Posts Tagged 'commercial real estate loan'

Notes from CREF – Commercial Real Estate Finance Confrence

This week commercial lenders and brokers got together in Las Vegas to discuss the state of the commercial real estate business and to convince each other to do business.   The meeting was well attended and optimism was in the air.  Everyone thought business would be good this year, well at least in comparison to last year.   But how could it have been worse given in 2009 lending was way down and real estate values collapsed.   While this meeting was focused on all types of commercial real estate, but a large part of the focus was on apartment lending. 

There were not many new announcements from Freddie or Fannie.  Both lenders stressed that they will continue to support the market and that they do not expect government action to change their structure  or focus during 2010. 

HUD was one of the big topics of the conference.  Over the last year this has been a main lender for many brokers/mortgage bankers.  For years HUD has been seen as a process oriented lender and one that does not really look at risk in the same way as the rest of the market.  It looks like that might change.    As mentioned in previous postings, HUD is planning on changing their underwriting criteria.   Based on comments made at the MBA it also seems that they will change their focus to a more market oriented approach.  Only time will tell.

Life Companies and  Conduits were abuzz about lending again.  Most Life companies were back in th market and a bunch of conduits were also back, at least for larger deals.   However, these lenders all indicated that they would not compete with Freddie and Fannie on apartment rates and therefore were focusing on other areas of commercial real estate.  It’s good that these lenders are back, but for now that won’t really effect the multifamily lending market.

There were no big announcements or sunrises at the meeting, but based on the tone and vibe at the event most professionals think commercial real estate lending may be ready to emerge from its cocoon.   I am not as optimistic and think we have another year or so before we start to see significant lending activity.    However, you have to walk before you run and I think we will be at least walking  (or crawling) this year.


CMBS is Back, Sort of.

Last year we saw some green shoots of CMBS issuance and lenders’ coming back into the market, but the New Year has seen real activity.  There are 5 major lenders who have reconstituted their programs, are hiring staff and marketing their programs.  This includes BOA, Citigroup, Goldman Sachs, JP Morgan/Chase and Bridger.

While this is exciting news, I don’t think it will have much effect on multifamily lending.   Given the economics of these deals they will not really compete with Freddie Mac and Fannie Mae and therefore will probably end up lending on other commercial real estate types.   Over time this might change.  We really don’t know what will happen with Freddie and Fannie as institutions or how their underwriting criteria might change.  For now they have a significant pricing advantage over CMBS and all other lenders, which makes them the lenders of choice.  However their underwriting does not fit every deal and as we find out what these CMBS lenders can really do they may be the right fit for some borrowers.

General Terms

Collateral:     Stabilized properties, all lenders will do multifamily and the three other main types of commercial real estate, but leverage will be adjusted depending on product.

Loan Amounts:   Most are looking for deals $10 million through $25 million, but one lender will look at smaller properties

Loan Term:     5, 7 or 10 year balloon loans

Maximum LTV:   60% – 75% depending on property type.  Multifamily is 70% – 75%

Minimum DSCR:    1.25 – 1.35 depending on property type, multifamily is 1.25x

Estimated Rate:     6.75% – 7.75%

Origination Fee:    1% to lender and probably another 1% to the broker/banker

Other Costs:     Typically $15,000 plus costs per loan

Prepayment:   Yield maintenance or defeasance, some lockout for the first couple of years.

In general the structures are similar to old CMBS deals, but the leverage is less and the underwriting scrutiny is higher.  For multifamily borrowers who fit into the Freddie or Fannie program that will be a better execution.  However, these programs might be a good fit for borrowers in secondary or tertiary markets where Freddie and Fannie are more conservative.  For now we will have to see what loans actually close with these lenders to see what they can really do and who they will really help.

Do I really need to send in all these documents?

I often get asked by clients why the need to send me so much information just to get a quote on a loan. They want to tell me what they think the property is worth and think I should then be able to give them a firm quote. They tell me other mortgage brokers do give quotes on such limited information. All I can say to that is garbage in/garbage out.

