Commercial mortgages

Tower Commercial Mortgage arranges $2.95M in Freddie Mac Financing for a 24 Unit Multifamily Asset in Salt Lake City Utah

By | Commercial mortgages, Commercial Real Estate, Construction financing, Multifamily housing
Multifamily apartments

SALT LAKE CITY, UTAH — Tower Commercial Mortgage through one of its capital partners, yesterday arranged permanent financing for $2.95 million in Freddie Mac financing. The financing was used to take out the construction loan for the newly built multifamily asset that was stabilized in 2017, located in the Salt Lake City area. The originated loan features a 10-year term with a 10-year floating rate extension and a 30-year amortization schedule. The sponsor completed the 24-unit property in August 2017, and the property was stabilized in December 2017. Tower Commercial Mortgage had arranged the construction financing previously to construct the property. The borrowers were not disclosed.

The sponsor approached Tower Commercial Mortgage two years ago to find construction financing for the project. The sponsor had been looking for two years and was unable to secure financing. Tower Commercial Mortgage was able to secure construction financing within six weeks.

Mike De Carlo, President of Tower Commercial Mortgage, said “We are thrilled with the outcome of this loan as the project was a very successful project and that the property’s sponsor couldn’t be happier.” He said, “Salt Lake City, Utah is rapidly growing and demand for housing is strong. There are many people moving in from outside the state, attracted to the many recreational activities the state of Utah offers. So new multifamily projects are necessary to keep up with the additional demand.”

#CRE, #CREfinance, #multifamily, #apartments

Salt Lake City is recognized by Freddie Mac as a priority market for multifamily lending!

By | Commercial mortgages, Commercial Real Estate, Interest rates, Multifamily housing

Salt Lake City is now a priority market for Freddie Mac’s Small Balance Multifamily loans for $1-6MM. The agency lender has identified Salt Lake City for top market pricing. They recognize the need and that demand is strong for housing in this market.

Apartment owners of 5- 75 units in Salt Lake City (and given the property, surrounding cities) can get the same highly competitive rates (currently in the high 3%s) as in top markets around the country, like San Francisco, Los Angeles, New York City. Pricing is on a deal-by-deal basis. These loans are 100% non-recourse, have a step-down prepay, cash out option, and 10-year terms with a 30-year amortization. Interest only is available. No lender origination fees and loan closing fees are low. Loan-to-value ratios are as high as 80%.  The process takes less than 35 days from application to close. Apply and lock in a low rate.

As a correspondent lender, I can get you a quote in 24 hours. The items needed are:

  • Current rent roll (preferred with tenant names, start/end dates, and leased area)
  • Prior year and YTD property financials (perfer 2 years plus YTD)

Reversing The Risk Retention Rule For CMBS Could Improve Commercial Lending

By | Bond Market, Commercial mortgages, Financial Markets, Lenders, Regulation

There are several key bank regulations in the Dodd-Frank Act which if loosened could improve bank lending. One important one, is the risk retention rule for asset-backed securities including commercial mortgage-backed securities (CMBS). Reversing the risk retention rule, Section 941 of Dodd-Frank could help improve the CMBS market. The rule became effective December 24, 2015 and gave CMBS an additional year to comply which has caused lower CMBS loan origination volumes over the past year as CMBS lenders prepared to comply. It caused some smaller CMBS lenders to withdraw from CMBS lending altogether.

The risk retention rule problem

The main issue causing problems with the rule is that the CMBS issuers must have “skin in the game” by retaining 5% of the aggregate credit risk of the commercial mortgage loans that it adds to a securitization. Typically, a transaction goes like this. A lender originates a commercial mortgage and either holds on to it or sells it to a larger CMBS issuer. The CMBS issuer is an investment bank who pools other commercial mortgages from various lenders as collateral to support the CMBS. The CMBS issuer does its own homework on the loan before it purchases it.

So a lender will only sell loans that it feels would be accepted by the CMBS issuer. To do otherwise, risks the lender’s reputation with the CMBS issuer. There is already a lot of risk reduction going on before they get to the risk retention rule of holding 5%. That was not the case before the crisis for residential mortgages leading to the risk retention rule.

