Mortgage Financing for a Multi-Family - based on equity or income?

[Ilya V.]

Hi everyone,

I have heard two different things regarding obtaining bank financing for a Multi-Family property (larger than 4 units). One is that the bank will finance you based on the income that the property will generate rather than the raw value of the asset (as they do with primary resident properties). The second is that they expect you to take at least a 30% or so equity position in the property so you have "skin in the game".

I wanted to know if it is possible to get a mortgage for more than 70% if the property looks like it has better than average earning potential, or if that is a hard and fast rule.

Thanks!

[Joel Owens]

It depends again on what I said earlier about deal size will determine WHO the lender is. Local and regional banks lend on small properties. They also are audited by regulators on the loans they process and approve. Nobody on the loan committee at the bank wants to lose their job processing a marginal borrower or property. If the bank defaults and closes up shop they could also be facing criminals penalties from the feds for faulty procedures and gross negligence.

If the one loan that went bad was a whopper it can take them down fast. To a local bank with 20 million in deposits a 3 million loan is huge. For a CMBS multi-billion dollar lender it's small potatoes.

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Now with the banks they want a local owner operator. That is where the experience and track record comes in.

The type of clients I have 2 to 3 million is a small purchase. Usually the purchase is over 5 million to over 10 million and up.

In this range the larger lenders put more emphasis on WHO is managing the property. When a lender is loaning out large money they want to be comfortable who is looking over the asset. So these are not ( joe bob do it yourselfers). These are professional commercial firms that manage in the millions of sq ft of assets. Especially with CMBS lenders they will be doing a lockbox account. They will advise tenants to send rent to the lockbox account. From there lender will keep an escrow account after paying mortgage for estimated TI, leasing commissions, property taxes, etc.

After all of that the remaining will go to the borrowers account for cash flow. This is kind of a forced savings account the lender places on the property. It's still your money but the cash sits their instead of being used by the borrower.

So the question then becomes how much cash will be trapped for these reserves?? That is based on the market appraisal and what they say for vacancy, per sq ft  for TI's and LC's, etc. Often we fight to get underwritten cash flow up with getting market vacancy up and TI and LC estimates reduced.

If appraiser says market at 8% vacancy we try to fight to five etc.

I do not mess with this no money down stuff. As a commercial broker it's a waste of time to work with such buyers. I have lots of clients that have tons of money wanting to invest. Anytime you are trying to throw a football 80 yards down field how many times will the receiver successfully catch it in bounds?? Not many. It does happen but not often.

I like the short high percentage passes............. : )

These NMD deals a lot of the investors were doing these 3 to 4 years ago when markets were just thawing from being frozen. Sellers were more desperate to get creative. Fast forward to today and those deals can still get done but have been severely reduced.