Is there anyone on the lending/finance side of the business that wouldn't mind answering some questions?
Yep, another hi-im-a-new-guy-to-the-industry thread. You don't see or hear about the financing side of the business that much on this thread, I'm sure there are some people out there!
[{"id": "cte05pr", "text": "this sub moves slow sometimes.  I've posted and gotten answers months later.  I'm not lending/finance side, but I'd highly suggest just asking your questions and not waiting for someone to say they will help you.", "replies": [], "depth": 1}, {"id": "cte1301", "text": "I'm in the finance side of things and will help if I'm able. ", "replies": [], "depth": 1}, {"id": "cte3pxq", "text": "I was formerly on the financing side and will help if I can...", "replies": [{"id": "cte8fjw", "text": "I have a question, not to hijack the thread but no need to start another when you are already here.\n\nFirst question - lets theoretically say I wanted to buy an apartment complex and put ~30% down. I want to do this in a pretty standard way, no crazy financing, terms or the like. Let's assume the property is producing and meets LTV and DSCR requirements. As I understand, underwriters will look at the borrowers credit, their experience, their net worth, their other assets, as well as the profitability of the property. \n\nIs it completely naive of me to expect to get a commercial loan when walking in with 25-30% down payment and good credit, but with little to no commercial experience, minimal assets other than my primary residence, and low net worth. Would I be able to get something at 65% or even 60% LTV? Or even with a higher interest rate, or is there a good chance I might be denied altogether depending on the \"average\" of the other things lenders are looking at?", "replies": [{"id": "cte8lvm", "text": "You'd probably be able to get a recourse loan, provided you have material net worth. I think it's unlikely you get non-recourse financing or be able take out the loan in the name of a LLC or LP entity.", "replies": [{"id": "cte8t6e", "text": "Hmm, ok. Is there a point in value of the property where you typically go from recourse to non-recourse regardless of the other factors? Or is it really just a case by case basis? ", "replies": [{"id": "cte90x1", "text": "I work for a major commercial lender (greater than 35 bn portfolio) that also does equity deals via JV participations.  Sounds like for a project of the value you're shooting for, safe to guess less than 5 million?, a local commercial bank will be your best shot at financing.  Typically, most local commercial banks don't place non recourse loans.  From what I've seen, non recourse loans are only offered to institutional players (like REITs and PE funds etc.), and project values are usually north of 20 million.  To answer your question, unless you have a serious track record of investment or development (i.e. on par with institutional money), non recourse loans will be off the table.", "replies": [{"id": "ctegomh", "text": "I work in CMBS, I wouldn't say REITs + PE funds are a good example per se, because really the majority of CMBS loans by count are not quite that sophisticated of an entity (and many of those loans don't go CMBS too). They're usually a smaller corporation that owns, develops, and manages commercial properties, structured as a LP or LLC. There are tons of them out there.  By contrast, the number of loans with someone like Blackstone or Annaly (what I typically call a \"true\" institutional sponsor) on them are far lower, although by dollar balance they certainly rank up there. I guess in the end the distinction I am making is that there's a tiering of corporate sponsorship - the top tier containing your \"Class A\" names and the bottom tier containing your more amateurish developers. ", "replies": [], "depth": 6}], "depth": 5}, {"id": "cte9mhd", "text": "Also, a few pointers to keep in mind as you go forward in seeking a loan:\n\nLenders will price the loan based on:\n- Your personal balance sheet\n- The loan-to-value (higher = more expensive)\n- Project cash flow based on your pro forma and their underwriting\n- Appraised value (for smaller projects)\n\nHere's where you can greatly impact loan pricing to your favor:\n- Have a co-signer who has net worth appropriate to the loan size you're seeking\n- Seek lower leverage (&lt;60% LTV)\n- Do your market analysis, and show why you believe rents can grow at X% in your pro forma DCF\n- Provide rent and sale comparables of recent trades of similar assets in order to provide another benchmark of value (remember, they'll be relying on their 3rd party appraiser as their eyes and ears since commercial bankers typically are not commercial real estate professionals)\n\nRemember, even with the market having already priced in rate hikes for the end of this year, most local commercial banks are still hungry for commercial mortgages (especially lower levered ones).  Perhaps you should look into hiring a mortgage broker to do the heavy lifting for you; of course you'll be paying a commission, but with a good project, the long-run cost savings in the loan's coupon could be worth it.", "replies": [{"id": "cteah14", "text": "Very interesting. Did not know that non-recourse loans were essentially unavailable to \"small players\". \n\nYes, the project I would want to start off with will have a value of 1.5-3 million and a LTV of 60-70%\n\nI also understand that starting out and getting a loan on my own would be considerably harder but I am quite confident I would have access to a co-signer, like you mentioned, who has a corresponding net worth and experience to back it up. (GC and has built 150+ custom homes)\n\nWith where rates are now, how much fluctuation is there in rates between a perfect, ideal borrower, and a less than ideal borrower who is maybe just barely being able to qualify? ", "replies": [{"id": "ctehd3r", "text": "You may be looking at a rate spread of between 50 to 150 bps (but remember, shop your loan and get pricing down!).  This is where the art of finance comes in.  They will quote you as high of a rate as they think you'll be able to pay, while still able to hit their underwriting metrics e.g. DSCR,", "replies": [], "depth": 7}], "depth": 6}, {"id": "cteoqow", "text": "/u/nickfurrah all the pro-forma analysis is done by the appraiser, there's no way we go off of a borrower-prepared projection of cash flow.  The appraiser determines market rates and expenses and that creates the pro-forma NOI that is used to value the property.   You sound like you want the borrower to come in with his own determination of market rates and property value, I would barely even look at that because the only thing that matters is the appraiser's numbers.  I mean, it's good for your personal due diligence in looking at an investment, but the bank is not going to use that stuff. \n\n", "replies": [], "depth": 6}], "depth": 5}, {"id": "cteogy7", "text": "You're not going to be able to get a non-recourse loan\n\n", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "cteoelt", "text": "I'm an underwriter for CRE financing and I don't think your low net worth is a deal breaker.  As long as we can mitigate a weak guarantor with proper collateral margin, good debt service coverage and (preferably) adequate personal liquidity to service some of the debt service should the property become under-occupied at some point.  The complex should be fully leased up and I would rather see a 70% loan with a guarantor with liquidity on his balance sheet than a 65% or 60% LTV with none.  Despite what /u/sircharles said, you'd absolutely be able to hold this in a LLC and finance the purchase, you would be guarantor along with any other members.\n", "replies": [{"id": "ctet4np", "text": "Definitely makes sense. It's so great to see such a wide variety of knowledge in this forum. Thanks!", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "cte3vd1", "text": "What're the questions?", "replies": [], "depth": 1}, {"id": "cte9anc", "text": "I'm an auditor working with real estate clients and re investors ", "replies": [], "depth": 1}]