With the rule, the CMBS issuer, not originating lender has to hold a 5 percent interest in each mortgage they sell to a CMBS issuer. This causes issues both with the originating lender and with the CMBS issuer because the CMBS issuer must really know the lender’s origination and underwriting practices to have the assurance when purchasing loans from a lender. The bottom line is lower margins for all, higher interest rates and higher requirements for loans stemming from another rule that restricts lending. Loans that need to be refinanced and could be before the rule, now might struggle to get refinanced.

Additional issues occurring

A recent Wall Street Journal article expresses some of these issues.

“Pressures have been mounting on these firms for more than a year as volatility and risk have increased in the commercial mortgage-backed securities market.

Profit margins have narrowed in the past few months and are likely to be squeezed further as new rules take effect that require issuers of commercial mortgage-backed securities to keep at least 5% of the bonds they create.”

Some of the smaller lenders have left the business because of the new rules. Other lenders are having to increase their interest rates due to added cost of holding the 5 percent retention piece.

What to expect if you’re in the market for a commercial mortgage

CMBS lenders have, in the normal course of business, also been faced with increasing delinquency and default. As a result, according to another Wall Street Journal article more stress on CMBS lenders is causing additional requirements for commercial real estate borrowers. Some of the cautious steps lenders are taking to reduce their risk include the following. If you haven’t been in the market for a commercial mortgage recently, these are some things  you can expect.

  1. Lenders are keenly focused on their fundamentals of lending. Other than the top markets, commercial real estate geographic markets, lenders are really doing their homework and reviewing everything they can about the property in question. They are looking at the strength of the tenants, the lease terms, the net cash flow and looking closely at the sponsor’s liquidity globally not just on the subject property for example.
  2. The new risk retention rule has made borrowing more costly and complicated. Some property owners will not be able to refinance loans obtained prior to the financial crisis, or if they are able to it will be at a higher interest rate.
  3. Construction lending by banks (while not a CMBS product) has become more strict– with some of the big banks out of the business for certain property types. Part of this is the supply of new commercial properties, the other part is less permanent lending options available with CMBS. There are other non-bank lenders making construction loans, however. Some property types that remain strong candidates include industrial and multifamily.
  4. Increasing interest rates are causing lenders to underwrite commercial mortgages to higher interest rates than the current market rates -called a phantom rate. Note, a phantom rate is not the contractual rate– think of it as a stress test rate. By using a higher phantom rate, prospective borrowers will find that they are being approved, but at a loan amount lower than what they requested. So be ready to add additional cash to get a deal funded.

These and other lending rules have led to an increase in specialty finance sources to fill the gap that regulation has created with the big bank lenders. We are contacted almost daily by these lenders seeking deals to finance.

Reducing the regulatory burden

The Trump administration is working to reduce the regulatory burden that banks and financial markets are under. It could be a key step to improving the lending environment. Lenders were punished enough through their own mistaken lending practices to have the additional burden of more regulations imposed. Before any of the new regulations were written or became effective lenders had already learned their lessons. Lenders made the necessary changes to reduce their risk and make prudent loans. Banks don’t need post-crisis regulation to do it for them. Lenders are the practitioners, they know better than regulators what mistakes were made and how to correct them.

The regulatory backlash always happens after a crisis. A crisis happens, regulators point to the mistakes (that’s the easy part) and then write more rules to prevent the mistakes from occurring in the future (the hard part)– the problem is every crisis is different and rules don’t get repealed very often. Regulators have never predicted or stopped a financial crisis from occurring and it is not their mission. Even with prudent lending, lenders will have losses when the economy turns down and goes through a recession. If regulators wrote rules to prevent lenders from taking on risk and suffering losses, then there wouldn’t be any banks– because the rules would essentially prevent them from lending in the first place.

Finally, on a positive note, the economic outlook is strong and commercial real estate remains solid, and there are many lenders lending in a competitive environment so it’s still a great time for both lenders and commercial property owners.



Appraisals, The Lesser Of Appraised Value or Purchase Price

By | Commercial mortgages, Commercial Real Estate

Regarding appraisals, what does the “lessor of appraised value or purchase price” mean? The regulatory guidance refers to this a little differently as “lessor of the actual acquisition cost or the estimate of value.” This article will help you understand what lenders are talking about and why they see this as an important distinction. Banks are required by FDIC Part 365 Real Estate Lending Standards and the Federal Interagency Appraisal and Evaluation Guidelines to evaluate any real estate collateral following certain standards of evaluation. So, what are banks looking for in appraisal estimations verses purchase price? More importantly, why it can be a deal killer? What can you do about it when the lender doesn’t see enough value in your commercial property?

