I am putting together a multi-family deal. I am planning to have part or all of the down payment provided by a private investor, which I will pay interest to, and refinance after a few years, once I add value, and then payoff the investor in full.
My question, is assuming a bank allows a borrowed down payment (I found some that do, and some that don't), should I expect them to include the down payment in the DSCR, since it's borrowed?
This would be a commercial real estate loan.
This is a preferred equity structure, which is functionally like mezzanine debt, so your lender will likely want to ensure you pay your debt obligations before your equity obligations. The bank may treat your equity obligation like debt service and, if so, it could be part of your DSCR for underwriting purposes. But they will be more concerned that your debt obligations on their loan have payment priority over your equity obligations and they will want to ensure their mortgage/deed of trust lien on the property has priority over any lien related to the preferred equity.
Thank you. The bank would certainly have first position above the investor, but I am wondering if typically others have seen this down payment included in DSCR or not. I didn't plan to have the investor as part of the LLC, or guarantor on the loan. Can you explain the preferred equity structure you are speaking of.
Preferred equity is junior to mortgage debt but senior to owner or “common” equity. Typically, a preferred investor (after all debt has been repaid) receives the agreed upon “preferred return” on their capital invested and then the remaining distributions go to the common equity holders (ie owner and any non-preferred investors). Preferred equity involves an ownership interest in an entity but is typically not secured by the property itself.
If you do not intend to give your investor an ownership interest in your entity that owns the property, then your investor is a mezzanine lender.
Talk to your attorney about this structure before taking any action. I am not your attorney.
Our bank requires the loan docs for seller assist mortgages, so I assume that figure that in.
With 100% financing (loan and borrowed down payment), I'm at 1.12 DSCR at purchase, but after value add, which will mean markets rents, even conservative market rents, I'm at 1.28.
I don't think 1.12 will fly, so you can see why I want the borrowed down payment, excluded.
Lender will look at what income is TODAY and stabilized revenue stream over the last 12 to 24 months. Value add and turn around is hypothetical. That situation may not happen at all or not go as planned.
That DSCR is too thin. I do not know any lender that would touch that on most properties. Any little blip happens and the property could instantly be cash flow negative.
With true value add properties a typical structure is interest only on the loan so payments are minimal while injecting capital and stabilizing the property. An owner typically cares less about principal pay down when stabilizing.