Commercial Loan-Would I be able to obtain financing for this

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Commercial Loan-Would I be able to obtain financing for this

Anthony G.
Investor · New York, NY · Member since 2013 · 27 posts · 2 votes

Hello BP Community,

Wanted to throw a  scenario out there, to see how realistic or easy/difficult it would be to obtain financing from a bank on a commercial multifamily property, or discuss possible work arounds.

Experience 

Owning and self managing a 4 unit residential property for a decade then gut renovating it to re-rent it for much higher. Licensed RE Agent in NYS, experience mostly in residential as well.  (Assuming none of this will transfer over as experience in commercial though)

Income 

Self employed in Construction/RE and rental income totaling around 100-120k net per yr, in the last 2 years. 2017 return estimated be 10-15% higher

Credit 

780+

Lets say I found a deal underwritten conservatively on a large stabilized MF at 10 million , with 25-30% down of my own, and investor capital, plus I was able to meet the banks DCR, liquidity & reserve requirements. Would I have trouble obtaining a loan of this size because of my lack of experience, or the fact that I'm looking to borrow much more than my own personal net worth, assuming the deal itself was solid, and made the bank comfortable? Are there any ways to make this scenario workable? Personal guarantee? Bringing on a key sponsor to meet the net worth requirement? I believe I read somewhere you can find an investor to sign onto the deal for a couple points in equity on a non-recourse loan to satisfy the banks net worth requirement, which would be a win-win, but I can't really see how the bank wins, or would let that fly, honestly that advice sounds like some late night tv commercial guru stuff, but I could be mistaken.

If there is any critical piece of info you think Im missing here, or any thoughts, advice, or how I should mange my expectations on something like this, that would be great, and I would love to hear from you! 

Thanks

Anthony

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Tim Milazzo
Lender · New Smyrna Beach, FL · Member since 2017 · 122 posts · 54 votes
9y

Hi Anthony,

Sounds exciting to be getting into bigger deals! Here's my 2 cents. Getting a bank loan in your scenario, at 25-30% down, is most likely going to be full recourse financing. With enough liquidity, you should be able to find a bank to get you to 70% LTV and at least 20 year amortization to do this, if the property itself supports such a loan.

Now there's another option, which is non-recourse, lower rate, and higher LTV (up to 80%), but that you don't personally qualify for due to Net Worth. That's an agency loan, backed by either Freddie Mac or Fannie Mae. They expect higher net worth and some more experience, but if you're able to find a co-sponsor that meets those requirements, that would be another option.

 - Tim

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  • Tim Milazzo
    Lender · New Smyrna Beach, FL · Member since 2017 · 122 posts · 54 votes
    9y

    Hi Anthony,

    Sounds exciting to be getting into bigger deals! Here's my 2 cents. Getting a bank loan in your scenario, at 25-30% down, is most likely going to be full recourse financing. With enough liquidity, you should be able to find a bank to get you to 70% LTV and at least 20 year amortization to do this, if the property itself supports such a loan.

    Now there's another option, which is non-recourse, lower rate, and higher LTV (up to 80%), but that you don't personally qualify for due to Net Worth. That's an agency loan, backed by either Freddie Mac or Fannie Mae. They expect higher net worth and some more experience, but if you're able to find a co-sponsor that meets those requirements, that would be another option.

     - Tim

    2Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    9y

    You need a stronger partner to do in the business what is known as ( kiss the note ). Whether that is a private non-institutional partner or an institutional one.

    For them to back the guarantee on the loan they will definitely want more upside. You have to run project numbers over and over to determine what you could live with on the deal or if the current deal is unworkable for your time with what you have to give away.

    What you want as a back end promote is up to you.

    I know some developers on larger deals of 50 million or higher that take a 50% back end promote. Pref is 8% return. Additional return above 8% is split 50/50 with investor group and sponsor.

    Everything is negotiable and many ways to structure.