Lenders and regulators have the same goal really in this lending concept. They are looking to reduce their credit risk in case of a loan default. If they lend more than the property is worth, they could suffer a larger loss when they foreclose and liquidate the property. So, they take the more conservative approach and use the lower value of the purchase price or appraised value.

Here’s an example to illustrate.

Let’s say you’ve placed a warehouse property under contract for $2,000,000 and the bank’s appraiser values it at $2,250,000, the bank can consider a loan amount of up to 60% of the $2,000,000 purchase price (because it’s the lesser value), or $1,200,000. The $1,200,000 equals only 53.5% of the appraised value. But since the Bank takes the lesser value of purchase price or appraised value, it uses the purchase price to calculate the maximum loan amount. By using the lesser value, the Bank is funding $150,000 less on the property. Why is this? Because if they had used appraised value you would be able to borrow $1,350,000 (60% of $2,250,000) instead of $1,200,000. This can be frustrating if the economics of the deal are sound, the economy is growing, commercial property values are increasing and you are confident that the market supports the appraised value. But the deal is still doable.

But what if the appraised value came in below the purchase price? Let’s say the appraisal valuation was $1,750,000. Ouch, that would mean the bank’s maximum loan amount would be only 1,050,000 (60% of $1,750.000). Or $150,000 less than if they had used the purchase price. So if you still want to buy the property the bank will be asking you to come up with an additional $150,000 at closing because they only lend 60% based on the lower of purchase price or appraised value. This can be frustrating because it will require more cash to close. The additional cash will reduce the cash on cash return as well. If the economics of the deal are sound, the economy is growing, commercial property values are increasing and you are confident that the market supports the appraised value that is a real disappointment. But, if you have the additional cash, the deal is still doable.

How to increase the appraisal’s estimate

There are a couple ways you can help the lender resolve a low appraisal estimate. The lender would really like to approve your loan. So work with them. Review the appraisal and look closely at the comparable properties (“comps”). Make sure the comps are fair and closely match your property. Look at the discount rate the appraiser used in calculating the discounted cash flows on your property. Review the comparable rents, locations, how old the buildings are. Point out any weaknesses in the appraisal report that lowers your commercial property’s value. You know your property better than anyone and know the strengths and weaknesses. Help the appraiser and lender understand your property better to help calculate a higher estimate of the property’s value.

So what if the deal isn’t doable with this lender? You paid for the appraisal and they are expensive! So, ask for it– its your right and take it to another lender. Lenders can accept appraisals ordered by another financial institution. So don’t let it stop you. The main requirement is that the appraisal was ordered in good faith by a lender, has the lender’s name on it– not your’s as the borrower.

Remember, when you are applying for a loan with a regulated financial institution, know that they will use the lower value. If you run into this problem, if you and lender cannot resolve the valuation with the appraisal, give us a call us. We have lenders who will lend based on the the higher of appraised value or purchase price.

Manage Cash Flow to Improve Your Business Credit Score

By | Commercial mortgages, Financial Markets, Lenders

By better managing cash flow in your business you can utilize both your capital and credit in a more efficient way– which will improve or maintain a strong business credit score. Cash flow becomes very important if you have a line of credit that you are drawing on. If you have a line of credit, it is to your advantage to show that you have the ability and capacity to repay the line on a consistent basis. Ideally, the balance should be paid down to zero for each billing cycle. If it is a commercial mortgage loan, whatever you do, don’t make a late payment and plan ahead for the balloon payment by seeking a replacement loan well in advance to give enough time to correct any weaknesses.

Here are some ways to improve cash flow and therefore improve your business credit score.

  • Know what your credit terms and conditions are and live by them. Do all you can to prevent violating those loan covenants.
  • Review your credit terms to ensure you are receiving competitive terms. Look at the whole relationship. Shop around find out what others are paying to give you leverage to negotiate better terms and fees.
  • Improve incoming cash by giving your customers incentives to pay you early.
  • Don’t out spend your growth by trying to grow too fast.
  • Control your costs associated with advertising, sales and administration.