You need real information in order to get a good quote, one that can be delivered and closed without changes or re-trading. A good mortgage banker or broker will analyze the information you provide and present it to a lender in a format that allows you to get the best loan. Without having all of the information the lending package is limited and you don’t get the best quote from a lender.

While you should be able to get a rough indication quote with just the rent-roll, year-to-date or trailing 12 months statement, the last full years income and expense statements and a brief description of the property. However, the more information you provide your mortgage broker/banker the more accurate quote you are likely to get.

 The information listed below is a mortgage banker/ brokers wish list. It’s not necessary to send in all this information, but the more you have the better they will understand the property and the more accurate the quote.

Current rent-roll – This is critical and the loan can’t be underwritten without a rent-roll. Most lenders base the GPI of the property on the current rent-roll. Also, it is impossible for me to determine if rents are at or under market without such a document.

List of asking rents and concessions – This is not a critical document, but it allows the lender to see the upside or downside in the rent-roll.

Trailing 12 months income and expense statement – This has become an increasingly important document over the last few years and is a required document with many lenders. While lenders ask for full trailing 12 month statements they only really need trailing 12 months of income. This is a month by month statement listing the collections of rental and other income. Only with this can the lender see the trend in collections.

Year to date income and expense statement – During the first few months of the year this is not very important, but as it gets towards summer and later in the year this is critical. Also, if you have expensed any capital improvements such as carpeting, appliances or major rehab work you should provide an explanation of these costs so the financials can be adjusted.

Last three full years income and expense statements – Having at least two years historical income and expense is critical, but having three years is very useful. If there is a nice trend of increasing income it is easier to convince a lender to trend rents in underwriting your loan. As with the YTD statement above, if you have expensed any capital improvements such as carpeting, appliances or major work you should provide an explanation of this so the financials can be adjusted. Without such information your statement overestimates your true operating expenses.

A description of the property – This is critical. Any description should include the number of units, their size, type of heating system, appliances, in unit amenities and property-based amenities. This should also include a description of any recent or planned capital improvements with estimated costs, if possible. The lender will eventually find out the true condition of your property and if the property is worse than initially indicated they will probably change their quote prior to commitment.

Photos of the property (interior and exterior) – Lenders will usually require photos before issuing a firm quote. If I am able, I usually take these photos myself, but if a borrower sends me photo’s it makes the lenders job easier and makes it quicker to get a quote.

Resume of the borrower and management company – This should include information on the exact legal name and type of borrowing entity as well as information on the principals of the borrowing entity. It should include how many properties you own or manage and an estimate of your net worth. If you are looking for a bank or construction loan you should also include your current financial statement. Getting this information in written form is not always necessary. This information can be gained through in a phone conversation, but it is easer and quicker if it comes in written form.

Borrower Financial information – A copy of the borrower or borrowing principals financial statement is important.  Loans today are not just based on the collateral but the borrower.  Without knowing the borrowers net worth and liquidity position you really can’t tell if a loan will work or not. This is also information that can be obtained through a conversation, but before the loan goes forward the actual statement will be required.

A brief description of the location/neighborhood – This is not critical information, but it is certainly helpful. As an owner you probably know the best points about the property’s location and unless you share that information the lender may not find out how great a location you have. As they say real estate is location, location, location so giving a good description of the location can help you get a better loan.

A request for what you want – In order to get what you really want you need to ask for it. Unless you tell someone you might want a 25-year loan you will probably get a quote for a 10-year loan. If you want a certain dollar amount or maximum proceeds please let you lender know. You can ask for more than one type of quote, but unless you ask, you won’t get a quote for what you want.

Copies of existing reports – While getting copies of existing appraisals, environmental or engineering reports is not necessary, it is certainly useful. Even if these reports are old they give excellent descriptions of the property and issues that might need to be addressed on a loan.

 A description of any issues you see at the property – Through the due diligence process lenders will find out everything about your loan. If issues are found out late in the process you have limited negotiation strength. If, however you bring up issues early you will be able to negotiate the solution from strength. Once you are processing a loan most lender think they have your business, but if you negotiate issues before going under application they are still trying to win your business and therefore must negotiate with you.

