20 Unit Deal - Commercial loan questions

23 Replies

Hey BP Community,

I'm trying to figure out how much cash I'll need to raise in order to obtain a commercial loan and be able to close on a light value add property.  He is roughly what I've come up with but would like input from the community.

$1M Property (12-24 units) - will need to meet or partner with someone who meets Net Worth requirement

25% Down

15% Reserves - 6 months of debt service + light rehab

I'm targeting the raise at $400K.  Does that sound too much, too little or about right?

10% liquidity after close  $75K

How much to allocate for the following:

Closing Costs (2%?)

Due Diligence / Inspections

Legal - to create LLP and PPM

What else am I missing?

I can probably achieve or partner with someone who will help with the Net Worth, Credit Score, Cash Reserves and am planning to buy something that will have a Debt Service Coverage Ratio above 1.25%, but I've never bought a commercial property before.  If I meet the other financial requirements will lack of multifamily experience be a deal killer?  Or do I need to knock on the door of smaller local banks?

I'm probably missing a few obvious things so please let me know if this fosters additional questions or discussion.

@Mark Doty Hey Mark. Not sure if this applies to you in California but I can tell you what I went through here in NYC. I recently purchased a commercial property for $980k. I was able to owner occupy the space (I moved my office there) and get away with 25% down instead of 30%, which was the minimum requirement. I used Investor’s Bank and wound up with a 5.25% 7/12 rate (locked for 7yrs and callable in 12yrs). I own about $4m in additional real estate which did come into play during the application process. So total out of pocket for me was $277,000 as follows: $245,000 (25% down payment) $32,000 (closing costs...mainly mortgage tax and title) And my payment is $5,804 per month with taxes. I have 7 tenants in the building that help me cover that. The loan parameters for commercial properties are the same for multi unit properties here in NYC. Though assets and credit did come into play, your NOI needs to cover the mortgage with a certain vacancy rate. Lenders will vary. I suggest shopping around. I went to several banks and private lenders before choosing Investor’s Bank. Good luck.

@Mark Doty   When we look to determine the capital stack, we first determine all our "Uses" or costs.   So, what is not clear is in the "light value add", 

what amount is necessary for that?

is it a performing asset?

how long will it take to get it performing?

We take all those figures to determine the Uses in our Proforma, and then apply the market rate on debt for the Sources.  The balance is the necessary Equity.  The sources must equal the uses.

@Mark Doty I don't think the costs to create LLP and PPM make sense with that small of a property. You'd be better off partnering with one or two other people in a deal this size to increase returns for everyone. Also, don't forget about cost segregation. IMHO once a property reaches $1MM+ then it makes sense, cost-wise, to do a cost seg study.

@Mark Doty I agree with @Dan Handford that a deal that size is tough to do with a syndication.  I did have a syndicated 20 unit deal and the pickings were slim.  On the other hand, the education you might gain may be worth doing it.  It would be like taking a baby step on your way up to bigger deals

@Scott Krone , @Dan Handford , @Jeff Greenberg thanks for the replies...the light value add is like paint, management replacement, appliances and landscaping. Limited heavy out of state lifting. This is a friends and family deal to get comfortable with the syndication model, provide decent returns then improve on the model. Thoughts and feedback appreciated. 

If not a pure syndication with 10ish investors, what would be a better way to structure the investment package?  The goal is to gain experience with a small win. 

@Mark Doty For some cheaper money consider baking the repairs into the purchase and packaging it into a Fannie Mae loan product. 30-year amortization and ~4.9% interest and 80% LTV on the ARV. Talk to Sam Schwass about it at Arbor. I’m closing on a 40-unit Tuesday that he financed with a Freddie Mac product. Then you need 20% + closing costs (3%) + reserves (5-10%). As mentioned, bring in an equity partner of 20%+. Maybe offer a low preferred return too.

@Mark Doty If the 10 investors that you are wanting to bring in on the deal are going to just provide money and nothing else then you would be needing to discuss this in more detail with an SEC attorney as you are now selling a security which is why it would be considered a syndication at that point. This applies even if the 10+/- investors are just friends and family.

@David Walkotten thanks for the suggestion. How long is your term on that loan?  Congrats on the 40 unit!  On the preferred return, are you looking at like 8-9% or more than that?

@Dan Handford understood on the syndication point. It’s a security if the partners don’t have another role in the deal, correct?  My understanding is that if the people investing (which doesn’t matter if it’s 3 people or 100 -I don’t think) don’t have an active role or responsibility outside of the money, then the deal should be structured as a security.  

After completing the friends and family deal, I will next have to decide how to market and whether the investors are accredited or not...but that’s down the road for me.  Thanks for the tip and feedback!

@Mark Doty my investor ‘s preferred return is 6.5% which is actually pretty high considering he is also receiving equity for the investment. I think 5.0-7.5% is normal if they are also getting equity. It’s a 30-year amortization. 1 year interest only up front and then 9 more years fixed P&I. 10 fixed. Then 10 more years floating for a tOTal 20-year term.

@Mark Doty I second what @Dan Handford mentioned above about your investment potentially being a security. In terms of investors roles, being active translates into everyone having to do something for a deal. If that's your plan, then you'd have to come up with a very detailed Operating Agreement stating everyone's responsibility to avoid conflicts and/or questions down the road as to who's responsible for what in a partnership. Again, it's worth a conversation with a securities attorney. 

Perhaps someone experienced as @Kim Lisa Taylor .

@Mark Doty Just for reference, I have had an inspection on a 12 and a 16 in Tacoma and each of those were around $1k, as well as a 15 in Cleveland which was $975. These were done by pretty solid inspectors so I believe that $1K should be a pretty good number to budget.

This is no mans land for investing because you are getting the worse terms and recourse debt until going over 1M loan size.

@Lane Kawaoka thanks for the insight...sounds like from you perspective it would be better to go after a minimum of a 1.25M property to obtain better financing, so that the loan exceeds that $1M threshold. Am I reading your comment correctly?

25% down payment sounds accurate. You need an operating account fund for unexpected maintenance issues, dips in occupancy, etc., which can be 1% to 5% of the purchase price (depending on the current condition).

If you are funding the renovations out-of-pocket, you will need to raise that. I would add in 10% to 15% of the total rehab budget for contingency.

Closing costs are usually around 1% of the purchase price. There are also financing fees to pay for due diligence, loan applications, legal, etc., which are around 1.75% of the purchase price.

If you charge an acquisition fee, you will need to raise that too.

The 10% liquidity doesn't need to be raised. The lender will need someone to sign on the loan with a balance sheet with 10% of the loan amount and a net work that is 100% of the loan amount. They will also likely want someone who has past experience doing a similar sized deal to sign on the loan too.