. Note there are many private funds and private investors who will work with foreign nationals, but they offer only high rates and points.
Over on the residential side, we have a new lender who will allow a variant of stated income – true stated income programs being a thing of the past. These new programs require a great deal of liquid assets; and the assets are “imputed” (calculated via a formula) to be able to convert into an income stream as needed that can service the debt. This is a nice option for wealthy individuals who like to hide their income and sit on vast piles of cash. This cash “could be” (if needed) converted into a monthly draw to service the debt – and that is good enough for this lender.
Also on the residential side, we have a new lender who will provide purchase money second loans to enable the old 80-10-10 that we all relied on for so many years. This is a new program, and very few lenders have this option available. However, it is limited to major metro areas, and is limited in size (the first and second loans combined cannot exceed $750,000) and of course good income and credit are required along with seasoned funds for a 10% down payment. This program is also available as a piggyback second loan – holders of loans at the old high balance limit of $729,750 could in theory now split their loans into a $625,500 first (the new high limit for conforming) and a $124,500 second loan to take advantage of the better rates at the limit of $625,500.
Note however that we still have our 90% financing program for first time buyers available from one of our favorite lenders. This is a terrific program – buyers qualify on income, and while they need to make enough to qualify for the loan, they also cannot make “too much” income or they will not qualify for the program. Buyers need good credit, a seasoned 10% down payment (gifts are OK), good job history and credit history, but no reserves are needed and no PMI is required (usually PMI would be required for a 10% down payment). Buyers who qualify for this program will benefit from a rate improvement of 0.25 for a 30 year fixed rate, and the lender will cover many of the lender’s usual closing costs such as underwriting fees. The savings in PMI alone make this program much better than your typical FHA program; the only FHA advantage would be smaller down payment in most cases.
One of the most irritating aspects of lending these days is the requirement that all deposits be "sourced". This is a big hassle for everyone.....but standard now for Fannie, Freddie, and jumbo investors.
Here is the issue. Lenders care about your reserves and liquidity....but in the past ignored deposits made into bank accounts that "create" this liquidity. Lenders were unable to "prove" to investors that these new deposits of funds were "really" belonging to the borrower.....since in theory these deposits could be from a credit card advance, or even borrowed funds. Because of this, deposits made to bank accounts are now scrutinized; borrowers now need to provide evidence that these deposit funds belong to them by providing a "paper trail".
A "paper trail" consists of two things:
Here is the best way to organize this document:
I have been reminded recently as to how important it is for a client to work with a competent commercial loan broker…..not some of the time, but all of the time. Here are some examples.
During a recent transaction for a single purpose/ single tenant building in the San Diego area, a client discovered the true value of a good broker. They had contacted their long-standing bank, a top-five national bank, and received just a marginal, almost indifferent response to their request to refinance their loan to a lower rate and to receive some cash-out. Once we were involved, we engaged the services of five of our top commercial lenders. We had to reconsider our approach, and re-package the loan to meet the client requirement for cash out, but in the end we had three very attractive offers. Amazingly, one of the three offers was from the same big bank that had originally given the client such an indifferent response. Here is the point of this transaction: Taking your loan to “your bank” will sometimes work, but sometimes it will not. The key is knowing which individual, or which group to contact. Your local branch may not know everything about commercial loans, and chances are very high that commercial loans are not being underwritten at your branch. They literally may not know how to help you without making a number of internal phone calls.
During this same transaction, a bank officer also explained why they like working with brokers. A good commercial loan officer knows the language of commercial underwriting. We know how to analyze and how to package and present a file as well. In fact, it has been confirmed for me many times that a good broker’s work packaging and presentation is so important to commercial lenders that they reflect this in their quotes. If a consumer approaches a bank on his or her own, and the bank officer has to do all of the analysis and packaging, then the consumer will see this in the bank’s offer. The loans will usually be priced at 1.0 – 1.5 points paid by the client. When a broker gets an offer for that same client, the offer price will usually include just .25 to .5 point to the client – in other words the bank discounts the offer to make room for the broker fee….and charges less because the broker is doing so much of the work that the bank officer would have done. In many cases this means that the actual cost of using the broker can be as little as $0.00.