The difference between 30/360 and actual/360 and why should you care?

Do you know how your lender calculates your monthly payment ad amortization schedule.   Its not as simple as you think.   In fact your lender may be calculating your payment differently than you expect or know.

A few years ago there was a lot of talk about payment methodology. People were talking about 30/360 payments, actual/360, actual/365 and all sorts of different methods to calculate your monthly payment.   From my perspective these various payment methods were just ways for lenders and brokers to hide the real deal and fool borrowers.  Today you don’t hear much about this issue, but its still an issue and one you need to understand in order to property evaluate your loan options.

For most of the 20th century, all lenders used a 30/360 calculation in determining your monthly payment.  They assumed every month had 30 days and each year had 360 days. This allowed for easy calculation of interest rates and amortization schedules. A 30/360 calculation is listed on standard loan constant charts and used by your calculator or computer in determining mortgage payments.

During the mid 1990’s the Wall Street lenders started using actual/360 or actual/365 payments in mortgages.  These are methodologies used in some other debt instruments sold on wall street.  These methodologies call for the borrower to pay interest for the actual number of days in a month. This effectively means that you are paying interest for 5 or 6 (on a leap year) additional days a year.  By doing this a lender can quote you a lower spread and rate on a transaction but actually collect the same or a greater amount of interest each year.    

The difference between actual/360 and actual/365 is the monthly payments not the overall yearly interest charge.  Both calculations charge you interest on the actual days in a month, but on the 30/365 loan your monthly payment is increased by the extra 5 (or 6) days of interest.  On an actual/360 loan the monthly payments are the same as on a 30/360 loan, but the amortization schedule is adjusted to account for the difference in interest.  Therefore, your balloon balance for an actual/360 loan would be slightly higher than for a 30/360 with the same payments. An actual/360 loan will have a balloon balance approximately 1% to 2% higher than a 30/360 loan with the same payment.

At current rates of about 6% the difference between an actual/360 or 365 loan and a 30/360 loan translates into about 8 Bps.  So in order to compare a 30/360 loan to actual/360 loan you should subtract 8 Bps or so from the 30/360 quote to put it in the same terms as an actual/360 or 365 quote. 

While the Wall Street conduit lenders started this trend, the Freddie Mac and Fannie Mae multifamily groups followed quickly behind.   Freddie and Fannie found they were losing deals to conduit lenders because of the quoted lower spread and its lower payment even thought he effective interest rate charge was the same or in some cases higher.  They started offering actual/360 loans in addition to 30/360 and today you can request a loan using either calculation.    Though the conduits are dead you still see most Freddie and Fannie quotes being offered as actual/360.    This is because it makes the rate sound better, lowers the monthly payment and makes it more likely the borrower will go ahead with the loan.   However this is not always te case so ask your lender what calculation method they are using.

While most Freddie and Fannie loans are being quoted as actual/360 this is not true of most other lenders.  FHA/HUD loans are quoted as 30/360 as are most life insurance company loans and almost all bank loans.   Therefore when comparing a Freddie or Fannie loan to a quote from another lender you must adjust for the payment methodology.

What’s the better methodology?  It really does not matter as long as you understand the difference.   Some people prefer actual/360 because it’s effectively a longer amortization schedule.  I personally prefer 30/360 because I can calculate the payment myself on my trusty HP 12c.  On an actual/360 loan I need an excel spreadsheet and still need to ask the lender for a printout of the actual payment and amortization schedule to make sure I am correct.   Whichever you prefer just remember to ask what payment methodology your lender is using so you can properly evaluate your loan quotes.

Interest only vs. amortization in today’s multifamily market

In the good old days, before the collapse of the CMBS market and partial failure of the banking system, interest only (I/O) loans were everywhere.  Banks were offering them, Life Companies were offering them, and Conduits were putting them on practically every deal as were Freddie and Fannie.   And it wasn’t only partial I/O, for the first year or two of the loan term; it was full term I/O, for the life of the loan.  The thought was that I/O improved the cash flow for the investor and with cap rates running at historic lows this extra cash flow was needed to support the value.  If you had to pay amortization then you could not support the debt service and still get a reasonable return.  Anyway, principal payments aren’t tax deductible so why pay them.   No one cared about principal pay downs because the values of these properties were going up so there was really no refinance risk.  