At the end of the day, the more cash you report on your financial statements the better!

Multifamily Housing Supply Unfavorable to Lower-Income Renters

By | Commercial mortgages, Commercial Real Estate, Multifamily housing, New Construction

Lower-income households that are looking for affordable multifamily rental housing are faced with significant challenges. With little new stock affordable to them, many lower-income households are renting apartments that are beyond their financial means, leaving them less money for food, healthcare, transportation to work, and other necessities.

If changes to the stock of multifamily housing in the U.S., broken down by tenure, affordability, and assisted rental housing status. The results show that lower-income renters have lost ground recently. The average monthly rent of a unit lost from stock was $600 while the average monthly rent of a unit added was $1,000. In addition, while the number of units lost has decreased, lower-income renters experienced a disproportionate amount of those lost units, and that units added were affordable to higher-income renters. Only one-quarter of the units added (approximately 38,000 annually) were affordable to Very Low Income renters, further highlighting renter affordability challenges.

The results of this analysis show that both units added to and units lost from the multifamily housing stock experienced a slowdown between 2005 and 2013. In both cases, lower-income renters lost ground. Most of the multifamily rental stock lost was affordable to lower-income renters, with a median monthly rent of $600 in 2011 for these lost units compared with a $750 median rent for units remaining in the stock. By contrast, little of the new stock added was affordable to lower-income renters, with a median rent of $1,000 in 2013 for these new units compared with a median rent of $780 for units remaining in the stock. These trends show the challenge facing lower-income households that are looking for affordable multifamily rental housing.

Read the full report here

Commercial mortgage loans less available as Bank mergers increase

By | Commercial mortgages, Commercial Real Estate, Lenders, Regulation

One in Six Banks Will Have to Merge: CBA Chief Hunt

Thanks to the Dodd Frank Act bank mergers and consolidation in the banking industry continues. The reasons cited below certainly are driving the trend at an accelerating rate. The impact to commercial property owners is that they will not have as many commercial mortgage loans choices among traditional banks. As a result, it could be harder for commercial property owners to obtain the financing that best meets their needs. The American Banker article summary below explains the probable cause for this trend.

In a recent interview, Consumer Bankers Association President and CEO Richard Hunt said consolidation will keep community banking viable in the face of such persistent threats as the economy, technology, and regulation. He expects mergers and acquisitions to pick up among banks with $10 billion to $100 billion in assets. “We have been saying for some time there are three great disruptors in the marketplace today — the economy, the evolution of technology, and the burdensome new regulatory environment,” he said. “Any one of those would have a dramatic effect on banking, but to have all three happen simultaneously creates the perfect storm. We expect more [mergers] to continue throughout 2016 and years beyond.” Hunt said there are more than 6,000 banks currently, and even if 1,000 to 1,500 were lost, the industry would still be competitive. However, he noted that “the definition of competition will become greatly different. You don’t have to have a branch in a hometown in order to be competitive because of the Internet.” Hunt said consolidations ultimately will benefit consumers because “by combining forces and achieving the economies of scale, the technological platforms will be better.”  From “One in Six Banks Will Have to Merge: CBA Chief Hunt” American Banker (02/12/16) Stewart, Jackie

We have many lender relationships outside of traditional banking that are actively funding commercial mortgage loans. We have established relationship with wholesale lenders, private equity firms, conduit lenders or life insurance companies that rely upon third parties to introduce borrowers to their commercial lending products. The bottom line is we have lender relationships that the typical commercial property owner does not have access to or possibly even knows that such lenders exist. If your local bank is not able to provide the commercial mortgage loan that you need, we would be happy to work with you and our lender network to find the commercial mortgage that fits you and your property.

Fed Nods to Negative Rates, Hurdles and All

By | Bond Market, Commercial mortgages, Federal Reserve, Financial Markets

Legal and practical obstacles make negative rates unlikely, but Janet Yellen suggests such a move is possible

Federal Reserve Chairwoman Janet Yellen waded into fraught territory before Congress, suggesting the central bank could turn to negative interest rates in an economic downturn despite legal and other uncertainties.

Her comments Wednesday came as concerns about unsettled markets and weak global growth pushed benchmark U.S. Treasury rates to a one-year low. The yield on the 10-year note fell to 1.706%, leaving it down more than half a percentage point so far this year.

