Exit Strategy Ideas For Multifamily Modification

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Exit Strategy Ideas For Multifamily Modification

Brian S.
Member since 2011 · 10 posts · 0 votes

Could someone help me kick around some ideas for exit strategy development? After talking to our lender about a loan mod they've requested that we submit a package covering what's going on, how we want the loan to be modified, and our proposed exit strategy.

General info:
- 30 some unit mfd in a somewhat major metro acquired in the mid 2000's
- Around $2.5mm remaining balance of debt, 10yr ~5.5% balloon which comes due in a few years with a ~$2.2M balloon payment
- Has performed around breakeven on a before tax cash flow basis overall, the last two years have been a little negative.
- In decent physical condition, we renovated half the building after purchase
- Near full occupancy
- It was set up to cater to local college students (2 schools in walking distance that don't provide housing), pre-recession it was near full student tenants but it fell off a cliff and is now ~1/2 students.
- We expect the student population to rebound in the coming years, the schools have launched plans that include large increases in enrollment. Independent and state projection studies see 300-400 additional students per year through 2020.
- Recently appraised ~$2.1M

I've got the numbers figured out on how to optimize returns both before and after tax based on the structure of the mortgage, but in doing so it assumes we'll be able to sell the property. One of the mod features will be a term extension pushing the balloon back 8-10 years from now

Exit strategy ideas I've been thinking through:
- Rent then sell prior to balloon
*have modified so balloon is around $2.0-2.1M
* general upkeep of common areas done -> school enrollment higher -> more student tenants again -> rent raises over time -> increased value to sell for

- Refinance prior to balloon
this also assumes an increase in value (which from market research and lots of knowledge about the building i believe will actually happen)

Any thoughts? don't know how strong it is to present these options to them (director of portfolio management) with both exit strategies assuming an increase in value

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Your at almost 84,000 a door in loan balance before having any resale costs.

    What is your rent per door currently??

    Who is the lender?? A private party,local,regional,or national bank??

    It will make a difference as to how they view a loan workout.

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    14y

    It seems like the big white elephant in the room which you didn't mention really is what are you doing to increase your net profits?

    It sounds like you have a high occupancy. Do you have any upside to future rents? Where are some of the expenses you can trim down?

    You are over leveraged. The plan should start to look at paying that balance down. I am not sure if I would plan on the bank being so nice as to just write off that portion of the balance. I am also not sure I would assume that without any positive movement in your cash flow and bottom line to expect any type of future value increase.

    In my opinion, all the other stuff you are talking about is just noise around the real issue. Increase top and bottom line numbers and decrease you interest liability.

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Is this a recourse or non-recourse loan?? If there is a non-recourse is there "carve -outs" or "bad boy" clauses in there?

    Any personal guarantees on this loan or cross collateralization of other properties??

    When working anything out the lender will look at their options.

    You have not provided enough info here to discuss further.

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  • Brian S.
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    Member since 2011 · 10 posts · 0 votes
    14y

    I needed to head out of the office after that first post, sorry for the lagged response time.

    - effectively grosses ~$300k/yr (potential at current rates is 6-7% higher)
    - regional bank
    - non-recourse
    - no personal guarantees, cross collateralization, or unfavorable clauses
    - There is a decent amount of upside for rents, noted separately by our broker friend and the appraiser. There are multiple instances of identical units being rented at different rates too.

    I didn't have any involvement, or was even with the fund, around the time of acquistion. I realize it's over leveraged. I've been handed this mess to attempt to clean up.

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  • Brian S.
    OP
    Member since 2011 · 10 posts · 0 votes
    14y

    Thank you for the help/responses by the way, I really appreciate it.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Yeah so this loan was funded at the height of the market where the lenders thought values would go up forever.

    Your property owners are in the drivers seat and the bank has no leverage at all because the buyer has zero liability in this case.

    Now the fund even though there is no liability to the bank does the fund have liability to it's shareholders or investors who have placed money into the deal??

    How old is this building??

    300,000 by 30 units is 10,000 per unit and around 834 monthly.

    At a 10 cap with 50% costs you are looking at a value of 1,500,000 for resale and then you have the costs of selling (commission,closing costs,inspections,appraisal,etc.)

    This is without the other half of the building you said isn't renovated.Is it more than 30 units or is 15 renovated and 15 not but 100% are occupied.

