$2MM Portfolio Loan Successfully Completed! Lessons Learned

[Shiloh Lundahl]

I know that this post is long, however, I think that it can provide some insight into the process of getting a portfolio loan for those willing to take the time and effort to read it.

My Portfolio Loan Story

I feel like I just finished an ultra marathon.  We just finished getting a portfolio loan on 18 properties in Arizona. This was the process.  Hopefully this can be helpful to people looking to do a portfolio loan at some point.  

Towards the end of last year we had several properties that we had purchased using hard money and we wanted our local bank (the bank that had already given us 1.6 million in loans on other properties) to refinance us out of hard money.  The bank stated that they would need our tax returns for 2018 so we would need to wait to do our taxes for 2018 in order to do the refinance.  

We needed our financials but my CPA was unavailable

We got all of our financial information to my CPA as early as we could at the beginning of 2019 but, due to a death in his family, the taxes were not done until the end of April or May.  We were patient with our CPA during his mourning process, however, we were also anxious to get these loans done ASAP.  We already had to pay extension fees on the hard money loans because the loans had gone past their original maturity dates.  

My go-to bank turned me down

We finally got all of our information to our local bank.  They started digging deeply into at our financials and the underwriter came back saying that they weren't going to do the loan.  We were confused and frustrated.  I followed up with my banker to find out why.  It turns out that the bank got a new risk manager who wanted to be more conservative and this new guy didn't like our overall Global Financial Statement where as they were lending at 1.15 before, now they were only willing to lend at 1.25.  So ultimately we had to look for another bank.  

A "relationship banker" that really cared about the relationship

I had already started working with another bank in 2018 to refinance some other properties, but I didn't want to go with them on the current properties because the banker I was working with was not very attentive. Also, I felt he pushed for some loans that would benefit him and his bank more than me so I wasn't excited to talk with them about getting these newer properties in long term loans with them.  But I needed to get the loans done (some of which were manufactured homes and most banks wouldn't loan on manufactured loans for investors) and they were a viable option.

I contacted them and my previous banker was no longer with the bank (so much for being a "relationship bank").  I shared my concerns with my new "relationship banker" and he really stepped it up and went to bat for me.  So I gave him all of my financials, including needing to get updated lease agreements for my whole portfolio - not fun, but something that should be done anyway.  Also, I give my tenants a $100 discount to pay the rent on time and to take care of all of the little repairs for the property and the rent rolls I gave my last bank had the discounted amounts; so with this new bank I was going to put what they actually had written on their lease instead of the discounted amount.  Additionally, as we updated our lease agreements, we found that we needed to do some yearly rent increases with several of our tenants.  So ultimately our Global Financial Statement looked better than with the previous bank.

Because we have complicated business structures and financials and because we try to minimize our tax burden, we had to have my CPA write a letter to explain our finances to the bank (this is a benefit to having a competent CPA do our books).  After explaining our income and then adding back in all of the capital improvements and depreciation, our bankers were able to see our true income for 2018.  

Creating the deal

The bank then stated that they were willing to do a refinance of the properties but that I would need to include some of our other properties into the portfolio loan rather than just doing 7 or 8 new loans for single family homes.  They combed through our properties and picked out several that they liked and wanted in the refinance.  The downside was they were going to give me a loan at a higher interest rate than the loans that the properties had on them already so I didn't like that, but since the homes had appreciated a lot, I was going to get a lot more money out and I would be able to pay off several 2nd position notes on these properties where I was paying out 8-12% interest.  So ultimately it was going to be a really good deal for us.

Stipulations

Another condition for the bank loan was that I keep $150k in the bank at all times as reserves for the loan that they were going to give me.  This was tough because we recently had a contractor take 85k of our money that he paid him for rehabbing 3 of our properties and spend it on trying to fix his life that was falling apart rather than rehabbing our properties.  This contractor worked with us for over 2 years and was a good friend so it was really a difficult and sad situation for both him and us.  Regardless, we had a lot of our money tied up in several of the 18 properties and it was very difficult to scrape up all that money to just sit in their bank.

Appraisal anxiety

Then it was time for the appraisal.  My banker called me and told me that the bank was going to give me what was called a bulk sales approach appraisal (something stupid that basically means that if the bank had to liquidate my portfolio quickly how much could they likely sell it for as a packaged deal).  They basically were going to do an appraisal on each property and then add them up and then discount it about 15% (lame, I know). But, he told me that they would lend at 75% rather than 70% to try to soften the bad news.  I put up a bit of a stink about it and let him know that I didn't want to be jerked around and have the bank lead me on just to put me into a bad deal at the last hour.  I also told him that I had another bank that was working on the loan as well (and that was true.  When I do large loans like this, I will often have 2 banks creating the loan at the same time in order to create competition which ultimately benefits me as the customer and in case one bank falls through, the other bank can close the loan). My banker came back and said that he could try to get the loan from a 20 year loan to a 30 year loan in order to create more cash flow.  So we proceeded further.

The bank got 3 different bids for appraisals. They ranged from over 8k to about 4k.  We went with the lower appraisal for obvious reasons but also because I knew the appraiser from the last properties of mine that he appraised and he did a decent job before.  He only needed to go inside 5 out of the 18 properties and because I told the bank that it would be difficult to coordinate all the tenants of the 18 properties to be there to allow the appraiser to come in, the bank let me choose which of the 18 properties would be the easiest for the appraiser to access.   Rather than just looking for the easiest, I, of course, went for the best 5 of the properties  so that he could get an idea of how nice I make my properties.  I had my assistant drive him around to each of the properties to help the tenants feel comfortable and to help him get around to the properties more easily.

I struggled sleeping for the next 2 weeks as I was really worried about what the appraised values was going to come in at.  I needed the appraisal to come in higher than expected in order to not have to come into the refinance with extra cash because of the stupid bulk sales approach method.  Luckily, the appraisal come in at 3.1 million and we were able to get a 2 million dollars loan on it including a 100k cash out.  I was really happy about that, but I wasn't out of the woods yet.  

Last minute negotiations

One of the things that made me nervous about the loan docs was that they did not have an automatic renewal but I would need to prequalify for the loan in 5 years.  We worked it out to where I could get the loan renewal to go out to 7 years rather than 5 with such a small difference in the rate that it didn't really matter.  Also, setting up auto payments, and opening up a corporate credit card with them lowered the loan interest rate as well.  So the interest rate on the loan actually came down to 4.75%, 30 year amortization, 7 year balloon payment.

The whole loan process took around 5 months and just finished. It was long and arduous but it finally ended well.

My advice to the investors out there is to not give up when working with banks on financing.  It can be a long and arduous process but the reward at the end is worth it.  

Let me know if you have any comments or questions.

[Jay Hinrichs]

Originally posted by @Shiloh Lundahl:

@Ben Sears A Global Financial Statement is a snap shot for the bank to take a look at your financial health and the financial health of you businesses.  It's kind of like debt to income ratio but it includes more things as well.  They want to know that for every $1.25 that comes into your hands, that only $1 is going out of your hands.  For us, because we don't live off of our real estate income and we are in the building phase, we are acquiring more properties and using debt to do it.  It is important not to become over leveraged in doing this because if you are and there are issues that come up, it can sink the whole ship.  

@Jay Hinrichs Could you explain better what a Global Financial Statement is?

to me it would be full underwriting.. ALL LLC tax returns and K 1s bank accounts.. current p and L and personal financial statement.

for me since I have been with the same banker for 25 years its just annual updates.. I would HATE to have to start over given the complexity of what we do..  I mean sometimes I confuse myself :)