Lenders: Are IO and 80% LTVs now a thing of the past for multifamily?
Hi All,

I'm a CRE investor in the mid-Atlantic and, while touring a portfolio with our buyers agent last week, was told that banks are no longer consider IO loans.  I was also told that even it you're able to get an IO loan, you're only looking at a year max.  

He also told me to say goodbye to 80% LTVs and that we're now in 30-40% down payment territory. 

This is boutique multi-family (6 - 16 units) product we're looking at in what has historically been an incredibly incredibly strong sub-market.
[{"id": "g54aczt", "text": "I/O no, 80% yes. Usually I/O only for HNW sponsor or strong, established banking relationship.", "replies": [{"id": "g54ktzf", "text": "What's the appetite for non-recourse debt? Is that still an option to borrowers?", "replies": [{"id": "g55az48", "text": "Let\u2019s say an existing borrower with $100 million in other loans and $30 million in average deposits wants a non-recourse loan at a lower LTV and strong DSCR. That could (and probably will) happen. \n\nOtherwise, financing will have to get creative with burn down guarantees, springing reserves, or a carve out guaranty if they really want a non-recourse loan.", "replies": [], "depth": 3}], "depth": 2}, {"id": "g54nkcw", "text": "Please explain what I/O stands for - thank you.", "replies": [{"id": "g54q1ys", "text": "IO= Interest Only loans. These loans only charge the borrower interest payments only thereby making your monthly mortgage obligation much smaller than what it would normally be with an amortizing Lon that includes portion of the principal. \n\nBecause of the smaller monthly payment it can really help to boost your cash flow and therefore returns. They are fantastic if you plan on buying something fixing it up and selling it but if they are used for long term holds you do not build any equity. \n\nHope that helps!", "replies": [{"id": "g54qg8o", "text": "Very helpful, thank you. \n\nHow common were IO loans before Covid in CRE? Have they been around awhile or a recent phenomena?", "replies": [{"id": "g55ajgo", "text": "They\u2019ve existed for as long as real estate has been an institutional asset class. Closed end value and opportunity funds take it exclusively. Private buyers will take it too as it\u2019s usually open to prepay at par while fixed rate debt is usually locked out until maturity unless you pay a significant penalty (usually greater of 1% UPB or YM through maturity)", "replies": [{"id": "g55hto0", "text": "Thank you for explaining further!", "replies": [], "depth": 6}], "depth": 5}, {"id": "g55cq5x", "text": "IO loans are usually for: \n\n* construction loans where interest is paid directly from the loan \n\n* bridge loans (1-2 years) for properties that aren\u2019t stabilized. Interest is typically paid in advance (3-12 months in advance, replenished once exhausted or falling below a specified amount). \n\nThese are just general remarks for discussion purposes. I\u2019ve seen term sheets from other lenders offering IO under other unique circumstances.", "replies": [{"id": "g55hpov", "text": "Awesome context, thank you.", "replies": [], "depth": 6}, {"id": "g55i0b0", "text": "I always take I/O for exit flexibility, I don\u2019t want sale dictated by open prepay at maturity date.", "replies": [{"id": "g55io6s", "text": "Floating rate loans typically don\u2019t have pre-payment penalties. Varies per bank, but that\u2019s normally the case", "replies": [{"id": "g55j25v", "text": "That is why I take floating rate loans - never fixed, like I said I don\u2019t want my sale dictated by open prepay at maturity date on a fixed rate loan.", "replies": [{"id": "g55lyth", "text": "IO loans have payments consisting of interest only, no principal. \n\nFloating rate loans are principal and interest, very different.", "replies": [{"id": "g55mb54", "text": "Floaters = IO, ive never heard of an amortizing floating rate loan (well until you\u2019re in the extension period or year 5 on a GSE)", "replies": [{"id": "g55ncot", "text": "Most existing (pre-COVID before rates dropped) CRE loans for stabilized properties are amortizing with a floating rate. Just an FYI.", "replies": [{"id": "g55tqgt", "text": "I\u2019ve never seen that for an I/O loan - I\u2019ve only seen it amo in extension term - and that\u2019s across all property types globally. Learn something new everyday.\n\nI guess as a caveat I\u2019ve also never bought a stabilized property or originated debt for one.", "replies": [], "depth": 12}], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g54drqs", "text": "It's available for GSE loans, but loan amount needs to be $1MM + and lower leverage gets more IO, but still need to be $1MM+ loan amount. There are also covid reserves for P&amp;I. Not many banks will go to 80% leverage unless existing relationship for HNW individuals.", "replies": [{"id": "g7tc3wm", "text": "This comment \ud83d\udc46\ud83d\udc46\nCan also attest. Got a ~$20mm Fannie loan on a broken condo deal in FL with 80% of units owned. But only 65% LTV. IO for 12 years. Did have to do an escrow with 6 months of interest. \n\nTo answer OP, I would say yes, it\u2019s a thing of the past, in my experience.