What kind of terms would you expect for this kind of deal?

Question

5.25mil-ish

48 units

83% occupancy for 2024.

Rents are well below market value currently.

I am new to this multifamily/commercial side of things. I was offered LTV of 54%, 6% rate from a commercial lending institution but that LTV isn't feasible for me and was definately a lower LTV than I expected. Any thoughts on this? (I know it's hard without seeing the full rent roll and financials, let me know if there's any other general details you'd need that would make you this "oh, that's why they offered that" kind of thing).

Robert Rixer · Answer

Approaching a lending broker may be appropriate in this case. It could also be worth looking into short term bridge debt. Make improvements, get the property stabilized and then refi into agency debt. They typically can do higher LTV's and are more lenient with variable conditions as long as the deal is solid.

Ian Stuart · Answer

The problem you're going to run into is that you do not have stabilized occupancy. Ideally, you'll want to see average 90% occupancy across the board, otherwise you'll be relegated to regional bank and credit union lenders that require (i) recourse, (ii) deposit requirements at close, (iii) slightly higher rates, (iv) lower amortization, and (v) less interest only [if cash flow is a priority for you].

Also keep in mind that most loans are DCR constrained nowadays. The reason your LTV may "seem low" is because the property's cash flow is underperforming. This underperforming cash flow is likely due to your higher vacancy, not to mention whatever bad debt write offs or concessions are in the mix.

IMO - focus on improving your cash flow, lowering your vacancy, limiting bad debt, and screening for high quality tenants. Then - once you're stabilized around 90% occupancy - re enter the markets to secure quotes from Freddie / Fannie / HUD / life companies / banks / credit unions.

If it's an acquisition perhaps you put short term debt on the property, re-position the asset, then refinance after you're turned the operation around. You can typically secure shorter term 3-5 year fixed rate permanent financing for this with lower leverage, or if you're feeling riskier you could go with a higher leverage, more expensive floating rate bridge loan. Many ways to skin a cat.

Gino Barbaro · Answer

@Alyssa Lake

It depends upon many variables, such as age, condition, location, the amount of capital you need for repairs and unit turns. Is it 83% physically occupied, or economically occupied? What does delinquency look like?

This may be a seller financing opportunity. The banks requiring a bigdown payment because of the perceived risk of a property that is not stabilized. The agencies want 90% for 90 days for stabilization, and I wouldn't be surprised that when the new owner takes the property over, occupancy drops below 80%.

What are rents currently? And where do you think you can get rents.

We've been able to secure 80% loan to cost on these types of deals with a credit union recently. 6% is a good rate, but I would see if you can shop around the LTV

Good luck

Gino

Alexander George · Answer

The occupancy is below stabilization for most lenders (85%-90%+) and they are likely shy because your track record is nil (you said you were new to commercial/multifamily). On the bright side the 6% rate is actually pretty good. You must be in a strong market to get a valuation $5.3MM so I say it's worth shopping out to more banks. What LTV and rate makes this deal work for you? Also, would you be opposed to a bridge product until it's stabilized?

Chris Grenzig · Answer

@Alyssa Lake In today's world for Multifamily most deals are DSCR constrained and not LTV constrained. When cap rates were 6-7% and rates were 4% most deals were 75-80% LTV and you might exceed the 1.25x DSCR requirement but a bank wasn't going to go above 80% LTV.

Today rates are 6-8% and cap rates are 5-7%, so your lender is probably going right up to their DSCR level, which is probably around 1.25x DSCR, and because your occupancy is lower, you're going in cap rate is not great, and because occupancy is lower it's probably viewed riskier so your rate might be higher.

That's why for deals like this, you will see people utilize bridge loans where they will lend up to 75% LTV and fund capex potentially because the property has problems and they are looking more at the future value and operations. However, your term is probably only 1-5 years and your rates are much higher.

(We have acquired 150+ units across several properties as well as being property managers. I mention this so you know we have a background in financing deals and acquiring them, and not just managing them since my profile label says property manager.)

Justin Moy · Answer

The 83% occupancy is going to hurt your loan options. It also sounds like this is a newer venture for you so unless you have a key partner with experience banks will also factor that into their loans.

On the bright side, a lower LTV will decrease the risk of the project for you so it's a good buffer to have on your first deal

Jason Wray · Answer

Thats a low LTV but without knowing or seeing the PFS, Returns and previous P&L its tough but if strong 65% even higher should be workable.

What kind of terms would you expect for this kind of deal?

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