Typical fees and financing for multi-family apartments

17 Replies

First, I am learning that "typical" and "commercial" should not be said in the same sentence.  But a couple questions for those with experience in multi-family apartment complexes.

First, what should I expect to pay for an environmental survey?

What about financing?  I have a couple of lenders I am working with but want an unbiased opinion on what a good structure looks like.  I know everyone's situation is different.  For me, I am trying to minimize risk by saving some of my cash for operating capital.  My planned exit strategy is likely to be a refi in a few years to hopefully pull money out to fund the next one.  If it's too hard to say what is "typical" then please respond with what you think a good set of terms would look like.  Here is what I am thinking:

  • Term:  5 years with 6 months of interest only (is 7-10 years common/achievable without getting hammered on rate)?
  • Recourse loan (pretty common for your first deal?)
  • Origination:  1% (is less than 1% common?)
  • Amortization:  25 years 
  • No pre-payment penalty
  • 80% LTV

Anything else I should consider?

Term: Go to 10 years and lock in your rate. You can get up to 2 years interest only, just depends on the deal. You can find a lender that won't hammer you too much on the 10 year vs 5 year. But I believe it's worth it to even pay the higher rate now and get it for 10 years. Interest rates are rising, and what if you can't exit the deal or refinance when you want to. 

You can get nonrecourse on your first deal. Talk to at least 10 lenders and at least half of them should offer nonrecourse. 

1% origination is common. 

Amortization is typically 25-30. 

No prepayment penalty will be harder to get than nonrecourse. Curious are you using a portfolio lender? This terms look identical to some portfolio lenders I've come across. From what I've seen, the structure overall isn't typical outside of those lenders. 

80% LTV will likely come from a local portfolio lender, or only in a really good market with a higher class property with agency debt.

Here are my most recent 3 commercial loans, all closed Feb 2018.

1. 3/1 hybrid arm 4.19%, 3 years Io, 30 year final, 3-2-1 pre pay, no origination, 62 ltv , non recourse

2. 5/1 hybrid arm 4.00% no IO, 30 year final. 4-3-2-1 pre pay, no origination, 70 ltv, recourse

3. Float, COFI + 1.75, 3 years IO, 27 year amort after, 10 year final, no origination, 65 ltv, recourse.

I never go 10 years, but if you do what is the issue with a pre pay?

Matt

@Sam Grooms Thanks, very helpful. @Matt Hoyt thanks for sharing...if you have the time and are able, can you add some context to your last 3 loans? As a new investor, I'm reading and understanding the words...but I'm not really understanding the "why" behind each of these loans. Why did a 3/1 hybrid arm make sense in loan vs. a 5/1 hybrid in loan 2? Was the deal different and the better terms just weren't available for deal 1? What is a float? COFI? Etc.

I get that you might have time to provide "all" of the answers but the more you can elaborate the more helpful your answer will be. Thanks in advance for any detail you can provide.

Hello @Tony Castronovo . We paid around $2500 for our last environmental survey (Sept 2017). 

Regarding the financing, here's what we grabbed on our last deal:

  • Term: 25 Year Amortization, 5 year balloon, 1 year IO
  • Always shoot for non-recourse; unless the property is not stable (<75% vacancy) non-recourse should be an option for you.
  • Most banks will want to see you have 6+ months of operating capital just in case, especially in a recourse situation. 

@Tony Castronovo Your loan options will depend a lot on the loan size, property location, DSC and stability. Generally speaking, the more you borrow the better terms you will get.

You don't want to get your only survey's done. The lender will order these as part of the loan process.

@Scott Skinger When I lock a loan I consider quite a few variables, here are three:

1. What is the spread between the products? 

Sometimes different things are priced differently on different days. I typically go 3/1 or 5/1 because I'm going to refi in 3 or 5 anyway and the premium for a 7/1 or 10/1 is too much. In commercial it's truly what the market will bear. In residential sometimes things can be subsidized and the 7/1 is actually pretty attractive.