How times have changed.  For the most part banks have pulled back from I/O loans and, in fact, have generally shortened their amortization schedules.  The standard for banks doing apartment loans now is a 25 year amortization schedule.  Some banks are willing to stretch their amortization schedule to 30 years for a good deal or client while others are shortening the amortization to 20 (or even 15 years) for more risky loans.  Conduits have disappeared and most Life Companies are hiding from new loans, but Freddie and Fannie are still lending and still offering I/O.

First let’s talk about what they are offering.  Since both lenders have become more conservative they have also pared back their I/O offerings.  For 5 year loans, I/O is only available on lower LTV/higher DSC loans and typically for only the first 2-3 years of the loan term.  To get the full term, 5 years I/O you need to be 55%-60% LTV.   For 7 year loans the story is not much different, but a 65% LTV loan (in a good location with a good borrower) will probably be able to get full term I/O.  On 10 year deals (which are most of what Freddie and Fannie do) 2 years of interest only payments are available on most loans.   However, in order to get full term I/O you need to have a very strong DSC.

So interest only is clearly available for many multifamily deals.  However there is a big change from the “old days”, back then I/O was not really considered as a risk factor and I/O was free.   The CMBS bond investors did not require a higher spread for I/O deals so they must not be riskier deals.    While many lenders did personally recognize I/O as a risk, they had to play the game in order to get business so they did not price up for I/O and made these loans without a second thought.  Today lenders do recognize that I/O is a risk factor and offer it only on loans they think deserve it.  It’s no longer an automatic, but in general I would say Freddie is a bit more willing to offer I/O, particularly partial I/O, than is Fannie.  Lenders are also pricing up for I/O.   Fannie is generally adding 1-2 Bps per year of I/O and Freddie is adding 3 bps per year.  These are not exact add-ons and each deal is priced individually, but it’s a good rule of thumb.

So does it make sense for a borrower to choose I/O?  Let’s look at a couple of examples.  Below are two examples of I/O vs. an amortizing loan, one for full term I/O and one for 2 years of I/O, both on 10 year loans.  It’s clear to see that from a purely nominal dollar amount the amortizing loan makes more sense than the I/O deal.  On the full term I/O you save about $50,000 per year in payments, but have to pay back $815,000 more at maturity.  That’s over $300,000 of additional money you pay the lender over the life of the loan.    For the 2 year I/O deal the story is basically the same.            


 Full Term I/O


 2 years I/O





 Loan amount            $5,000,000               $5,000,000
 Amortizing rate (30 years)                   6.00%                     6.00%
 Amortizing Payment              359,730                 359,730
 I/O Rate                   6.20%                             6.04%
 I/O Payment              310,000                302,000
 Payment after I/O period                  361,275
 Total Payment savings from I/O              497,303                103,103
 Amortizing maturity balance            4,184,286              4,184,286
 I/O maturity balance            5,000,000              4,392,247
 Additional Maturity balance on I/O              815,714                207,961
 Total Cost Amortizing Loan            2,781,589              2,781,589
 Total Cost I/O Loan            3,100,000              2,886,447
 Additional cost of I/O loan              318,411               104,858
 * assumes a 10 year loan, 30/360 payment and 2 Bps per year add on for I/O

 But this analysis does not take into account every factor.  It does not account for the time value of money, basically a dollar today is worth more than a dollar in the future and it does not account for the different tax issues.  To do the analysis correctly you need to discount the actual after tax income from the transaction and run either a net present value (NPV) or Internal rate of return (IRR) on your investment.  I focus more on the IRR, but both methodsare valid.  If you look at a sample investment with these example financing options you find that the amortizing loan has a slightly better IRR than the I/O loan.     If the rate for the I/O loan were the same rate as the amortizing loan, as it had been in the recent past, then, the I/O loan is a better option.  In my examples the break even for the two deals is about 2Bps per year for I/O.     This is about the charge for a Fannie I/O loan, but below the Freddie cost.  Therefore for a Freddie deal the I/O option may not be as attractive, from a purely finanncial stabdpoint, as their amortizing loan.