    Example purchase 10,000,000

    Debt 7,500,000

    Equity 2,500,000

    Sponsor 10% investment or 250,000

    Equity Investors: 2,250,000

    8% preferred return at 2,500,000 = 200,000 annually 

    Sponsor 250,000 X .08 = 20,000 annually 

    Equity Investor Group 2,250,000 X .08 = 180,000 annually

    To keep it simple say in 3 years property is worth 13,000,000

    Debt was interest only as you were stabilizing the property.

    13,000,000 minus

    Resale costs 600,000

    Capital investment 700,000

    Sponsor Investment 250,000

    Equity Investors  2,250,000

    Loan Payoff 7,500,000

    1,700,000 proceeds 50/50 

    850,000 back end promote sponsor

    850,000 back end return to equity investor group

    Obviously there is the sponsors additional return back of capital 250,000 and then the ongoing 8% cash flow for years owned when stabilized plus acquisition and management fees.

    You have to decide what you are taking on, what the returns should be, and if it is worth your time. You do not want to give too much away and end up working for almost free. It's better to walk away to the next deal and set of investors.

    Some passive investors tend to be greedy and want too much while doing nothing in the deal.

    If you need to raise 1 million as an example but for 1 investor to put all 1 million in they want a 70% back end and you 30%. Instead you line up 4 investors at 250k each that will accept the 50% back end promote for the sponsor.

    I personally will not spend time on projects for low fees and back end. I will just keep transacting commercial real estate with clients and make commissions as they tend to be six figures per deal.

    There are some people not usually in real estate trying to get going on smaller syndicated deals as a sponsor to quit their 50k a year job and make a living as a sponsor. They tend to give more away as they are not experienced so for equity investors to (roll the dice) on them they have to sweeten the pot. 

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  • Conor Freeman
    Lender · San Diego, CA · Member since 2015 · 88 posts · 57 votes
    9y

    Hi @Anthony G. ,

    To piggy-back of @Tim Milazzo suggestion of a Fannie/Freddie deal, your lack of experience in the space is not necessarily a deal killer for us but you would need to a) partner up, like Tim and Joel mentioned, and b) probably do a deal in the $1mm-$5mm ballpark first. I work with a number of investors who have similar amounts of NW and liquidity but want to participate their own deals, in the $5mm-$10mm space. They either find a strong partner, who will kiss the note, like Joel mentioned, or partner with 2 or 3 people and syndicate the equity. 

    As a Fannie/Freddie lender, I would want the following items:

    • Sponsors' combined net worth equal to or greater than the loan request
    • 6-9 months P&I payments - post close liquidity 
    • If you're going to be the one managing the deal you have to be local to the property as this is your first multifamily deal of this size. It's a non-starter if you go out of your market. 

    My suggestion would be to partner up with someone who is going to manage the deal but will allow you to get the experience under your belt. Referencing that deal in the future will open more doors. I'm sure with your background on the resi side and being in NY, you have some people in mind. Good Luck!

    Conor 

    1Reply
  • Anthony G.
    OP
    Investor · New York, NY · Member since 2013 · 27 posts · 2 votes
    9y

    @Tim Milazzo Thanks for the response,  I definitely want to check out Stacksource when the time comes for financing, as I feel this is the type of innovation the RE industry needs.

    @Joel Owens  I appreciate the detailed response,  you definitely gave me a few different angles to look at things from when it comes to syndicating a deal. You really captured the essence of my question and then what I would have to consider next. There was so much good information in your post,  I agree with you and I can see your point about why you would rather act in the capacity of a broker if the deal isn't worth all the hard work that goes with it.  My logic is if I can put a bigger deal together it would off set whatever extra equity I would have to give up until I become a proven entity in the space. I would be willing to put more of my own skin in the game then the standard 10% to make it work. If I can get a couple points more annualized on my money and have control of the deal this is exactly where Id like to be. If not Id rather invest smaller sums with other syndicators, or buy more stocks when the market finally takes a substantial dip.

    @Conor Freeman Thanks for giving me some insight on what your criteria is as a lender that was very helpful and gave me a couple ideas of how I might pull a deal off. I have considered working with other syndicators to get started I may even consider it to gain some credibility.Thanks for the suggestions.

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