    If you have more than 30 units then that will skew the numbers.Any excess land or could these buildings be torn down and higher density be built increasing the value potential and income stream?

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  • Brian S.
    OP
    Member since 2011 · 10 posts · 0 votes
    14y
    Originally posted by Joel Owens:

    Your property owners are in the drivers seat and the bank has no leverage at all because the buyer has zero liability in this case.

    Yeah, don't know how I forgot to initially include this tidbit of info. The commitment letter actually noted that the lending institution could require personal guarantees for 25% of the original principal at their discretion... but they opted against it for some reason. I've triple checked on this stuff. The ball is really in our court for this.

    Originally posted by Joel Owens:

    Now the fund even though there is no liability to the bank does the fund have liability to it's shareholders or investors who have placed money into the deal??

    This is under a separate single asset holding partnership with only our managing partners and a couple of their family members having stakes in the deal

    Originally posted by Joel Owens:

    How old is this building??

    Coming up on a century

    Originally posted by Joel Owens:

    300,000 by 30 units is 10,000 per unit and around 834 monthly.

    At a 10 cap with 50% costs you are looking at a value of 1,500,000 for resale and then you have the costs of selling (commission,closing costs,inspections,appraisal,etc.)

    This is without the other half of the building you said isn't renovated.Is it more than 30 units or is 15 renovated and 15 not but 100% are occupied.

    If you have more than 30 units then that will skew the numbers.Any excess land or could these buildings be torn down and higher density be built increasing the value potential and income stream?

    I should have been a little more specific on these 'renovations', the units on bottom half of the building were renovated with new wood flooring and central air was added. The other half has older hardwood that is still in good shape and no central air. That's basically it.

    Little excess land (on a city block) to be had, it could be torn down to build up something bigger but that doesn't seem like a realistic option as a larger building on the same block is for sale and this building is in decent condition.

    According to the CBRE cap rate survey from last month the applicable market cap would be ~3%-7.25% (probably on the higher end), but this is obviously going to be different in a few years

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  • Brian S.
    OP
    Member since 2011 · 10 posts · 0 votes
    14y
    Originally posted by Dion DePaoli:

    You are over leveraged. The plan should start to look at paying that balance down. I am not sure if I would plan on the bank being so nice as to just write off that portion of the balance. I am also not sure I would assume that without any positive movement in your cash flow and bottom line to expect any type of future value increase.

    - We've had breakage issues with the non-student local market and the units in the building don't have much appeal to families or older renters due to the way things were built. Effective gross income has dropped by $40k from 2007

    - We've been paying the balance down for years already. The way the mortgage is structured creates a problem with gearing things for a faster amortization reduce the balloon. With a fixed monthly payment amount and fixed rate debt service would be the same annual amount regardless of rate, but the P&I distribution changes with rate. The faster it amortizes, the lower the after tax cash flows (the partners have income free to be written off). So simply getting a principal reduction or lowering the rate would in reality result in no change in before tax cash flows prior to the balloon but decrease the after tax cash flows (by a few hundred thousand over 6 years). The monthly payments wouldn't change, just the distribution of them, and reducing our after tax cash flows isn't a sustainable route. There's too much involved to be typed out here, but I've done all the math and already know what will maximize before and after tax returns prior to the ballon, it's just risk adjustment that I'm still working on

    - We had a couple potential buyers look at it for the appraisal price even though it wasn't actually listed, so there's some interest/it's not a complete loss

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    14y

    Was that a MACRO report or a MICRO report??

    Your property has issues.To take those issues on for an investor or group requires a certain price point in selling.

    These reports you mentioned are usually MACRO and mean nothing as it is a blended rate with varying properties that are similar but very different as well.

    Unless this report was a MICRO report I would not give it much weight as to what CAPS are trading at.

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  • Brian S.
    OP
    Member since 2011 · 10 posts · 0 votes
    14y

    Micro, and our recent appraisal of the building aligns on the higher end of that rate.

    Regardless, this thread seems to have veered off track. The selling of the place isn't happening for any time in the near future. I've walked a few potential buyers through but after confirming the non-recourse, no guarantee, no clause thing we've decided to modify instead. From sitting on conference calls with the lender and my initial contact with them, it is apparent that we are in control of what happens. We own a mid-size law firm as well btw, which has confirmed the liability situation past my own research.

    Either way, do any alternatives exist to selling or refinancing as an exit strategy? Payoff isn't realistic.

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