2. What I think I'm going to do with the property. 

I'm typically adding value and will want to cash out on that value. So if I lock longer then I'm likely getting a higher/longer pre pay and paying a higher rate when I just plan on cashing out in 3 years anyway.

3. What is the futures curve look like?

Terminal fed funds is between 2.25 and 2.50 according to those who bet on that for a living. Most of our loan after the fixed period head to a libor margin/index (that's changing next couple years). Usually around 2.25 over the 1month/6month/1year libor. That means rates are headed to high 4's to high 5's. Not 9%. And that's if economy is hot, if it's not they'll cut. 

On my loans specifically I locked that 5/1 at 4% in December at 10 year of 2.47 and the 3/1 I locked in Feb at 10 year 2.90, that why the difference. The 3/1 is a 28 unit which I will add value to and want the cash. The 5/1 is my office which I likely won't add too much value to and took a longer term. For me, 5/1 is long.


Floating means your rate is adjustable. In this case we took a floating product out of the gate on a 7 unit building because the bank made us a very attractive offer. COFI is the cost of funds index, also known as the 11th district. Instead of libor we are tied to COFI. It historically has been a very attractive index for borrowers as it moves very slowly. They gave me a crazy margin. So yes, you're reading it right, we bought a building in February of 2018 in a rising rate environment with a loan that adjusts monthly. But the start rate is 2.50%. I figure I'll win significantly after I add value and refi in 3 years. I love the COFI, I actually have it on my primary and vacation home.

Everyone here always talks about BRRR but then says you should get 30 year fixed on houses and 10/1 on commercial. Those theories run counter to each other.

Hope this helps.

Matt

Originally posted by @Matt Hoyt :

@Scott Skinger

Everyone here always talks about BRRR but then says you should get 30 year fixed on houses and 10/1 on commercial. Those theories run counter to each other.

I agree with you that they counter but most people doing BRR are buying their houses cash and then refinancing. Similarly, if you plan to refinance on commercial you should do a bridge loan or do shorter terms with no pre-payments. Of course, things don't always go according to plan so it depends on your risk tolerance. To be safe you can go with a longer term 10-year term which limits your upside but also could prevent you from having to refinance during a down turn.

@Matt Hoyt I reread your post again. I'm understanding it but I also realize that I have a lot to figure out and understand regarding financing and contextualizing to my situation. Some of this I'm sure just comes with experience and lots of conversations. However, I was wondering if you have recommendations for books or sites that offer basic to intermediate information for those of us starting out and really trying to establish a good base of knowledge. Thanks again!

You guys just all saved me a ton of time trying to narrow down what a good commercial loan on multi-family looks like. Thank you all for that! Now I know what I'm negotiating on with the banks/credit unions I have lined up.

One note of interest to me: I called Capital One and they have a recourse loan that doesn't require any cash reserves, I even asked the question a second time to make sure I heard that correctly. I figured it's because it was a recourse loan. But in this thread @Jay Helms said in a recourse loan, the banks want to see 6+ months of capital. Guess I need to dig a little deeper into that point.

Hi Tony,

The type of financing i.e. rates terms and fees will depend on a few things in reference to the property and sponsor.

Some qualifying factors are:

The vacancy rate. Typically it is 10% or less it is considered stabilized and the property will qualify for a "conventional" of a paper loan. These loans you would get via Freddie Mac product and offer the lowest rates and terms

The properties that are more the 10% vacant or may need renovation to stabilize the property would qualify for alternative financing. There are a few variables here when it comes to the rate and terms for this loan but basically, the sponsor should expect to bring 25-30% down with interested rate from 7-10% depending on what state the property is in. For example is the property is vacant or barely leased up then it is considered a higher risk and therefore costs more in rates and fees whereas property that has requirements to stabilize it will be less it rate and fees. 

