DSCR for Value-Add

[Joshua Nackenson]

I'm curious how banks looks at DSCR for properties that are value-add. Specifically, a property where there is not any significant cap-ex, simply gross mismanagement.

ie. The market is NOT over-saturated, but rents are 30-50% below market rents.

Will the banks underwrite based on the current NOI or based on projected NOI for Year 1?

[Devin Peterson]

Quote from @Joshua Nackenson:

I'm curious how banks looks at DSCR for properties that are value-add. Specifically, a property where there is not any significant cap-ex, simply gross mismanagement.

ie. The market is NOT over-saturated, but rents are 30-50% below market rents.

Will the banks underwrite based on the current NOI or based on projected NOI for Year 1?

A majority of the non-am lenders who use DSCR loans will use the rent schedule off of the appraisal. As long as the rent on the appraisal covers your monthly mortgage payment (PITI) - you'll be pass. Gl!

[Brian Burke]

It depends on the lender. Agency lenders will size to current income. Banks would most likely do the same, but each bank sets their own lending guidelines so this may vary. Debt fund (bridge) lenders often don't constrain to DSCR, instead many of them look at a going in and going out debt yield, which is kind of like cap rate except you substitute the loan amount for the purchase price.

For example, let's say the deal is $10 million and the current NOI is $500,000, which is a 5% cap rate. A bridge lender might size to the lesser of X% LTV or an X% going in debt yield. Let's say it's 80% LTV / 6% DY. That would constrain sizing to $8 million (80% LTV) or $8,333,333 ($500K NOI/6% DY). Lower of the two is $8 million. They might also have a going-out DY test. Let's say for example purposes it's 9.5%. Then let's say you project the NOI in year 3 will increase to $750,000. $750K/9.5%DY = $7,895,000. The lowest of the three is this one, so the loan sizing would cap out at $7,895,000.

Bridge lenders all set their own guidelines so you have to shop around.

[Shafi Noss]

What I usually see is a syndicator buying the property with a private bridge loan, where DSCR is low and rates are high, and then after stabilizing refinancing into a long term bank loan, where DSCR is high and rates are low.

I have seen banks be really variable on other lending products though and the relationship matters a lot too, so it's probably worth talking to a few if you get the point where you need hard data. 

[Henry Clark]

Not sure on type of property.  

The three banks we work with work off the appraisal.  25% down or 10% if SBA.   Or 40% if ag land.  

Appraisals are based off three approach’s:

Cost basis

Comparables

Net operating income

Part of our appraisal was rent comparables.  Your question on rents  They factored the rate differences into their analysis. 

The key is actual relationship with them and your experience with the asset type.  Also they will want a personal guarantee. How are your personal financials.  They will want them also.  

[Eliott Elias]

That's what the 6 month seasoning period is for. 

[Charles Park]

I was a 20-year CRE underwriter at various banks and now I am a commercial loan broker. If you are applying for the 25-year amortized permanent loan, the bank will underwrite based on the current lease agreement or NOI, not the projected income. The lender will only use the projected income to calculate the DSCR for short-term construction loans.

[Stephanie P.]

Quote from @Joshua Nackenson:

I'm curious how banks looks at DSCR for properties that are value-add. Specifically, a property where there is not any significant cap-ex, simply gross mismanagement.

ie. The market is NOT over-saturated, but rents are 30-50% below market rents.

Will the banks underwrite based on the current NOI or based on projected NOI for Year 1?

 Many lenders look at the lease amount or market rents on the appraisal and use whichever is lower.

[Alex Bekeza]

@Joshua Nackenson

No, DSCR lenders do not lend on pro forma rents.

Would the actual rents get you anywhere near a 1.0 DSCR at today's rates?

Happy to take a look offline for you.