James has been in commercial real estate for 15 years. In the last 5 years, he has focused on multifamily properties working on sales loan origination as a mortgage broker and investor. He also works with Old Capital Lending, which has a podcast that they’ve been doing for 5-6 years. The company offers commercial loans including those for multifamily properties. In this episode, James gives us all the information about commercial loans.
There are 4 types of loans, the standard recourse bank loan, Fannie Mae, Freddie Mac, and the non-recourse bridge loan.
Commercial loans are typically 3-5 years with an amortization of 20-25 years. Most investors buying a property start with a bank recourse loan for $500,000 or $1 million loans. For $1 million or more, Fannie Mae or Freddie Mac is the option. Loans over $5 million are non-recourse bridge loans.
The big differences between residential and commercial loans are the amortization, the prepayment penalty of at least 1% or higher, and the recourse vs. non-recourse.
Commercial buildings aren’t fully amortized because people don’t hold them for 30 years. Most owners sell in 3-5 years as that is the only time when they can make money from the deal.
For example, a $4 million loan to buy a $5 million property requires showing that you have $4 million in net worth, 10% of the loan amount in cash or marketable securities, and multifamily experience.
If anyone of those is missing then you might need to find a partner who can make up for it.
The equity may not be divided equally among the partners. It would depend on how much of the requirements they are fulfilling for the loan.
When you start the process, you would need 3 reports, an engineering report, an environmental report, and an appraisal.
The engineering report would contain the list of repairs that need to get done and the capital reserve schedule. The environmental report would check if there is any groundwater contamination or leaks from surrounding areas. The appraisal would check the current income and compute the value after rehab.
Supplemental loans can be added on top of a loan when you assume someone else’s loan. You can add up to 75% of your purchase price. But you’d have to use the same lender and qualify for a 130 debt service coverage.
Supplemental loans will be coterminous with the existing loan.
Fannie Mae and Freddie Mac compute net operating income (NOI) by looking at the last 3 months of your net rental, the last 12 months of your other income, proforma of your expenses except utilities, which will be based on the last 12 months, plus replacement reserves of $300 a unit.
You need to have at least 125 debt-service coverage which means your NOI is $125,000 and your principal and interest are $100,000.
Vacancy rates are also taken into consideration. Even if you’re 100% occupied, they would take 5% of that number.
Yield maintenance penalties could be between 10-20% of the loan dependent on the current interest rates. When 10-year Treasury rates go down, prepayment penalties on yield maintenance go up.
Freddie Mac offers a step-down prepayment which means you pay a higher interest rate on a percentage of the loan, have lower leverage, but also have a significantly lower prepayment penalty.
You can get a maximum of 80% for an appraised value at 80% and a debt-service coverage at 125. But most right now are getting in between 70-75%.
Due to the uncertainty, deals have not been pushing through. They are now giving a 10-15% discount for uncertainty. Fannie Mae and Freddie Mac now require 12-18 months of real estate taxes, insurance, and some reserves to be put in escrow. Before, they only required 2 months to be put in escrow.
Most of the people selling deals are those that have near-term maturity or the deal is about to break because they’re not able to make a debt payment.
Rent collection is driven by location and class. It is also dependent on whether their market is tourism-driven or oil-driven.
Properties that have zero or negative NOI won’t be able to refinance through Fannie Mae or Freddie Mae anymore should someone assume a loan. The only options are to get a bridge loan, non-recourse bridge loan, or a recourse standard bank loan.
Fannie Mae and Freddie Mac loans take up to 45-60 days. Non-recourse loans take 30-45 days. Because it’s harder to do appraisals now, it’s advisable to add 15 more days.
Multifamily properties or self-storage things that have a diversified tenant base tend to be better deals as they are not dependent on just a single tenant paying.
Office buildings or industrial properties that have a single-tenant are the ones that end up not doing well.
Student housing and senior housing are both getting pummeled due to the pandemic. So the things that people thought were recession-proof end up not being one.
For James, he wants to stick to Class B, multifamily conventional properties in diversified markets.
Get educated on the commercial loan space. Learn as much as you can. But there is still a lot of information not put out there.
Find somebody who has done what you want to do. Then ask them for information or referrals.
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