All Forum Posts by: Chris Winterhalter

I wanted to expand on a topic that Joel Owens and I started to discuss on another thread. It relates to the loan offerings available from local/regional banks for commercial loans under 2MM. I know it has been discussed several times however I want to dive into the pros/cons along with other options available in the marketplace. I am definitely concerned about the interest rate risk currently present in my 5 year ballon loans. What will happen to real estate once interest rates start to soar? How will inflation come to affect interest rates and vice versa.

Local/Regional Banks - CRE loans under 2MM

• Typically fixed for 3 or 5 years. Many come fixed for 3 to 5 years with a ballon payment after the fixed loan period. Some banks will go to 7 years however these are extremely far and few between. I haven't been able to find a bank that will commit to 7 years. Large deposits and prior relationship help however don't always guarantee the ability to get 7 year fixed loans. Banks are scared of the interest rate risk...just about as much as we are.
• I'm seeing rates ranging from 3.5-5% depending on the market and borrower. My lowest interest rate on CRE loans under 2MM is 4% and I'm currently going through the refi process.
• Full recourse loans with no exceptions. If you are syndicating deals sub 2MM then your investors with over 20% stake will have to personally guarantee the loan. If they bring the majority of the capital they still might have to guarantee the loan even if they have less than 20% ownership.
• Low loan fees....sometimes extremely low. We were currently approved for a 1.44MM acquisition and construction loan with loan fees totaling $1,000.
• Higher LTV - Local banks will go as high as 80% LTV
• Construction loans - Ability to have a construction loan tied in with the refinance or acquisition loan.
• Amortization typically at 20 years with some banks going to 25 years.
• No pre-payment penalties - I'm not seeing pre-payment penalties from local/regional banks on CRE loans.
• Short closing timeframes - If you have an existing relationship you can close a loan within 30 days depending on the bank.

Small Balance CMBS under 2MM

• Typically fixed for 10 years (sometimes 7 years)
• Rates are generally priced around 5.5% (right now) and are based on the swap rate + so many basis points. Or some other pricing structure.
• Non-recourse - Huge benefit of the loans
• High loan & inspection fees - Very high loan fees in relation to the loan amount. 20k plus
• LTV - max LTV is generally around 75%
• No construction funds available within the loan.
• Amortization as high as 30 years
• Pre-payment penalties
• Longer closing time frames (60 days)

Small Balance Life Insurance under 2MM

• Similar to small balance CMBS however possibly come with full recourse and lower LTV (70% LTV). Life companies generally want nicer and new product.

So what do you go with? One option is to do bigger deals...3-4MM+ so non-recourse financing makes more sense. Let's table that option though...let's look at the loan options listed. Local/Regional bank loans are relatively cheap when compared to their non-recourse counterparts. They are easy to refinance with no-prepayment penalties. Let's compare two 1MM loans...

Local/Regional Bank example

1MM loan @ 4% for 20 years with a 5 year ballon

Payment is $6,060

Balloon payment due at year 5 of $825,298.

Non-Recourse example

1MM loan @ 5.5% for 30 years with a 10 year ballon

Payment is $5,678

Balloon payment due after 10 years of $831,087

So in this example the balance is actually higher after 10 years on the non-recourse loan compared to the full recourse 5 year balloon bank loan. And that is obviously the case due to the amortization and interest rate difference. The 5 year fixed loan could jump up to 7-8% if interest rates spike. However you have the ability to refinance cheaply at the 5 or 6% range if you see rates skyrocketing up. With the non-recourse option you have to deal with high loan fees and pre-payment penalties but you have 10 years. How important is non-recourse financing to you and your investors? It is probably important to your investors. You might not have any outside investors for a smaller deal like this though. I'm not pro one way or the other...I see benefits to both sides however would like to get the thoughts of other experienced BP members.

Thoughts?

@Nik S.

As Bill mentioned you need to speak with a banker first in regards to how it will directly affect his future ability to borrow. More than likely if the property performs and he wants to continue seeking commercial loans he shouldn't have a problem. Car loans are extremely easy to get...however he should talk to the local bank that is going to finance the multi-family and any other banks that he currently has a relationship with. If he holds large deposits with any specific local bank or credit union more than likely they will not have an issue extending him a car loan. They might tick his rate up a 100 basis points however that really isn't a big issue.

If you are reasonably confident that you and your father have the ability to obtain financing then your number one priority is to go through proper due diligence. Be very careful when underwriting the deal. Utilize your fathers expertise however also lean on the help of competent professionals. As this is your first deal you are probably looking at this property with rose colored glasses. Remove those glasses, stomp on them, and replace them with a pair of cautiously optimistic ones. Good luck!

@Nik S.

Let me clarify about the equity stake....he just needs to be an owner in the property (probably 20% or more). He doesn't necessarily need to bring capital to closing however will need to sign a personal guarantee. I think you could structure a solid deal with your father. Let's say you offer him 25% ownership, 25% of cash flow, and 25% of the upside of the deal for signing on the loan. That could be a win win for everyone involved.

In regards to the DTI issue...why is your father worried about this? Commercial loans don't show up on your personal credit report like conventional residential mortgages do. If he is worried about getting additional commercial mortgages it won't be an issue as long as the property cash flows. His global cash flow picture will be important to commercial lenders.

@Joel Owens 5 year fixed loans are pretty much the only loans you can get with local/regional lenders right now for smaller commercial loans. They are just as scared as we are in regards to interest rate risk. There are small balance CMBS loans out there sub 2 MM with non-recourse however the fees are so high it almost doesn't make sense. Some life insurance companies are doing small balance recourse loans sub 2MM with longer fixed terms however the fees are also extremely high.

