I have a deal that I'm looking at that has a $10M non-recourse assumable loan with a mid 4% interest rate for 20yr term. I normally look at just getting new financing at purchase, but wanted to consider this option to assume current loan to see if it would be worth it. The current lender is an insurance company, and I'm not sure how hard they are to deal with. I do have the following questions:
1. With dealing with this type of lender are these loan terms usually locked in, or can they be re-negotiated by the buyer? (i.e. pre-payment penalty percentage, length of term remaining, interest rate, etc.)
2. With the assumption of the existing loan, the lender is wanting 30%-35% equity. Is the difference between the current loan balance and the sale price minus the down payment wrapped into the old loan, or will we need to come up with the difference from investors?
The seller is offering a discount if we assume the current loan versus getting new financing. At the end of the day, I just want to make sure that I am getting the best deal for investors. Any advice or constructive criticism is greatly appreciated! Thanks in advance,
1. They are typically locked in. No real benefit to the lender to renegotiate.
2. It will depend on if they will be willing to issue a supplemental loan to increase proceeds. Another option is a bridge loan until the yield maintenance clears depend on how long is left on the note.
Do you know how much the yield maintenance is? Typically the seller is discounting his price based off of that amount. Yield maintenance will depend on the interest rate and how many years are left on the note.
It's good that you are looking at both options. Typically, we also like to put new financing so we can get a couple years of I/O but we did a FNMA loan assumption early this year that has been crushing our projections.
@Abel Sng hit the nail on the head.
I'm working on a LifeCo assumption right now. The borrower bought it in 2014 and now has a 60 day window to refinance out now with no prepayment penalty. Depending on the LifeCo, that may be written in the loan docs, or negotiable after some period of time (like the deal I'm working on), but Abel is right - no real benefit to the lender to negotiate the prepay, term or rate (unless its gone up).
You'll definitely want to pencil out your cash-on-cash and IRR with the two scenarios. Assumed loan + seller discount + cost of supplemental vs new financing.
My group corresponds to 50+ LifeCo's so we probably work with them. If you want to PM me the name of the company I can give you some insight on how they work, and your likelihood of negotiating. Possibly intro you to the right people.
@Abel Sng Thank you for the information. I was kind of thinking that they probably wouldn't be willing to negotiate any of the terms. I think the yield maintenance is 5%. So the FNMA that you mentioned...is it crushing your projections in a good way or bad way....?
@Conor Freeman Thanks for the info. I didn't see anything in the loan docs that talks about negotiation after a certain period. Just saw the prepayment penalty section that has a penalty from year 5 to year 20. That's the biggest concern I had with it. The interest rate is okay, but would see about a longer term as well.
Daniel it's crushing it in a good way haha! We bought it at a 7+ cap so sale price was essentially price adjusted for the assumption.
I would run two scenarios get the actually yield maintenance $ amount and add it to the purchase price and see what your model looks like after placing new debt and what your model looks like if the lender will give you a supplemental.
What's your exit strategy and timeline?
@Abel Sng That's great! It's always better to beat what your projections are than to have to go back to investors and tell them bad news. I will go back and relook the projections, but initially the projections are providing the investors a 9.1% Cash on Cash, 18% Average Annual Return, and a 15% IRR. Exit will be in Yr 5. At this point in the evaluation, I am not sure if we would be able to refi in the first 2yrs or not, but if we do we will definitely have to consider the prepayment penalty.