Financing a 15 unit apartment building
Background: Our advisor consults one of our small portfolio lenders to discuss the financing of a 15 unit apartment building. Using their underwriting guidelines, the property most likely qualifies for up to a $960,000 loan amount. However, after performing an in-depth analysis of tax returns, bank statements, and the credit report, it appears that a “full documentation” approach was not the best option. Our advisor then took this opportunity to educate the customer.
Full Documentation vs. Stated Income: In the mortgage industry, these are two primary approaches to underwriting loan requests.
Equity Line of Credit on a commercial building
Background: Our advisor made inquiries with a number of our lenders about establishing a Multifamily Equity Line of Credit shortly after closing escrow on a commercial building. To begin with, very few lenders will offer this loan product. Of the few that will offer it, every single lender required a Full Documentation approach for a MELOC. The lenders view a 2nd position as greater risk, so therefore they require greater documentation and verification for this type of loan product. In addition, they will enforce a stricter Debt Coverage Ratio of 1.20 or higher, which means that the property may not qualify for a $100,000 line of credit. (Keep in mind we are using a 1.15 DCR on the 1st mortgage, which maximizes loan dollars for the client.)
MELOC vs. 2nd Mortgage: Since the MELOC is not a feasible scenario, an alternative would be a 2nd mortgage from a private lender. The biggest advantage is that a private lender will fund $100,000 without requiring a full verification of the borrower’s financial condition. Private lenders are asset-based lenders so they focus on the unused equity in a property. However, they will generally limit their exposure to 65% of the property value.
Disadvantages of a 2nd Mortgage: Despite the fact that we can probably obtain a $100,000 2nd mortgage on the property from a private lender, there are some disadvantages to this scenario:
Background: Our advisor was granted a portfolio assignment that consisted of roughly 60 million in small balance apartments primarily located in the South Bay area of California. What was discovered soon in the initial consultation was that the borrower had some major hurdles for us to get around. The problems primarily were a result of the decrease in property values a sign of the current CRE markets which made the required Loan to Value an issue.
To begin with our Advisor had to identify all of the lenders that would underwrite to the highest LTV and at the most aggressive rates. Of the few Lenders that made the first cut we acknowledged that we were going to have to spread these properties out to different lenders based on the characteristics to the property type, location, loan balance, and estimated value. After conferring with the chosen lenders we came up with a strategy that best met the client's goals.