What is needed to qualify for a non-recourse loan for commercial?

Question

Im interested in procuring a non recourse loan for commercial investment purpose. What would be the expectations and qualifications for me as the investor?

Brian Burke · Answer

Requirements vary widely, but generally you need:

• A property with in-place cash flow producing adequate debt service coverage ratio (net income divided by the loan payment, generally looking for 1.25+).
• Potentially, minimum trailing occupancy rates.
• Well thought-out financial projections / business plan.
• Enough relevant experience to give the lender comfort that you can successfully execute the business plan.
• A net worth equal to some percentage of the loan amount.  100% is not unusual, but varies by lender.
• Cash reserves that range from a certain number of months of debt service to percentages of the loan amount.
• Good credit and track record.

Simon C. · Answer

I believe most regional and local banks offers recourse debt while Agency Debt (Fannie Mae and Freddie Mac) offers non-recourse debt. You should check out the whitepaper written by the folks at Old Capital (http://www.oldcapitalpodcast.com/) I found it very useful to understand multifamily investing. Biggest difference is recourse debt requires personal guarantee while non-recourse doesn't. Might be a little tough in the beginning to qualify for agency debt as they look to see if you have prior multifamily experience.

Ellie Perlman · Answer

Mario Broughton - You'll need a DSCR of min 1.25. The lender will evaluate it by looking at the OM, RR and T12 (provided by the broker). To sign on the loan, you'll need to have a net worth equal to the loan amount + liquidity equal to 1 year of loan payment. You can always find someone who can be your KP (key principle) and give them some equity for singing on the loan. GOOD LUCK!

John Lenhart · Answer

You have to have a decent amount of equity in the property. Depending on the program at least 80% if you do a Fannie or Freddie loan. Insurance companies will require a bit more skin in the game. Typically, most non-recourse lenders require at least $1.5 in loan principal but prefer to do amounts much higher.

These loans cost more to close too.

Charles LeMaire · Answer

$0.02 worth:  Agency loans typically have larger prepayment penalties which effects the business model (likely longer hold times).

Mario Broughton · Answer

Thank you all for your insightful response. Im currently working to meet or exceed many of the the requirements. This kind of loan make sense for the larger projects.

Dan Wallace · Answer

As with most broad questions, the answer is equally broad, it depends. Non-recourse loans rely more heavily on the project and don't rely upon the support of a sponsor. However, a lender will still want to make sure the sponsor(s) have adequate experience and financial support even though there is no personal guarantee.

The primary difference in a recourse and non-recourse loan will be the amount of initial equity required and the stability of historical cash flows. There are multi-family programs, specifically Freddie Mac, that offer very attractive non-recourse terms but the sponsors are still underwritten for experience and financial strength.

For other types of projects or projects where you don't have the requisite experience/financial strength, you can go hard money with a large down payment. But be cautious since hard money lenders are not only expensive but they are angling for you to fail so they can take your project and the injected equity.

Vasundhara Ranjani · Answer

What are the terms of a non-recourse loan and why are they better than recourse loans? Can someone explain?

Ronald Rohde · Answer

All great answers, and even some of my strongest borrowers/properties don't get to non-recourse until 12 months of P&I before a burn off. If any rehab or improvements, forget about it until those are complete and cash flowing,

What is needed to qualify for a non-recourse loan for commercial?

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