Multi Family Commercial Mortgage Basics
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This 15 slide presentation illustrates the basics of a multi family / investment property commercial mortgage loan. For more information, or to discuss a specific property, please call Commercial Funding Network in Niskayuna New York at 800-503-1972.
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Multi Family Commercial Mortgage Basics
- 1. Multifamily Apartment Building Financing Prepared and Presented by: Daniel G. Alcorn Commercial Funding Network, Inc. 518-346-2115 November 29, 2012 commercialfundingnetwork.com 1
- 2. • Formed in 1999 by banking executives with experience dating to the ’70s. • 1999 to 2003 - Located in Vermont •2003 - Relocated company to Niskayuna, New York. Daniel G. Alcorn, company founder and President, served from 1984 to 1998 as Senior Vice President of VT based Chittenden Bank. November 29, 2012 commercialfundingnetwork.com 2
- 3. Commercial Real Estate Finance Multifamily Apartment Building Financing • Who lends money on income producing properties? • Are all multi family properties the same? • Underwriting the three “C’s” November 29, 2012 commercialfundingnetwork.com 3
- 4. Multifamily Apartment Building Financing Who lends money on income producing properties? • Banks • Savings Institutions • Credit Unions • Commercial Lenders • Insurance Companies • Pension and Retirement Funds • Note and Mortgage Buyers (purchase mortgages) • Self Directed IRA and Roth IRA • Private “hard money” lenders • Friends and Family members November 29, 2012 commercialfundingnetwork.com 4
- 5. Multifamily Apartment Building Financing Who lends money on income producing properties? Small Business Administration 504 Requires meeting job creation, community development or public policy goals 10-20% Equity SBDC makes SBA guaranteed loan up to 40% 50% lender, secured by 1st position Long term fixed rate financing Removes uncertainty of balloon refinancing November 29, 2012 commercialfundingnetwork.com 5
- 6. Multifamily Apartment Building Financing Are all multi family properties the same? Do some lenders prefer certain properties? • Loan Size and Cash Out (refi) • Owner Occupied vs. Investor • Zip Code: 25,000 population and / or within range of metro location • Number of Rental Units • Minimum 3 (stated income) • Minimum 5 (conventional) • Nature of Rental Units • monthly vs. lease contract • rooming house • square footage / unit November 29, 2012 commercialfundingnetwork.com 6
- 7. Multifamily Apartment Building Financing Underwriting the “ three C’s” • 1 - Credit Rating • 2 - Collateral • 3 - Capacity / Cash Flow November 29, 2012 commercialfundingnetwork.com 7
- 8. Multifamily Apartment Building Financing 1 - Credit Rating • FICO Credit Score • Revolving Debt Balance Credit Line Pct Used / Available • DTI – Owner’s Personal Debt to Income Ratio November 29, 2012 commercialfundingnetwork.com 8
- 9. Multifamily Apartment Building Financing 2 - Collateral • Sales Comparison Method • Market Approach • Recent Sales • Similar Properties • Income Capitalization Method • Discounting the value of all future net income • Loan To Value • Private lenders 60 to 65% • Normal 70 to 75% November 29, 2012 commercialfundingnetwork.com 9
- 10. Multifamily Apartment Building Financing 3 – Capacity / Cash Flow • Full Documentation • 2 years Business Tax Filings • 2 years Personal Tax Filings • Interim Income Statement and Bank Statements • Limited / Stated Income • Cash Flow from investment property, owner occupied business and / or personal November 29, 2012 commercialfundingnetwork.com 10
- 11. Multifamily Apartment Building Financing 3 – Capacity / Cash Flow • Full Documentation • 2 years Business Tax Filings • Form 1120 or 1065 • Net Income • + depreciation • + interest expense • + amortization • = cash available • Debt Service • Existing P&I payments • Existing lease payments • Proposed payments • Coverage Ratio 1.20 : 1.00 • Cash : Debt Service November 29, 2012 commercialfundingnetwork.com 11
- 12. Multifamily Apartment Building Financing 3 – Capacity / Cash Flow 1. List each tenant with unit rent and square footage 2. Determine gross monthly income 3. Subtract actual or assumed vacancy factor 4. Equals Adjusted or Effective Gross Income November 29, 2012 commercialfundingnetwork.com 12
- 13. Multifamily Apartment Building Financing 3 – Capacity / Cash Flow From Adjusted / Effective Gross Income Subtract Actual Property Expenses Real Estate Taxes Property Insurance Water / Sewer Trash Removal Seasonal Snowplowing / Landscaping Subtract Assumed or Actual Property Expenses Replacement Reserve Repairs / Maintenance Janitorial / Third Party Management Equals Net Operating Income November 29, 2012 commercialfundingnetwork.com 13
- 14. Multifamily Apartment Building Financing example: Net Operating Income $26,690 26,690 / 1.20 DSCR = 22,242 annual P&I payments $1853.47 monthly $1853.47 monthly 8% interest rate 20 year term $221,590 mortgage Quick Test: Is an investor interested in earning 10%? (If so, the $26,690 net income is 10% of $____________.) November 29, 2012 commercialfundingnetwork.com 14
- 15. Multifamily Apartment Building Financing Daniel G. Alcorn Commercial Funding Network, Inc. 518-346-2115 w 212-658-9003 f November 29, 2012 commercialfundingnetwork.com 15
Notas del editor
- 1977 to 1983 Nashua NH Trust Company 1984 to 1998 Chittenden Bank 1999
- What are the Sources of capital? Wall Street conduits Mortgage Backed Securities Money Center Banks Regional Banks Insurance Companies SBA Why should a buyer / borrower care? Differences in Timing Process Due Diligence Underwriting Requirements
- Job Creation within two years Community Development improve diversify or stabilize the economy Public Policy Goals 51% Minority veteran or woman owned Rural location Reduce energy consumption by 10% Will produce renewable energy
- Other Considerations Owner Occupied vs. Absentee landlord the experience level of the owner or third party management company
- Scores range from 500 to 850 < 500 2% 500 - 599 13% 600 - 699 27% 700 - 749 18% 750 – 799 27% 800+13% 35% is based on how you pay your bills . Paying bills late lowers your score, as does declaring bankruptcy. The more recent these events have occurred, the greater effect on your score. 30% is based on your outstanding debt vs available 15% is based on your length of credit history. The longer you8 have had credit, the better. A longer history with more information about past payments establishes a more accurate picture. 10% is based on new activity. A lot of recent credit inquiries or applications could indicate that are in financial difficulty or assuming a lot of new debt. 10% is based on your types of credit. A healthy mix of accounts including revolving credit, like credit cards, installment credit, like auto and mortgage loans, results in a better score.
- Environmental Questionnaire – property history Phase I Environmental Site Assessment (ESA) Phase II Field Investigation when Phase I results confirm presence of contamination. Site reconnaissance, historical search, database search, owner occupant questionnaire or interview
- Liquidity X number of months of P&I payments Business and guarantor must show ability to make payments or have liquid assets to repay business debt Net Worth of business or guarantor greater than request amount Leverage : Business Debt suggested to be no more than 3 times net worth Annual Income : positive, trending up and able to sustain additional debt service Minimum Equity 10% equity 15% seller held note 75% funding source
- Vacancy Effective Gross Income/ Net Operating Income Reserves Relationship between annual net operating income and annual debt service Debt Service Coverage Ratio DSCR Calculated by dividing net operating income (NOI) by the annual debt service. If over 1.0, the property is generating enough income to pay its debt obligation. Funding sources typically want to see a DSCR of 1.20 or higher
- Commercialfundingnetwork.com