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g54h5gm", "text": "I/O 100% still exists, you can get to 80% from a bank if your an UHNW with balance sheet guarantee. GSEs will do 80% for a tier 1 sponsor. Maybe FNMA would get you to like 70% on it if you have a personal guarantee on it, Freddie wouldn\u2019t go that high for that small of a deal. My $0.002", "replies": [{"id": "g54k63i", "text": "Thanks for this. I know the building sizes sound small but purchase prices here will range from $3M - $8M so loan amounts will be large.", "replies": [{"id": "g55av6o", "text": "That\u2019s still tiny - I honestly don\u2019t know if Freddie will go that low (ie a 4mm UPB) unless it\u2019s part of a larger crossed facility that gets them to like 20+ but I\u2019m sure a GSE originator is on here who can co firm.", "replies": [], "depth": 3}], "depth": 2}, {"id": "g56p3hw", "text": "Fannie doesn't take personal guarantees.", "replies": [], "depth": 2}], "depth": 1}, {"id": "g54ixhs", "text": "You can still get an IO period for renovation &amp; stabilization but the \"I just want 3 years of IO to juice my returns\" is a much harder sell right now given the uncertainty about the future of market rents/consumer preferences.  You may still find some 80% LTV lenders but most projects are getting beat up on the vacancy &amp; collection assumptions in the time of COVID job losses &amp; eviction moratoriums so you're getting crimped on the underwriting cash flow not the appraisal.  At least comp sales and rents haven't cratered too much... yet.", "replies": [{"id": "g54ki4d", "text": "What makes this even more difficult is these properties are vacant and will need leased up so that probably changes the calculus as well.\n\nOf course I was looking at IO to make the returns more attractive to our equity partners but these will ultimately be buy and hold properties so I wouldn't mind locking in a decent sub 5% assumable non-recourse product.", "replies": [{"id": "g55bxep", "text": "I\u2019ve seen institutional rates sub 2% lately. Debt is practically free.", "replies": [{"id": "g55tqba", "text": "We just got a 2.16% and I thought that was ridiculous... Sub 2% is nuts.", "replies": [{"id": "g55ub8j", "text": "Got a client who got L+150 no floor. That\u2019s like 1.65% money. It\u2019s unheard of here in the US.\n\nMy in-laws have had 1% money for a decade in Germany. It\u2019s going to be the new normal in the US, especially if we have another 10 year recovery.", "replies": [{"id": "g56x9be", "text": "What kind of balance sheet does that client have?  If you dont mind me asking.", "replies": [{"id": "g570fyw", "text": "Several $3B REITs that they sponsor", "replies": [], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g54k54i", "text": "I was looking at the same multifamily sizes, in a very strong market and seeing most lenders were requiring *at least* 30% down, one lender required 44% (keep in mind this is a deal that had better than market cap rate and strong cash flow at 25% down). I shopped 8-10 lenders and got the same answer across the board. The best I could get was some local lenders who were willing to meet me right at 30%.\n\nIt comes down to DSCR. Most lenders are underwriting with much higher vacancy/reserve assumptions and higher coverage needed on top of that. I also had someone say they were lending at 2.8% rate, but for underwriting had to use a 5.5% interest rate when calculating debt service \u201cto be conservative\u201d (even though this was a fixed rate product). It\u2019s why you\u2019re probably seeing a significant slowdown in multifamily deals in most markets with less than 7.5% cap rate or so. Anything less than that tends not to meet the tightened up requirements at reasonable down payments.\n\nIMO this is all nonsense. With such low interest rates, lenders aren\u2019t really that interested in deploying long term capital right now so they get to be extremely picky.", "replies": [{"id": "g54meo6", "text": "Ouch! I was afraid of this.  The problem I'm having is that I'm not seeing pricing correlate with these more strict lending requirements (at least in my market). Condo sales (and therefore developers) are propping up pricing on multi-family properties in my market.\n\nAre you still moving ahead with deals? I can't imagine what 30% - 40% down payments are doing to your returns.  Are you just willing to accept lower returns or simply putting your cash elsewhere?", "replies": [{"id": "g54o3l3", "text": "Almost every market is moving slower. Prices aren\u2019t changing much (some urban areas like SF are starting to see a hit), but volume is way down in essentially all major markets.