Board Topic: Financing Multi-Family Housing project
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Financing Multi-Family Housing project

Posted by: Michael Aug 21 2003, 12:04 PM

I'm completing construction on a 12 unit multi-family apartment complex. My construction loan is for 2 yrs at 6% and is due in April of 2004. Construction of the first building (6 units) is scheduled to complete in Sept 2003 with the second building to complete the following month. I'm looking for advice on the right questions to ask when talking to lenders about converting the construction loan to a long term commercial mortgage. I'm also hoping that you can advise on potential traps that I should be wary of. The local bank that financed the construction loan will offer 1 yr adjustable @ 5.5% or 5 yr fixed @ 6.5% for a 20 yr term. I've spoken to a mortgage company (Internet searches) that is willing to offer 30 yr fixed @ 6.25%. Are mortgage companies generally willing to offer the better deal? To be honest, I'm a bit skeptical about companies offering good deals on the Internet but I don't what to miss out on a good option at the same time.


Posted by: loanuniverse Aug 22 2003, 09:02 AM

You are right to be skeptical, but as long as you are going into the transaction with your eyes wide open then you can judge clearly whether or not proceeding with this mortgage company instead of your local bank is a good idea. As you are probably aware, commercial banks do not like to lend on fixed rates for more than five years some might go as far out as ten years, but there are not many of those deals available to a regular investor.

The reasons behind the reluctance of banks to lend for a long period have to do with the way they are funded and with interest rate risk. They do not want to be holding an asset in 10 years that is making them 6.5% while they might have to pay the same rate for deposits. This was one of the reasons behind the whole Savings & Loans debacle.

The good news is that right now the rates are very low. If you take a look at the prime rate it is at 4.00% and prime is usually the base rate for these types of loans. I remember doing analysis for apartment buildings such as the one you are completing back in 2000 and using a base prime rate of 8.5% to 9.0%. You can imagine how the profitability of a project is affected by a rate like that.

When I see the alternative financing deals that you present in your post, it seems like they are very good, but let me comment on them anyway.

Variable 1 year ARM @ 5.5% I would stay away from this one. First, rates are low now, but this is probably not going to be the case in the future. If you are still interested on the option go over the historical data on the base rate and see what your rate would have been over the last ten years.

Bank 5 year fixed @ 6.5% As of right now this loan is slightly overpriced. Assuming good loan to value, good personal credit, you might be able to negotiate this down to 6%. Remember that this also assumes that rates stay at this level. If you can get 100% occupancy on your buildings by January you will be in a stronger position to negotiate this. Also make sure that you are being offered a 20-year loan with repricing every five years. I think that you might have been offered a five-year loan based on a twenty-year amortization. The difference here is that with one only your rate changes while the other means that you will have to spend money for a renewal. If you were offered a five-year loan, try to get a ten-year loan with a repricing after the first five. This will save you some refinancing fees after the five years if you are happy with the situation then.

30 yr fixed @ 6.25% This sounds good, first the amortization is longer so payments are lower improving your cash flow, the rate is lower and no need to refinance. The only problems I see are that the mortgage company might not be local, which can cause a problem at closing. Also a couple of things off the top of my head:

- Do not give the company any money ahead of time. The way commercial mortgages work is that the lender will issue a commitment usually in the form of a “commitment letter” where they spell out the conditions under which they will do the loan. This is not a preliminary term sheet or a “we will agree to look at memo”. This is a firm commitment from the lender that says: I will lend you $X if you agree to this. At that moment they will require a commitment fee. Only give money when you have a commitment from the lender to do the deal. I am familiar to the way several community banks operate and only remember one ever asking for money before they issued a commitment. As a customer, I would walk away from that.

- Please investigate the company if you are going to go with the mortgage company. Dealing with a bank gives you a level of safety as they are heavily regulated. Some places to start your investigation: 1- Better Business Bureau. 2- State license board.

Hope this helps.

P.S: Although you might be thinking that you want to get a long-term mortgage and just forget about it for a long time. A couple of years down the road, you will be tempted to access the equity in these buildings to help you with another development or acquisition. So it is a good idea to look not only at the rate, but also the other expenses and figure out how much you would be really paying under different holding periods.

Posted by: Michael Aug 25 2003, 04:30 PM
Great! I appreciate the good advice! I'm going to dig deeper into the Mortgage Company. It's starting to look like the broker may be able to find me a better rate and longer term but will charge more percentage points (origination fees, lender fees, broker fees, etc....). The "good faith commitment" will help me assess those charges and balance them against my cash flow. I’m sure I’ll have more questions as I progress along.


Posted by: loanuniverse Aug 25 2003, 09:38 PM
QUOTE (Michael @ Aug 25 2003, 04:30 PM)
The "good faith commitment" will help me assess those charges and balance them against my cash flow. I’m sure I’ll have more questions as I progress along.

No problem, just make sure you don't get your terms confused. Commercial lending does not have a "good faith estimate" That is a residential loan term. The lender does not have to provide one when dealing with income producing property. {Unless this was for the financing of your house as part of a multi-family property loan}

You are only assured of the lender commitment to make the loan when the letter makes it clear. In fact, most preliminary correspondence on terms and conditions will clearly say This is not a commitment.

Feel free to keep in touch regarding your loan request.

Posted by: Aart Aug 28 2003, 08:31 AM
Regarding mortgages through internet searches (Lending tree, etc.), I'd like to add my 2 cents. My experience with refinancing my home was that the offers that came back were very attractive, with a bait and switch kind of feel to them. When I pursued a couple of them further, the total closing costs, origination and discounts points, turned out to be much higher than the initial contact advertised. I ended up sticking to my local bank.

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