Central banks in Europe and Japan have turned to the once-radical idea of negative interest rates to spur their moribund economies. The idea that their U.S. counterpart might follow suit is unlikely but not impossible. The Fed raised interest rates in December for the first time in a decade and is weighing whether to raise them further. Ms. Yellen in her testimony said it was unlikely the central bank would need to cut rates soon, much less go negative.

When questioned about the possibility, however, she said it could be done if necessary.

“I’m not aware of anything that would prevent us from doing it,” Ms. Yellen said.

That the question even comes up is a sign of the bind central banks find themselves in seven years after the financial crisis. Growth remains weak, and investors have retreated from risky assets this year, putting pressure on monetary-policy makers to find more aggressive ways to stimulate demand.

The  Janet Yellen adopted negative rates in January, following the example of the European Central Bank and policy makers elsewhere in Europe. Countries representing more than a fifth of global economic output now are experimenting with negative rates.

Fed officials are taking the idea seriously after watching the efforts overseas. Negative rates are “working more than I could say I expected” only a few years ago, Fed Vice Chairman Janet Yellen said this month. The Fed said in recent materials related to its annual bank “stress tests” that big financial institutions need to model how they would perform under negative borrowing costs.

The prospect would face a number of challenges. A central impediment is the law authorizing the Fed to pay interest to banks on reserves they deposit with the central bank. The Fed now is paying 0.5%, a rate it moved up from 0.25% in December in hopes the economy and job market would keep improving.

The 2006 law granting the Fed that authority says depository institutions “may receive earnings to be paid by the Federal Reserve.” That language—“to be paid”—might prevent the Fed from charging interest on deposits without new legislation from Congress. The Fed looked at the legality of negative interest rates in 2010 but didn’t reach firm conclusions, Ms. Yellen said Wednesday.

The Fed faces more practical barriers, too. Fed computer systems for calculating interest on reserves don’t allow for negative rates, though they could be modified, according to an internal Fed memo from 2010 that was authorized for public release late last month. Negative rates also could pinch bank profits and the $2.7 trillion money-market fund industry that households and corporations rely on as a place to keep money readily accessible.

“We would need to see recession-like conditions before the Fed seriously considered this option,” Michael Feroli, an economist with J.P. Morgan Chase, said in a recent note to clients.

Meanwhile, the yield on the 10-year U.S. government note fell after an auction of government debt Wednesday drew strong demand from investors at home and abroad. Investors accepted a 1.73% yield on new 10-year Treasury notes, the lowest auctioned yield on that maturity since 2012.

Those results reflect investors’ struggle to obtain assets that offer a good mix of safety and income. Thanks to negative rates elsewhere around the globe, U.S. Treasury bonds offer some of the highest yields in the developed world.

“U.S. yields are still much higher than many other peers, creating demand,” said Mary Ann Hurley, vice president of trading at D.A. Davidson & Co. “There is no inflation, and the global economy is struggling.”

Should the economy sink, some economists say the Fed will have no choice but to find a way around the impediments to engineering negative rates.

In almost any likely recession scenario, the Fed won’t have been able to raise rates high enough to then lower them enough to provide real economic lift, said Scott Sumner, an economics professor with George Mason University’s Mercatus research center. So to get there, the Fed will have to go under zero with its short-term rate target, he said. “When we next go into recession, we’ll go negative,” he said.

via (wsj)

Lenders Tighten Lending Standards for Some Loans

By | Commercial mortgages, Commercial Real Estate, Economy

Banks cited the recent uncertainty surrounding economic forecasts as driving their decision

Lenders tightened lending standards on commercial and industrial loans and commercial real-estate loans in the fourth quarter of 2015 and expect to tighten further in 2016, according to a Federal Reserve survey of senior loan officers.

Banks cited the recent uncertainty surrounding economic forecasts as driving their decision to tighten commercial lending standards. Some lenders also said they were worried about the performance of the oil and gas industries, which have been battered by falling prices.

Survey respondents also said they expect interest rates on many types of commercial loans to increase and “a significant fraction of domestic banks” said they expected delinquencies to rise.

