How to Finance Large Mixed-Use Building

Question

I recently came across a fantastic $11mm building with 16 lofts in downtown Los Angeles.

Now, I'm not actually interested in pursuing the building. But let's assume the building met all of my qualifications and I wanted to move forward.

Generally speaking, what does the profile of the buyer look like? How would one finance this? Would it be a regular mortgage that required 25% down and 30 yr fixed? How might the property's pro forma impact qualification and terms?

I have my own thoughts but would like to hear others' thoughts so I can learn.

Account Closed · Answer

What's the other use in this mixed-use property? Office? Retail? I am only speculating on the profile of the qualified borrower. I once did a case study in an exec MBA RE finance course that dealt with pro forma analysis on two large multi-family projects in Boston. I contacted an old friend in Boston who works in multi-family for a big commercial firm to discuss the outcome of the property as the case study was based on a real world scenario. He told me it sold to an institutional investor (think Fidelity, State Street, etc.).

So to answer your question I would say the profile of the successful borrower is probably an institutional investor--maybe even a REIT. If a smaller outfit, I would say they would need a strong track record for successful investments in multi-family and have great operating partners in management.

The borrower could raise funds in the form of debt or equity. The debt might look something like a traditional mortgage with terms of 10-20-30 years, and LTV limits might look similar too (70-80%). But more than likely the pro forma cash flows and NOI would drive the loan limits with a maximum debt service coverage ratio. Any lender or equity partner would be sure to beat up your assumptions in the pro forma; market information like base rent, growth rates, CPI escalation and vacancies.