Actually the best deal in today’s market is the partial I/O loan.  A 2 year I/O offers the best of both world’s with some amortization to take care of the refinance risk, but better cash flow in the first few years.   This loan yields the highest IRR of the three options.   If you do take this choice be aware of the risks.  Your payment will increase dramatically at the end of the I/O period.  That payment shock is something to keep track of because once you get used to the higher cash flow generated from a low debt payment it can be hard going to the higher payment.

There are other factors to consider in choosing I/O.   For many owners who are raising funds from investors the I/O deal is better.    Investors get better initial cash on cash (CoC) return (which are what investors mainly look at) so even if the overall IRR or NPV is the same or worse doing the I/O deal may make sense.    On the other hand a full term I/O deal is assuming the properties value will increase over time or you are borrowing initially at a low LTV.   Borrowers who choose full term I/O a few years ago are having trouble refinancing and may loose their property because their mortgage is ballooning at the wrong time.  The markets won’t let them refinance because of lower property values and/or more stringent financing criteria.   If their loans were amortizing they may have had a better chance to refinance or work out the loan with the existing lender.

As I said earlier this analysis needs to be done individually on each transaction.  If you are looking at loan options and want assistance with that analysis or are you don’t know where you can get an interest only loan please feel free to e-mail me to discuss your situation (

Loans options for owners of small multifamily properties

You hear in a lot of places that the only commercial loans available today are for apartments.  Apartment loans are available especially for larger apartment project (over $5 million) where the agency lenders, Freddie Mac and Fannie Mae, and HUD are keeping the market going.  These lenders are offering very aggressive rates and in some cases aggressive loans.   HUD loans are still available up to 85% LTV and Freddie and Fannie loans are available in the 75%-80% LTV range in most markets.  However, Freddie and Fannie do not generally service the smaller loan market.  You can get a loan from them in the $3-$5 million range, but only if you find the right correspondent lender.  For loans under $3 million its very tough to get a Freddie or Fannie lender interested in talking to you at all.


So for smaller properties is there capital still available?  Thee quick answer is yes.  Owners of properties under $5 million still have choices.   There are fewer choices today compared to last year, but of coarse who has more choices today when compared to last year.  There are still some banks lending and some Fannie lenders are offering loans to borrower needing between $1 and $3 million.  


Over the last week my office called over 100 banks in the Chicago area looking to see who is lending.  We found 21 banks (about 20%) who said they were willing to consider new loans.  A slightly smaller survey earlier in the year found almost 50% of the banks we called saying that they were lending.   Additionally many of these lenders who said they were looking to make loans were offering terms so onerous that I would not really consider them in the market.   These banks were only willing to do amortization schedules of 20 years or less and/or requiring LTV’s under 60%.  The rates offered had a wide range with some offering rates slightly below 6% and others being at 7.5% or higher.  In reality fewer than 10 loans were really looking for new loans and wanted to compete for new business.


The good news is that the terms from these banks were pretty good.   Maximum LTV’s were typically 75% though some lenders were willing to consider 80% for the right borrower and property.  Most lenders wanted a 25 year amortization, but some were willing to do 30 years.  Terms were typically 5 years with flexible step-down prepayment premiums and low fees.    Most banks were quoting rates between 6% and 6.75%, but a couple of banks were quoting rates below 6%.   These rates are up 25 – 50 Bps from our survey performed a few months ago.  The one negative for most of these quotes were the requirement for a depository relationship, typically the operating accounts.   In general banks are looking for relationships and not just a loan transaction.