Here is another reason. A client in Southern California has a single tenant investment property in Indiana. He does not have the industry knowledge to know which lender will have the best rates. Furthermore, there is no way for him (or any consumer) to know which banks are lending in the Midwest, because many banks are not. The “rust belt” is particularly difficult to work with…Illinois, Ohio, Pennsylvania, Michigan, Wisconsin and Indiana are still not popular places to lend for many big banks. Chase will not lend there, neither will Citi, Wells, Union Bank or Bank of America. How is a client living in California – or anywhere else – supposed to know where to take his loan? A competent broker will know just which bank does what, and where they lend, loan sizes they like, ratios and LTV and even preferred tenant types - all will all be at a good broker’s disposal.
So put a good broker to work on your next commercial refinance or purchase, and watch what a difference it makes. Your file will be professionally packaged, presented and managed; saving you time and stress. When the offers pour in later on, they will be discounted so that the net cost of using the broker will be minimal. Additionally, you will have the extra benefit of knowing that the right lender (with the best rate) received your loan – because you will likely have several loan offers to compare and consider.
Top five reasons why your commercial property has not been approved:
1) Value. Commercial properties are valued based upon their ability to produce income. Many if not most commercial properties have been faced with declining occupancy, and declining rental rates per square foot as tenants demand better value for their rental income. Issues such as these have a direct bearing on the value of your property, and are the major cause for declining commercial property values around the country. Meanwhile, more and more banks want to lend at a 65% loan to value.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources, including pension and hedge funds, which will allow in many cases a loan to value of up to 80%, even on a commercial investment property.
2) Debt Service Coverage Ratio, a commonly used underwriting criterion, can be calculated as net operating income divided by the debt obligation payments; either a monthly or yearly expression is acceptable. For the same reasons as described in #1 above, net operating income has been under pressure (due to increased vacancy and declining rent income). Since DSCR is based upon NOI / debt service; this means that in many cases DSCR is declining as well. Banks are looking for DSCR of 1.25, at a minimum….some want 1.35 or even 1.45 DSCR.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources, including pension and hedge funds, which will allow in many cases a DSCR of as little as 1.00, even on a commercial investment property……although keep in mind that rates and terms are better for properties that can demonstrate a more reasonable 1.15 to 1.20 DSCR.
3) Property Condition. This nebulous and highly subjective characteristic is a very useful “copout” for many banks in our current market. The thing is, is that banks of course can set their own internal standards for property condition. It is the inconsistent application of these standards that I find highly irritating. Many banks are looking for, and lending on only properties that are not only nice to look at but are in pristine condition with no deferred maintenance issues.
Solution: Bay Area Capital Funding Inc. has access to niche lending sources, including pension and hedge funds, and certain banks that are actually seeking less than perfect properties...at a slightly higher yield of course. Recent closings include an apartment in a very difficult portion of Oakland California and in the Sacramento Valley area as well. The key is an up to date understanding of which bank will like which property.
4) Lack of Historical Documentation: It is not uncommon with properties that have gone through foreclosure, or bank repossession and resale, for there to be no historical operating statements, no historical rent rolls or vacancy numbers, and no historical expenses. Most banks will decline a property such as this without going any further; they simply cannot accept the risk of a property with unknown expenses.
Solution: Bay Area Capital Funding Inc. has access to certain niche and financial lending sources, which will allow in many cases a loan to move into underwriting on the basis of estimated expenses and NOI….these numbers will need to be reasonable and eventually verified (or slightly amended) by the appraisal process.
5) Unfinished / Unrentable / incomplete Property: Most banks and lenders will expect and require your property to be not only complete, but functioning, with tenants and low vacancy, and several years of operating history. Banks have very little interest in anything that they consider “speculative”, and most banks would consider an incomplete property to be “speculative” not just because of the construction perspective, but doubly so because of the unknown income and expense numbers for the property as well.
Solution: Bay Area Capital Funding Inc. has access to non-traditional lending sources such as niche banks and pension funds that accept (and even seek out) rehab and construction projects, often with loan funds not just for purchase and / or the refinance of existing debt, but often with additional funds advanced (or set aside) for the rehab or completion of the project as well. A heavy reliance on the appraisal for estimated costs, estimated income, and estimated expenses are of course standard in this instance.