The survey results suggest banks could be starting to worry that a boom in commercial real estate could be coming to an end now that the Federal Reserve has raised short-term interest rates off from the near-zero level where they hovered for seven years. Fed officials have indicated they plan to raise rates further in 2016, which could dampen the commercial real-estate market.

Still, lenders said they had seen “stronger demand” for commercial real-estate loans in the fourth quarter of last year.

Banks showed less concern about lending to households, however.

Some lenders said they had eased standards for home loans, including the larger “jumbo” loans. Banks also said they expected to ease mortgage standards further in 2016.

Home sales have been healthy as consumers have become more confident in the economic expansion. The National Association of Realtors said last month that existing home sales reached 5.26 million in 2015, the highest annual level since 2006. That has pushed prices up and reduced available inventories, the group said.

via (wsj)

Five Tips on Financing Commercial Real Estate

By | Commercial mortgages, Commercial Real Estate

You most likely have invested a lot of time and a fair amount of capital to search for that commercial real estate property with hidden potential. But ask yourself, how much time have I spent on researching how to finance the purchase? What commercial mortgage options are there? Do I understand those options? Who can help me arrange the commercial real estate financing? Don’t short change your investment by not fully understanding what types of commercial mortgage financing is available for your specific type of property. Here are a few tips to help get you started.

1) Interest only option. Interest only can give you additional cash flow by reducing near-term cash outflow. However, it will not help you build equity. Interest only is a great option if you have a sound strategy to improve the property in ways that will increase the cash flow the property can reasonably generate. This is one reason, an interest only commercial mortgage is common with bridge lenders. You have to be realistic if not conservative in the cash flow forecasts your strategy generates. The main idea would be to use the principal portion of an amortizing mortgage, and reinvest that principal into the property to increase its value, or attract higher paying tenants to produce higher cash flows from the property. Ask yourself, are you comfortable with the debt level on the property and that it will not be reduced. Finally, when thinking about interest only, think about your exit strategy for the property. What are your longer term goals for the property?

2) Amortization schedule. What amortization schedule will you be comfortable with? The longer the amortization the lower your monthly payment and less impact on net cash flow from the commercial real estate property. This is really the main point with commercial mortgages, because nearly all lenders will attach a balloon payment with a maturity between 5, 7, or 10 years from when you fund the property. Therefore, it really comes down to the property’s ability to generate enough cash flow to handle the proposed amortization schedule.

3) Variable rates.  Variable rate commercial mortgages are typically tied to an index and have a margin that is added to the index. They also have caps, a floor for the limit on how low the rate will be over the life of the mortgage, and a ceiling as a limit on maximum rate that can charged be over the mortgage. When considering these variable features you should conduct rate shock analysis on your cash flows. Focus on the maximum rate and see if the commercial real estate property can still generate a positive cash flow if the index rate the mortgage is linked to increased enough to adjust your rate to the maximum rate. And don’t count on interest rates staying at the floor. If they do consider it icing on the cake and take your wife on a tropical holiday with the savings.

4) Prepayment penalty schedule. Some types of mortgages require a prepayment. These are not easy to get around, so it is important to consider your longer term strategy for any commercial real estate property. You do not want to make a short term decision to sell the the property if you accept and take a commercial mortgage with a prepayment schedule. There are different types of prepayment penalties. Lenders require them because they do not want to invest the time and cost in originating, underwriting and processing a new mortgage only to have it pay off in a year or two. Lenders are also looking at the interest rate risk involved in a prepayment. The reason there is interest rate risk for the lender is that they have contractual obligations for the liabilities they have to support the funding of the commercial mortgage. When the mortgage pays off early, they may have shortage in interest income because typically they pay funding sources at a certain rate and will now have replace the paid off mortgage with another one most likely at a lower rate. A discussion on the various types of prepayment penalties out there deserves a dedicated blog entry, so stay tuned.

5) Balloon payment. Most all commercial mortgage lenders will require a balloon payment. Lenders have to reduce their interest rate risk over time. The best way to do that is to basically “reprice” their mortgages. And typically, these terms are matched with the lenders sources of funding so that they can maintain a positive net interest margin over the life of the commercial mortgage.

Because there are a lot of commercial mortgage options available it is important to first understand your objectives for the property and then to figure out what type of financing will be most suitable to the property and your objectives. Give us a call to discuss your property and commercial mortgage needs– there is no obligation.