\n\nI proceeded because it was a 1031 and I wasn\u2019t about to eat that tax bill. But I took on less leverage than I\u2019d like to and a worse rate. Big lenders may do you for sub 3, but smaller lenders are hanging out closer to 4, maybe a tick below. \n\nRight now is a tough time to 1031. I would recommend proceeding cautiously, given the minimum debt requirements combined with lenders increased DSCR requirements can yield a very narrow purchase range.", "replies": [{"id": "g54qr86", "text": "What were the DSCR requirements for the lenders that you shopped? Higher than 1.3?", "replies": [{"id": "g54t0cg", "text": "I don\u2019t recall exactly. The exact number didn\u2019t even matter because it\u2019s not like you could calculate it without the bank anyways. They would say it was something like 1.25 or 1.3 but then do all sorts of arbitrary adjustments to income/vacancy/expense assumptions that make it a nonsense number.", "replies": [{"id": "g557oew", "text": "Gaining an understanding of how each bank calculates their underwriting DSCR is unbelievably important before choosing to move forward with financing. \n\nFor starters, how much does the bank rely on the appraisal for determining income and expenses? To a \u201cT\u201d or as a frame of reference? \n\nWill they use appraisal market rents for vacant units? Typically we do, but I\u2019ve underwritten loans both below and above appraisal market rents. \n\nDo they have a minimum underwriting vacancy? If market vacancy is 2%, will the Bank still use a minimum underwriting vacancy rate? \n\nDoes the bank have a set formula for including replacement reserves (either $/unit or %EGI)?\n\nDoes the bank have a set formula for including management fees even if the property is self managed? \n\nWhat interest rate does the bank use for underwriting? Will minimum DSCR be dictated using the actual or underwriting interest rate? *Just an FYI, banks take into consideration refinance risk when calculating DSCR. Sure, rates are low now, but what if rates increase over the course of the loan? If a loan is underwritten using a 2.8% rate, the borrower could have to pay the loan down in order to refinance.*", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "g5535p8", "text": "Just did an 80%. Have not seen i/o recently.", "replies": [], "depth": 1}, {"id": "g55c9he", "text": "The market is most liquid in the 50-65% LTV range. Are there lenders who will go higher? Sure, for the right price. Debt funds are all over that part of the market but with coupons around 4-4.5%.\n\nEven at lower leverage, most lenders have floors so you\u2019re seeing coupons in the 2%-2.5% range these days for multi.", "replies": [], "depth": 1}, {"id": "g56p0er", "text": "We placed an 80% LTV loan at 2.99% for a 16 unit multifamily in Michigan two weeks ago. It was a regional bank deal, sub $1 Million. \n\nYou'll typically NOT be at a true 80% LTV with Fannie or Freddie anymore for two reasons:\n- Freddie eliminated 80% LTV for smaller markets.\n- Both have added higher reserve requirements which requires the borrower to bring more cash to the table, in any size market.", "replies": [], "depth": 1}, {"id": "g579298", "text": "Short answer, no. \n\nA lot of the comments on here are from people that clearly have no idea what they\u2019re talking about. Agency is still doing lots of deals at 80% LTV with IO, granted the DSCR reserves do effectively lower your LTV at origination, but that money gets released after 12 months +/-. On the other hand, traditional banks have never really been players in the 80% plus IO space to begin with. Most have always maxed out at 75% with no IO.", "replies": [], "depth": 1}, {"id": "g57mnnz", "text": " Where are you looking?", "replies": [], "depth": 1}, {"id": "g581jml", "text": "I work for a credit union as a commercial underwriter and we still offer 80% financing on all properties. I/O stuff though we don't really offer outside lines of credit and some 2 year time notes but that's more for acquisition of vacant land for some of our more frequent borrowers who buy the land, build a house, then either refinance/sell the house. Usually they're paid off in 8-10 months but we give them two years just to avoid any extra leg work and due diligence if it takes a year for them to get the house built.", "replies": [], "depth": 1}, {"id": "g58dk7e", "text": "I'm not sure about smaller projects but in the 100ish unit range we've gotten IO for 36 months recently. 24 months is pretty standard. Can't get 80% LTV to save our life.", "replies": [], "depth": 1}, {"id": "g5igs14", "text": "First time buying commercial real estate.\n\nThey are offering me a 70% LTV, 25 years Amortization, with a 4% interest and 6 months of principal + interest payment to be held in a escrow account.  My credit score is 740+ and the deal is 15 units with 9% current market cap rate. (in south florida). My broker said this is the best that i can do right now.\n\nThough on this quote? Is this the best i can do under the current market situation or should i shop for more lenders?", "replies": [], "depth": 1}, {"id": "g5xyg0q", "text": "Just got 70% LTV 10 year IO and 80% LTV 3 year IO. \\~2.7% FWIW (multifamily, $3M+ loan size). Agency debt\n\nNot sure if you are including reserve reqs at all in calculation", "replies": [], "depth": 1}, {"id": "g7ajsq4", "text": "I\u2019ve had multiple deals quoted over $5mm with full 10-year term io. 100% doable. Ltv will be closer to 70%", "replies": [], "depth": 1}]