Commercial (Multi-Family) Financing Pain Point

12 Replies

As this specifically relates to my job I have some questions and hoping for any insight from those who have gotten or applied for commercial financing with a bank for an apartment building with 5 units and above:

What are the pain point's you have experienced?

What would cause you to go with one lender vs another?

How important are the terms, (pre pay, fees, non-recourse, I/O, etc.) vs proceeds?

Is there anything you would like to see from a lender, to make any of the above easier?

Thanks,

Rob Krach

@Rob Krach  I've mentioned this on couple other posts, but it seems to fit here also, if not, disregard.

I'm in the process of closing my first duplex, using conventional financing (not commercial) and not planning to live there. Most frustrations for me have actually come from the financing side. I've never purchased a house or other real estate, so I didn't know what I didn't know. I guess pain points depend on the purchaser and how much they've dealt with real estate overall.  Some will be more familiar with loan requirements and restrictions than others.

For a couple examples of what frustrated me, I was discussing what my final closing costs (I'm still in the process of saving a couple grand every month trying to get it together) would be when my lender realized this was a property I would not be living in. I thought that it was clear, but they just assumed I was going to live there. This meant I now needed 25% down, instead of 20% -- which simply, would not have worked -- this was remedied by switching loan types. (I was previously told by them it was 20% for an investment property, but whatever). Then just last week, they informed me that the maximum cash back at close from the seller was 2%, when our contract already had us both agreeing they would provide 5%. A difference of $3900 that is now added to my closing costs because that's what the additional 3% was going to be used for... more of an issue with the underwriter of the loan, but still, it can't be the first time my mortgage guy had heard of it.

The difference in what I need to have saved and prepared for the purchase has changed by several thousand dollars. It was of course not their intention for me to misunderstand these things or misinform me, but they were aware of my resources, that it was my first purchase, and what my financial expectations were, etc., for the most part. I can't help feeling like they dropped the ball a bit. I am still in the closing process, but I was very nearly not going to be able to continue on this property because of loan restrictions I was completely unaware of. 

Overall, they've been very helpful with my questions and I think they're knowledgeable, and next time it will be easier now that I know what to expect, and I don't mean to place 100% of blame on them, but it's been a stressful closing period! Having very clear documents showing the restrictions for each loan type for beginners may be very helpful.

@Megan Phillips

Congrats on the closing. 

I hear that exact same thing from clients who are used to investing in SFR's and properties with 1 - 4 units. Every bank has x number of requirements and programs and none apparently seem to match what they were told and the consistencies are never there.

Rob

First pain point is the BANK ! they UNDERWRITE the property along with your income as well. If its only five units I would go with one of the private outlets even if it cost a point or 2 much much easier are you going to buy to hold for income? If so dont worry about a pre-pay the rates shold be about a point and a half higher.

@Clifford Kearns

The intention of my post was for those who have financed a building with a minimum of 5 units. Where I work in Chicago when we underwrite a multi-family deal, income has 0 effect on the deal / underwriting.

Originally posted by @Rob Krach :

As this specifically relates to my job I have some questions and hoping for any insight from those who have gotten or applied for commercial financing with a bank for an apartment building with 5 units and above:

What are the pain point's you have experienced?

What would cause you to go with one lender vs another?

How important are the terms, (pre pay, fees, non-recourse, I/O, etc.) vs proceeds?

Is there anything you would like to see from a lender, to make any of the above easier?

Thanks,

Rob Krach

 Actually a lot easier vs residential loans. 

Best terms and least paperwork. 

Very. Terms will drive cash flow and our primary focus is cash flow. 

Did I mention less paperwork? 

The terms are extremely important. Every little thing can come into play. And it all must be considered. There is no one to protect you in a commercial loan so you need to understand it all. Terms can be all over of the place.

And it can be less paperwork but not always. And while they typically underwrite the building they are going to look into you as well. One of my lenders recently told me i I had reached certain level and asked for my succession plan. Like I was running a small country or something.

Receiving the loans wasn't the hard part other than the ridiculous and expensive appraisals. I was only financing 50-60% but still had to pony up the thousands and wait for weeks.