Another factor that determines what type of loan you can get for the property is the sponsor. Sponsors who have excellent credit and strong financials can actually get a non-recourse loan with excellent rates. If the sponsor has some challenges with credit then lenders who fund them will charge higher interest rates and fees.

So in short all of those parameters that you asked about are "typical" but just know that the rate and terms of any multi family loan are dependant on the state of the property and the financial strength and creditworthiness of the sponsor. 

Originally posted by @Russell Gronsky :

You guys just all saved me a ton of time trying to narrow down what a good commercial loan on multi-family looks like. Thank you all for that! Now I know what I'm negotiating on with the banks/credit unions I have lined up.

One note of interest to me: I called Capital One and they have a recourse loan that doesn't require any cash reserves, I even asked the question a second time to make sure I heard that correctly. I figured it's because it was a recourse loan. But in this thread @Jay Helms said in a recourse loan, the banks want to see 6+ months of capital. Guess I need to dig a little deeper into that point.

I believe my comment was "most banks". The property condition, size and historical run rate will also play a factor in potential required reserves. Can you PM me the documentation Capital 1 provided you about the program they are offering? I'm interested to look at a recourse loan that doesn't require capital reserves for $1MM properties. 

@Michael Le agreed on Cash for BRRR. I personally don't like a bridge loans because of the rates/fees, but I get that. 3 years with a 3 year pre pay works right for me with my business model. I also acknowledge I live in a lower cap rate / higher appreciation type locale so that can tweak the strategy slightly. But on the refi in a downturn point I want to make clear I believe in short term fixed interest rate periods, but not short term loans. 95% of my loans are 30 year loans and I won't take a balloon less than 10.

@Scott Skinger I'm self taught. I'm a R.E. Broker by trade but in 2005 I got annoyed with some mortgage brokers being worthless and decided to do loans myself. I basically financed almost every residential deal for myself and clients through 2014. I'm done with that now but I learned quite a bit. When I don't know something I just look it up from reputable sources online and also quite a few of my college roommates work in finance and can get answers on things like Libor nuances for example. Most people don't even know what their margin/index is after the fixed period, that's a huge part of any loan.

Get a bunch of quotes and you can just ask me and I'll let you know my opinion, if you think it is valuable. 


I'd also note the rich get richer. The best loans, especially in commercial, are offered to guys who don't need them as much. So when starting out sometimes just getting the loan is winning the battle.

Matt

Tony-
Congrats!

Exactly - nothing typical in commercial!!!!

Not sure how much a ES is going to be in your area, in our local market depending on the type and pahse the cost fluctuates - also fluctuates with how quickly you may need it.

Loan term you described not bad the 80% LTV is good - the amort is good, the arm is typical, origination ok - you can likley get a non-recourse (thats your rate quote - will change until you lock in)

Check the prepayment clause, normally it is setup as a step down

You can likely ge t a 7yr. loan

I would encourage you to seek a local bank on your first deal, establish a relationship, perform and repeat :) 



Originally posted by @Tony Castronovo :

First, I am learning that "typical" and "commercial" should not be said in the same sentence.  But a couple questions for those with experience in multi-family apartment complexes.

First, what should I expect to pay for an environmental survey?

What about financing?  I have a couple of lenders I am working with but want an unbiased opinion on what a good structure looks like.  I know everyone's situation is different.  For me, I am trying to minimize risk by saving some of my cash for operating capital.  My planned exit strategy is likely to be a refi in a few years to hopefully pull money out to fund the next one.  If it's too hard to say what is "typical" then please respond with what you think a good set of terms would look like.  Here is what I am thinking:

  • Term:  5 years with 6 months of interest only (is 7-10 years common/achievable without getting hammered on rate)?
  • Recourse loan (pretty common for your first deal?)
  • Origination:  1% (is less than 1% common?)
  • Amortization:  25 years 
  • No pre-payment penalty
  • 80% LTV

Anything else I should consider?

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