All Forum Posts by: Douglas Andrew

I am seeing some deals get under 3%, interest only for more than 5 years now......some 10 year deals with 7 or 9 years of i/o!   Who wouldn't take 3% in this climate if the deal is solid for the lenders.... I would take that in a minute.

Hi Frank, good question! 

Here is the problem though, in essence a cap rate is "the cost of capital". So- for example, what is the cost of money to the investor ( you would always want your capitalization rate to be more than what your rate of borrowed money is). The problem you have is that you have a host of buyers and sellers and brokers and appraisers using different forms of analysis (if any) to get a "cap rate." Sometimes you will hear a broker convince a seller to use the net operating income divided by the sale price of the property as the cap rate for a multi family investment property. The seller should find another broker if they ask for that. It is actually meaningless. But you will see that 90% of the time. why? it is simple, easy to calculate, and it helps brokers get sellers to lower their price to raise the cap rate (buyers like high cap rates of course). However, it does not account for rent and expense growth over the years in an appropriate fashion. The higher the cap rate, the lower the asking price with the same net operating income. The real "cap rate" is  a weighted average cost of capital (wacc). Meaning, it is a combination of the investor personal money (his equity injection) and the money he borrows. For example, if a property cost $100 and the investor places $50 down and borrows $50 form the bank, the weighted average cost of capital may be ( private equity at $50 with the investor wanting 10% for his own cash at risk, and $50 from the bank at 3% interest rate) -----> ($50/$100)x10% + ($50/$100)x3% = 5% + 1.5% = 6.5% wacc. THEN, the correct way to calculate the value of a property is to use this rate in a discounted cash flow analysis, say, over 10 years with a sale in the 10th year. That calculation will be significantly higher for a seller than simply making up a cap rate and dividing by the current net operating income ( you can learn about this in a utube lesson or on a blog here.) The higher the cap rate, usually, the more risky the deal. why? because the investors cash demands a higher rate of return for their private equity injection. Above I used 10%. But if you are buying from a seller who has tenants not paying rent, maybe you want 20% for your cash. IN that case your wacc would have been  11.5% in my example above. So your 12% cap rate deal may be risky. Think about it... no one gets 20% on their cash right now....the US treasury gives you 0.6% for your 10 year cash right now... that should give you some perspective.

From what I understand, you can apply for the $10,000 EIDL, but depending on what you do next, it will become a grant or a loan. If you don't move to PPP after that, you are paying the $10,000 back. Since many of us have LLC's with no employees, we are not going to qualify for the PPP. Can anyone confirm that? What Sam is driving at here is a very simple concept, if renters can't pay, the banks and our city's need to either forbear ( or forgive a portion of) the mortgage and real estate taxes. This is not a scenario where landlords should bear the brunt of the losses for a controlled government shutdown of the economy. This is not a financial crisis like 2008, we are forced into this situation by the pandemic, and the government actions. The banks can't forbear from what I understand unless there is a time out all the way up the chain, so that regulars can relieve the banks and funds from their obligations for capital requirements and investor distributions ( a regulatory stop on Mark to Market). IF this does not happen soon, there will be a mortgage crisis before the month is over and the dominoes will fall (see Tom Barracks CNBC video " Commercial Mortgages on brink of collapse"). While I understand some of us need cash now, the banks and the government need to work together now, the SEC, the FDIC, the FSB and the Treasury to make this happen.Sam is right, In essence, the Landlord should get a bailout or a time out as well. This is not our cross to bear alone and let's hope the next package speaks to this.

Thank you Jon. Being able to get the same rate for those three years presents a benefit to the potential buyer. In a casual conversation with a real estate atty a few days ago he thought that the only benefit was avoiding mortgage tax, and that the buyer would not be able to assume the low 3% rate.

Hi All- I have a question on Loan Assumptions for a commercial loan. I have a $2.45 million loan at 3% interest only. It was for 5 years with 3 years remaining. We are thinking about selling our building after 10 years of ownership. The commitment letter had the following language;

Transfers/Assumability: Subject to Lender’s then-current underwriting requirements and compliance with the other requirements of the loan documents, the Loan is assumable by a qualified transferee of the Property for a fee of 1.00000%of the unpaid principal balance of the Loan at the time of such a transfer (a “Consented Transfer”).

My question relates to the terms of the loan and savings to the buyer. If the bank approves, does that mean that the Buyer can assume our $2.45 million loan at the same rate?? OR does that rate change based on the "Lender's then current underwriting requirements?" I am assuming that the Buyer also avoids mortgage tax?? Are those the main savings to them, and the main cost here is the 1% fee on the 2.45 Million.

Thank you,

Doug

Perfectly clear David. Many thanks again for your expertise, this forum is priceless.

Thank you David. I am new to this site, but see you have tremendous experience in various exchange scenarios and truly appreciate that answer. I think I may have miscommunicated my scenario. I do intend on buying a replacement property with a value of at least 4.8M , using $3.2M in equity, and replacing the debt at 1.6M, or, possibly adding more cash and reducing the debt load (possibly to $1M). He would place his entire $1.8M in real estate equity and 0.9M in new debt into a DST.

Follow up question, what would happen if he does not...say, he only takes 0.5M in debt for his exchange instead of 0.9M. Would that impact my tax obligation, or with the mortgage boot only impact his exchange and tax obligation?

Thanks again for your knowledge and insight!

Doug

Hi All!  I have a question. My partner and I are seriously considering the sale of a multifamily investment property that is worth $8M, and has current mortgage of say $2.5M. I own 64% and he owns 36%.

The original mortgage was for $1.5M, but we did a refinance cash out (interest

only this time with the same mortgage payments as previous) and took $1M out last year.

For argument purposes, let's say net sales proceeds are $7.5M, and our equity

after mortgage close out is $5M. 

In this case, if we wanted to do separate projects, assuming the assignment of the 

equity and total value would be  ;

Me: (0.64 x $7.5M) = $4.80 assigned value and (.64 x $2.5M) = $1.60 assigned debt

Partner: (0.36 x $7.5M) = $2.7M assigned value and (0.34 x $2.5) = $0.85M ***. debt

In this case, or in any way to meet the separation or new projects objective, can we

do the following?

Me: Purchase a replacement property for $3.35M equity plus $1.6M debt

Partner: Buy into a DST for $1.65 equity plus $0.85M debt?

Thanks for any guidance you can offer!

Doug

Manhattan, NY