The worst part of commercial loans for me was the annual financial reporting. I paid them off early rather than be bothered to turn in my homework like I'm back in high school or something.

Them being adjustable and callable every 5 years didn't  help either. Fix that. Now I only use private or seller financing.

My biggest pain point as we have started to acquire bigger units (80+), is that getting a loan on a value add that is not 90% occupied is difficult. I am buying out of state, so local banks shy away. Bridge lenders are an option, but they are very spendy. 

Contrary to what some folks experience has been with financing an acquisition of a small commercial loan for such building, the lender ABSOLUTELY reviews your numbers as a buyer and the building numbers. I closed on an 8 unit appt building in March 2017. 

My background. Have had various rental properties of one sort or another since 1997. On tax returns and self managed. I was in a 1031 exchange and this was an upleg. Already owned 9 other props. Mostly sfr, but also duplex and a condo. Mostly cash flowing on tax returns. 

Day job is real Estate agent and thus considered self employed.  16 yrs.  Decent income but also write off a bunch on tax return.  FICO about 770.

Property acquired in a C location and B/C condition. About a 10.5 GRM on actual rents that were about 10-15% under a very active Bay Area market. Coming in with about 35% down. Plenty of seasoned reserves. $1,150,000 price.

First Bank was Provident . They were quite optimistic to start and best rate. Most terms similar in shopping around. Paid appraisal and came in at value. 

But...they ultimately turned me down. Said global debt to income for me as a borrower was too high. I have no debt except a $400 car lease and 9 mortgages. About 50% ltv global on those too. They sliced and diced the income of the building, and increased the expenses for some huge vacancy factor on below market rents. So basically they underwrote  (word?) Me with reduced income and increased expense and completely ran me through the ringer on my personal side.  

Cost me a commercial appraisal and $700 in processing. Switched to a lender  (First Republic Bank) that I have a deep relationship with and they did it. Higher rate but also went from a 5 to a 7 yr arm.

So expect the full on body cavity search as a possibility.

I have heard from others familiar with this game that when you get to about 20 units, that the buyers are not scrutinized as much.

And stay away from Provident !  

Originally posted by @Todd Dexheimer :

My biggest pain point as we have started to acquire bigger units (80+), is that getting a loan on a value add that is not 90% occupied is difficult. I am buying out of state, so local banks shy away. Bridge lenders are an option, but they are very spendy. 

Interesting that you mention this. Have you looked into RS at all? Most people think of them only to raise equity, but apparently they also provide debt and bridge loans. I was speaking with a friend the other day who now helps run their debt team (he was at C&W before), and he said he was working on a bridge loan for a reposition. 80% LTV, 7% interest, interest only, due in 18 months. RS is using their own funds for this. After 18 months, RS will be putting them in a freddie mac loan.

What are you typically seeing for bridge lenders?

Right now we are doing one at 75%, at 7.1% interest, 3 year term with I/O. The closing costs are going to be $170k on a $2.5mm loan. This gets the deal done, but is very expensive.

@Rob Krach

Hi Rob,

Every part of the commercial financing experience can be painful, especially when you start out.  I quickly learned that EVERYTHING is negotiable. Don't be afraid to ask for a lower origination fee or longer term, don't be afraid to go out and get quotes from multiple banks.

We started out with community bank recourse loans, and refinanced to Freddie non recourse. We did not syndicate our deals and had the luxury of getting recourse loans.

Our first deal was a 20 yr am, 5.25% interest rate and 5 yr term ( They were not good terms). After 18 months we refinanced to another community bank that we still use to a 25 yr amort, 4.5% rate and 10 year term.

Never underestimate the value that a great banking relationship can bring.  Don't always look to save a minuscule amount of rate to destroy a relationship.  We love working with our community bank. They make it so easy to do business with them. And they love our business model.

i have an entire list of terms you have to negotiate, from guarantees to I/O payments to prepayment penalties.

When I first started, the focus was only on term and rate.  Look to these other parameters as well.

Good Luck

Gino

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