In addition to bank loans there are also a few lenders participating in the Fannie Mae small loan program.  These loans are only available in major markets, but they offer low fees and great rates.   Additionally, your loan really needs to be above $1 million.   These are the best deals out there for smaller properties.   The LTV’s are typically 75% or less with debt service coverage ratios of 1.25x or greater.  The loans are often quoted as recourse loans, but non-recourse is available for the right deal and/or borrower.   These are probably the only non-recourse loans available for smaller properties.  One small loan lender has fees of just 12.5 Bps ($2,000 minimum) including all lender legal and reports.   This is the kind of fee structure that makes sense for loans of this size.  Fannie small loan rates below 6%, for a 5 year loan and just over 6% for a 10 year loan.   These low rates with this cost structure should not be missed.  The one negative of this loan is the prepayment premium is yield maintenance, but at this rate the prepayment premium is probably worth it.


If you need assistance in finding a loan send me an e-mail (   To stay current on rates and trends in multifamily finance visit our web site and subscribe to MFLoan Update, our monthly newsletter on multifamily finance.

CMBS lending – Will it ever come back?

There as been a great deal of discussion about the future of CMBS and other types of securitized lending.  Will it ever come back? When will it come back? What will it look like when it does come back?   I have gotten a lot of questions about this since I wrote a blog posting on the Freddie Mac CME program.    Let’s get real, CMBS is not DEAD, but it is too early to know anything what the future will bring. 


Why am I so sure that CMBS is coming back?   Its simple, the capital markets are where the money is.    Lending has gotten too big to do it the old way with banks or insurance companies taking in money and then lending it out the back door.   And the ability for banks and insurance companies to get direct leverage from their own balance sheet is being limited not expanded.   Only through access to the capital markets will they be able to leverage their expertise and balance sheet to satisfy borrowing demand.   Once the general markets stabilize and there is confidence that the economy is strong, then CMBS will be back.  As long as the issuer can show they are really underwriting their loans and making “good” investment decisions the security investors will return.  They may require a higher interest rate, but they will return.


The most discussed issue relating to securitized lending is how to align the economic interests of the banks or originators and the security investors.  There have been many ideas discussed to accomplish this and its how CMBS was in the bad old days of the late 1990’s.  At that time the groups that originated the loans often bought the “B” or risky piece of the security so they made sure the loans were well underwritten and documented.  While its important to align the economic interests of the investors and originators (lenders) there are some legal issues that might be harder to overcome. 


You have probably heard the worries from lenders’ about the General Growth bankruptcy.  This is directly testing the issue of single asset entities.  In securitized lending each borrower is set up in a single asset entity so if it goes into default or bankruptcy the lender can cleanly foreclose on the property.   General Growth is a mall owner/operator which is the sole owner of a number of single asset entities.  These entities were set up for individual properties in order to accommodate the CMBS loans.   When General Growth went into bankruptcy it also took most of the individual single asset entities into bankruptcy.  They did this even though many of these properties were generating enough cash to pay their debt.  The concern of lenders is that the court might use cash flow and/or value from one entity to pay obligations of other entities.  In effect this would negate the benefit of single asset entities and make it harder for someone to lend on “just the real estate” and not the overall borrower.    How this will play out is still unclear, but this concern is buzzing around in the world of lenders.


Another, and from my perspective more worrisome, legal concern for securitization was recently highlighted in NY Times article Looking for the Lenders Little Helpers.   This showed how attorneys are claiming that the securities holders are really joint venture partners of the lender because the loans were created solely for the purpose of creating the securities.   This is an interesting approach and if it wins in court has the risk of putting the security holders and issuers in legal bed with the originator or lender.  This is effectively removing the holder in due course protection of a note holder and will mean the holder is liable for improper acts of the loan originator and could be responsible for statements, side agreements and promises of the loan originator.   This is a big deal.   From the article it sounds like courts are buying this argument for single family loans.  Whether this will fly on a commercial or multifamily deal is unknown, but its something we should keep watching.


If these legal issues do become the force of law it will drastically change the way securitized lending will occur.   It will also change how Freddie Mac, Fannie Mae and HUD financing occur since these lenders rely on the same legal standards.  However, these are issues that can be overcome.   Solving some of these issues may require new legislation or a different type of underwriting.  It may change how CMBS is originated or who does it and it will change what types of loans are available to the borrowing public.   However, I have herd it quoted that almost ½ of all lending in America was done on a securitized basis.  With the kind of money that generates we will find a way to save the baby and not throw it out with the bathwater.

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