@Nik S.

The commercial loan world doesn't really allow "co-signer's" for commercial loans. The "co-signer" would need to have an equity stake in the property. So your dad would need to be part owner in the property...probably at least 20% based on what the bank will allow. The bank will also look at your experience...if you don't have any experience and low income that will definitely be a negative to underwriting. What about reserves? How about net worth? They will look at both of these factors when underwriting the loan. Does your father have experience in real estate? Local banks can get over the experience portion for stabilized multi-families if the borrowers have strong financials (both income and capital).

Congrats on being a young investor and tackling a good sized deal. Just be careful of the pitfalls. It looks like you are buying just shy of 28k/door. Can you tell us anything about the deal? Rents? Who pays utilities? expenses etc etc?

@Aaron Ross

New construction or redevelopment? You could go several routes:

• Real estate agent for sales and/or leasing
• Property Management
• Development...within development you could go to
  • acquisitions
  • financing/funding
  • land development
  • planning & design
  • Construction management
  • Historic side - tax credits, subsidies, grants etc.

Working as an assistant or intern for the project head or principal for a development company (smaller...think less than 20MM/yr in development) could be a great job. You could learn a lot of different aspects of the business to give you an idea of what you like. There are many companies that encompass everything....owner/developer/manager. You will know these companies by walking around the city and looking at construction site signs. Who is active in the developing parts of the city in Richmond? You should find that out. You want to work with a growing company. Good luck!

Here's an update:

My loan commitment was up yesterday. We were pushing the appraiser to at least get a verbal into the bank before loan commitment was up and our 15k in earnest money went hard. On Wednesday it didn't look like the appraiser was going to get back to us until late in the day Friday. So I pushed the broker to get us an extension for a week on loan commitment and closing. With a lot of back and forth I finally signed my side of the amendment Thursday afternoon. Yesterday morning I was on the phone with the appraiser and broker making sure they were working on their respective documents. Everyone was assuring me that it wouldn't be a problem. The seller was going to sign the amendment and the appraiser was going to contact the bank. I reached out to my banker (my actual banker was on vacation so I was talking with her boss) and made sure he knew the importance of having the appraisal in before our money went hard. It seemed like we were all on the same page. I followed up several times during the day to double check on the appraisal and amendment status. 4pm came around and I started to get worried. My broker wasn't picking up his phone and the banker had ALREADY left for the holiday weekend. I called back the appraiser and asked him if he was able to get over the verbal...he replied yes but that he wasn't allowed to share the outcome with me based on his agreement with the bank. He also mentioned that he spoke with the banker's assistant and gave me her name. I called the bank back and asked for the assistant however she had also left for the day. I told them the situation and asked for their cell phone numbers or that they reach out to them and have them call me on my cell. Well they wouldn't do that...however they would relay my message to the switch board and that someone would call me today (Saturday). Then around 5:30 (Friday) my broker calls me back and apologizes that he missed my calls. He wasn't getting reception where he was golfing. He assured me that the amendment would get signed and that he would follow up with the seller. So essentially it's 5:30pm on a Friday of a holiday weekend and our 15k is going hard without any knowledge of the appraisal. I was pretty confident about value however anything can happen. Fast forward a few hours (around 10:30pm) and the broker forwards over the signed amendment. 15k in earnest money isn't a ton of money however it's also not insignificant. I'm not in the business of losing 15k.

This morning (Saturday) I get a call from the bank...some loan officer that was on duty today received the message from the switchboard. I told him the situation and he said he would reach out to the banker. About 10 minutes later the banker calls me and was unaware that the appraisal came in yesterday. I told him that it did indeed come in and that it was relayed to his assistant. He told me he would check with the assistant and call me right back. About 15 minutes later he called back....the assistant received the call...wrote the message down on her desk and walked out the door for the weekend. The building appraised both on the as-is value and the after repair value based on our loan request. So now I can enjoy the holiday weekend.

I learned a few things from yesterday. Always ask for the cell phone number of your banker. I have the cell phone number for my original banker...the one that is on vacation (she was in Europe). However I didn't have the cell phone number of her boss...the banker that was in charge of the transaction while she was gone. I stayed in constant communication with everyone and even started working on the backup plan (extension) days in advance. However always realize that CRE professionals are ready to hit the door running on Friday afternoon, especially on a holiday weekend. I hope that assistant had a great night yesterday....

NA Martin

Glad to see you are out and about looking for properties! Cincy does have high property taxes. The current tax market value is 296,890 so the taxes would presumably go down with a lower priced sale. If it is sold at 250k you could expect it would assess at around 35% or 87.5k. At the effective tax rate of 88.192116 per $1000 that would be $7,716.81 roughly give or take. So closer to 3% which is definitely higher than Kentucky (and high for other areas).

@Jay H.

As a commercial hotel contractor I would never agree on a cost plus 10% agreement. With that being said we currently only do redevelopment work and new construction is definitely different. However I would never trust that the contractor is actually doing a cost plus 10% deal...there are so many ways to hide profits and inflate costs in construction. I just don't see it being very clean on a smaller deal. Maybe a 100MM development project that has Ernst & Young auditing the contractor however on a smaller deal it's just not as cut and dry. And why worry about how much the contractor is making? You want the contractor to make money. I would go with a fixed fee all the way. Make sure you get multiple solid bids from experienced contractors and go with the one with the most value (not necessarily the lowest cost). Check out recent similar projects that they have completed and talk with the client about the process and their experience.

@Robert Piller

Any update on the deal?

@Steve Dove

Doesn't Dan Gilbert have the same plan for Detroit?