What are typical Multi family loan terms

Question

HI all,

I am closing on a 9 unit "c" class property in SE Minnesota, and the price is 400k with about a 9% cap rate. this is my first deal the is not residential, what type of terms should i expect to see for this size and type of project. I am more interested in hearing what length and type as well as amm. period, i.e. 7 year fixed with a 20 year amm. or 5/1 with a 25 year hmm. Is anyone writing these for 20% down or am i right to expect 25% down.  Any insight on rates would be helpful but fully understand this has a lot to do with my credit history as well. Hope this makes sense, any feedback would be appreciated.

josh

Michael Schmalzer · Answer

I'm a commercial lender in Minneapolis and we will typically see 15-20 year am, 5 year fixed, lesser of 75% LTC or 75% LTV.

Differentiation in amortization is based on Debt Service Coverage Ratio and condition of the property. Major things banks will look at is age of roof, age of HVAC, exterior and interior conditions, secondary uses, etc.

From a banks perspective, the last thing we want to do is own property. So, first we'll look at cash flow. Then we'll look at the collateral. Then we'll look at the guarantor.

The questions in my head, as a banker:

1a) Does the borrower have solid character? This is mainly determined from credit score. This is most important because character pays back loans... not cash flow. You could have all the cash flow in the world, but if you don't feel the need to pay back your debts, we'll incur a whole bunch of costs. So this isn't necessarily a gradation of rates or terms, but a pass fail (at this point).

1b) Does the property cash flow at or above 1.2 DSCR? Does it still cash flow when reasonably stress tested?

2) Is the property saleable? If this property is mismanaged or something happens beyond the borrower's control, can the Bank get out NOW? Otherwise we'll have to pay for winter heat, taxes, realtor fees, attorney fees, our time and sanity of trying to get rid of the property, etc.

3) What is the strength of the guarantor? Could they float the building for a bit (most)? Could they float it for the life of the loan (some)? Could they cash out immediately, in theory, (few)?

I hope this offered some insight into our brains. Best of luck! Feel free to ask any follow ups.

P.S. - yes banks will need personal guaranty.

Mike

Tim Swierczek · Answer

@Joshua Mccaffrey You can expect 25% down.  Most banks will negotiate a bit on Amortization.  For example, they may lead with 20 years, and you can ask for 25.  Usually, they don't fight this too hard.  They do often fight to stay below 30 years.

Tim Swierczek · Answer

@Andrew Johnson  agreed

Andrew Johnson · Answer

@Joshua Mccaffrey I'm with @Tim Swierczek, the will tell you 20 amor but you can ask for 25.  If the property cash-flows and you (the person) cash-flows then it's usually okay.  Odds are they'll have you sign a full-recourse loan so don't be at all surprised if they want to dig into your personal financials.  My experience has been that banks are more open to talking about 25 vs. 20 year amor as opposed to 7 year vs. 5 year fixed.  A lot of the time it's 5 year fixed with a balloon, at the end of 5 years you get the new loan (from the same bank) to payoff the balloon, rinse and repeat.  Down payments also vary between 15% and 25% but I'd say 25% is what you should have in your plan.  Anyway, the morale of the story is that terms do have some flexibility within the bank and between banks.  Oh yeah, they'll likely also have specifics (nothing crazy) that they want to see in your property insurance.

Joshua Mccaffrey · Answer

thanks for all the replies, yes @jessica Grewe this is the building in Owatonna. Sounds like ill be in good shape with a 20-25 year amor and 5 - 7 year fixed rate this is what i had in my calcs. ARMS kind of scare me right now after seeing what happened with the last dip. Ideally i am looking for a 7 year minimum before the loan reset, just in case the next down turn is still dragging on that long.

as this is also my first deal back in the mid west i am looking to fill out my team with local professionals. Any recomedatiosn for a solid insurance broker for the area? I am also lookignto adda local attorney to my team.

David Moore · Answer

All,

I work with a portfolio lender in the Twin Cities that will finance 80% LTV, up to 25 year amortization.  I've financed properties in Southern Minnesota with them as well.  PM me for the info and contact.

Jessica Grewe · Answer

Just curious but was this in Owatonna, MN?  My lender (local bank) does commercial loans with us for 20% down with only up to15 year.  We also have an established relationship with them.

Tom S. · Answer

@Joshua Mccaffrey  Hi Joshua - I have a 5 unit commercial loan, 25% down, 20 year amort, and it was fixed at 5% for the first 5 years.  After the first 5 years it resets with each interest rate change.  A small amount though - they just send me a letter in the mail stating that my payment will increase by $25 or so.

Yes, even though it's a commercial loan, a personal guarantee was required.  The application process wasn't much different than a conventional loan.  They looked at credit, bank statements, tax returns, etc.

Hope that helps,

- Tom

What are typical Multi family loan terms

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