Unknown Truths About Financing Commercial & Multi-Family RE

[David Hamilton]

Hello All,

I am new to the Bigger Pockets forums but have been listening to the podcasts for several months now. Although I certainly get a TON of value from the platform already, I found that more sophisticated, nuanced advice for financing commercial and multi-family real estate was sorely needed. 

I think one of the common misconceptions of commercial/multi-family is that the loan underwriting process is similar to residential. This could not be further from the truth. Residential (1-4 units) is almost completely dependent on the financial strength of the individual borrower(s) (income, credit score, debt/equity etc). In contrast, commercial and multi-family (5+ units) underwriting is MUCH more dependent on the metrics of the property itself. In order to qualify for commercial/multi-family conventional financing, there are two basic parameters that need to be met. 

1. The Net Operating Income (NOI) of the given property must be in excess of 1.15x-1.25x the loan payment

2. The total loan to value must not exceed 75-80%

As long as these two metrics are met, a borrower would be well on his/her way to approval. Of course, if the individual borrower has a checkered history (bankrupticies, foreclusures, felonies, etc.) there might be an issue. With that said, I have been able to secure pretty good terms for borrowers with a less than stellar financial profile simply because the property itself was such a gem.

What are the various types of capital sources for Commercial/Multi-Family real estate financing? I think most people know about Fannie Mae and Freddie Mac. These Government Sponsored Enterprises (GSE's) dominate the multi-family lending arena. Most people probably also know about the big banks such as Chase and Wells Fargo which are very active in the apartment and commercial sphere. In addition, some may know about Commercial Mortgage Backed Security (CMBS) lenders. These (along with residential mortgage backed securities) were the "bad loans" that were being made in the early to mid 2000's. I would recommend watching "The Big Short" if you are interested in learning more about these. CMBS loans are still around today and provide an important source of liquidity for commercial/multi-family financing.

With all that said, I am here to try to add value to The Bigger Pockets Community. I think I can do that by introducing a couple capital sources that are a little bit more under the radar...

The first is Federal Credit Unions. I have closed many loans with Federal Credit Unions over the past several years. The great thing about CU's as a source is that they can lend to a borrower no matter his/her location on properties across the nation. There is generally no geographic limitation. Also, by law, these loans have ZERO pre-payment penalties. I often place these loans for my borrowers that plan on adding a lot of value to the commercial or apartment property and want to make sure they do not incur a penalty once they sell or do a cash out re-finance. Finally, Federal Credit Unions also generally have low origination costs and 30 year amortizations which helps maximize cash-flow.

The second source I would like to discuss is Life Insurance Companies. Life Co's might be the most misunderstood source in the Commercial lending landscape. Even though Life Co's are routinely responsible for 10%-20% of all originated commercial loans, their role is often understated. I understand why... "Why would Life Insurance Companies be such active participants in Commercial and Multi-Family Lending?" The answer is actually pretty simple. Life Insurance Companies have long-term liabilities (policies) and they need to invest their monthly premiums in order to ensure that they are getting the return necessary to pay out on those policies. Because these policies are long-term liabilities, life companies want to match them with long-term assets. They do this by providing mortgages that otherwise don't really exist with the other previously mentioned capital sources. 10 years fixed... 15 years... 20 years... even 30 years! In fact, I just closed a $5,000,000 30 year fixed rate senior housing loan on a property in San Diego.

What else makes Life Companies unique besides the benefit of providing a long-term fixed rate and eliminating interest rate risk? 

• They provide loans that are non-recourse (no personal guarantee). This helps borrowers insulate the risk of that loan to just the property itself.
• They carry extremely low interest rates. Generally no other capital source can match the rates life companies can offer.
• No global underwriting. They generally only care about the asset and will not require an invasive individual underwriting process.
• Certainty of execution. Life companies rarely "re-trade" on loans. When they issue an application, it is pretty much a done deal.

Hopefully this post has added some value for the BP Community. Keep Killing it! I would love to talk with everyone further. This is such a great platform for sharing ideas and building wealth. also BRANDON AND JOSH this is my first official request to earn the privilege of joining the podcast!

David Hamilton