@Cory Carlson
Q: I would like to know of any major single family and small multifamily (2-4 units) investment financing options have changed.
A: Hi Cory, thank you for your questions. I cannot speak to single family or small multifamily products. I may sound like we are splitting hairs but it’s an important distinction to make, single family and small multifamily fall under the single family umbrellas within the agencies (we’ll call them multi unit versus multi family). These questions should be geared to a bank. My expertise is on the institutional side, loans starting at $1M with a 5-unit minimum. Most of what I work on is in the $20 to $25MM space with portfolios nearing $1BN. If anyone can chime to help Cory, it would be appreciated. The infrastructure behind institutional multifamily lending is different than what falls under the single family space. For example, most banks cannot transact directly with Fannie and Freddie on the multifamily products (think $1MM and up), they most go through a licensed firm (there are approximately 12, Berkadia is one of them and the number one lender of multifamily agency financing).
Q: Are there higher reserve requirements? Lower LTV requirements? What about owner occupied plex stuff?
A: Again, this answer is specific to $1MM and up for Fannie/Freddie business and the multiple product lines. We will address Small Balance Lending ($1MM to $5MM/$7.5MM in top markets) and Conventional ($5MM/$7.5MM plus). There needs to be distinctions made between reserves, which we will refer to as escrows in this body.
The below are broad strokes and there are differences between SBL and Conventional. The below is not all encompassing and as mentioned, a general guide to required escrows. There are many fine pointed details that must be addressed. If you are seeking acquisition or refinance financing, I suggest working a with a directly licensed banker to iron out all the details.
Replacement Reserves: Typically calculated by the unit in increments of $250/$300/$350, etc…). Pre-covid: Not funded upfront, Post-covid: Fannie may require, Freddie will not.
Immediate Repairs as defined by a PCA: Fannie and Freddie have always required these to be funded upfront. There are exceptions.
Taxes and Insurance: Pre-covid: Not funded upfront but built into your debt service for next year’s balloon payment, Post-covid: Fannie may require, Freddie will not.
Debt Service: Pre-covid: Not funded upfront, Post-covid: 6 to 12 months funded upfront and released once certain thresholds are hit (exceptions for student).
Some markets have been ratcheted down a tier from say 80% LTV to 75% LTV max in response to COVID.
Q: My principle broker is also a commercial mortgage broker and mentioned commercial options will roll out with a very conservative approach for apartment loans. Lower LTV's and he can't even do his refi's!
A: A large percentage of business with Fannie/Freddie in recent weeks are refinances. Escrows do apply and there is a watchful eye on values. This also includes supplemental financing (different from a refinance but similar in concept). Refinances are very much in play if the borrower understands the escrows and we can get a sign-off on values and feel confident about collections.
@ John Blanton
Thank you for your questions.
Q: Thanks @Kevin Owens , you eluded to it in your post, but have there been any changes to net worth or liquidity requirements for non-recourse debt?
A: No changes to NW and LIQ. However, cash reserves in excess of requirements are viewed favorably.
Q: As for required escrow reserves, is there much variance in regards to them being released? Or just 3-6 months of performance by the property post close.
A: It depends on lender (Fannie or Freddie), it can be as long as 36 months (technically) and as short as two stable consecutive quarters. These are updates in the COVID environment. Historically, escrows for immediate repairs are released upon completion. Ongoing replacement reserves can be drawn down based on the type of repair being completed. There has rarely been any escrow release for 3 to 6 months based on time frame alone.
@ Joe Splitock
@Kevin Owens I have a couple questions based on a this scenario. Lets say you are looking at a 30 unit apartment building that costs $2M and has 4% CAP rate.
Q: What minimum percent down payment is required?
A: When venturing into the institutional side of lending, we'll refer to this as equity rather than down. Most won't like my answer because, the answer is "it depends". On the example you gave, the deal would go under the Small Balance Program and will primarily be driven by market tier and max LTVs will range between 70% to 80% depending on how the deal is underwritten and again, what market you're in. For example, Houston once tapped out at 80% and has now been dialed back to 75%. In the example you gave, assuming the income and expenses that lead to a 4% cap are agency approved, you'd be looking at a ~60% LTV (the deal is DSCR constrained). A 60% LTV can open you up to waiving many things on the deal but is offset by a 1.25 DSCR.
Q: Can a down payment come from a HELOC?
A: It could but this will be viewed as a contingent liability and may reduce financial standing. In theory, you are taking value from your home and putting it into your cash account. Fannie and Freddie would rather have a borrower well heeled in the cash category and short on total net worth (5 to 10% short), rather than short on cash and a high net worth. This is especially the case for first time borrowers or first-time apartment owners. There are exceptions. The best thing to do is call a directly licensed banker.
Q: What net worth or other factors are you looking for in an investor?
A: The job of directly licensed banker is to advocate for the borrower and the property, align borrower expectations with credit policy and push on rate, escrows and shepherd after closing items to the finish line. Additionally, most quality bankers will play a large role in wealth management making suggestions in helping manage assets for the next deal or give finance guidance to minimize costs.
Q: Other factors other than NW and LIQ include…
A: Management experience, sponsor location and asset location (contrary to popular belief the location of a banker has no impact on the deal, it’s the banker’s experience and firm’s relationship with agencies that have the most impact). Fannie/Freddie want to see experience in the field, a reasonable budget (we can help with that) and no red flag issues (bankruptcies, history of willful neglect, lawsuits centered around mismanagement of funds, etc.. a slip and fall suit is deemed as general business risk and not held against you).
Q: What information do you need on the property?
A: Provide a trailing 12-month income and expense statement, a proposed value or LOI and a rent roll from the last 30 days. In most cases, I will not ask for a NW and LIQ statement, I'll take your word for it and make the requirements clear. If you're short of requirements, tell your banker. You can have multiple guarantors on a deal.
Q: What type of interest rate and term is available (ballpark)?
A: It depends, there are many factors, rates can range from 2.90% to close to 5%. We closed on a 2.96% deal last week and I had an SBL deal close at 3.62%. Small Balance Loans will have a higher rate than their conventional counterparts. Leverage points, interest only and prep-pay play large roles in determining the rate.
Q: How much time do people usually allow for closing after an offer is made?
A: Schedule 60 days, most will close 45 to 50 days.
Q: When you meet with a banker, what type of information do they want to see?
It depends on the banker and their experience. I usually have a 30-minute call to discuss docs, process and statements. I then request an REO schedule, NW and LIQ confirmation, T12, RR, management plan, flood zone information. I'll typically pull the tax bill and an OM if one is available. Most of the resources I have cover all transactions across the country and I can easily pull data. Bankers that transact heavily on agency can underwrite a deal a short time and see if there is a clear path forward. Upon confirming that, the deal will then be submitted.
