Commercial Real Estate

HVCRE update

By | Commercial Real Estate, Construction financing, Regulation

Our prior article about the Highly Volatile Commercial Real Estate (HVCRE) rule that was part of the Dodd-Frank Act’s Basel III capital rule needs an update.

May 22, 2018, the unclear and illogical HVCRE rule was amended. It now allows land to be valued at a current appraised value! This is a huge and welcome change. Previous to that, contributed land value was valued based on the prior sale. The new rule states, “the value of any real property contributed by a borrower as a capital contribution shall be the appraised value of the property.” Hopefully, this will help regulated banks make more loans on commercial real estate for acquisition, development, and construction.

The new rule better defines an HVCRE acquisition, development and/or construction (ADC) loan. It also allows banks to make such loans without the 150% capital weight– a huge penalty for a bank.  And for borrowers, there would no longer be a 15% cash contribution requirement (because the land would be accepted capital) and once the property begins to produce income, that income could “taken out,” for example, to payback the project’s investors.

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

Commercial Real Estate Trends for 2018

By | Commercial Real Estate, Economy, Interest rates

2017 was a great year overall for the commercial real estate industry. Some of the trends will carry over into 2018. Here’s a short list of items to consider going into 2018.

Economic trends

Interest rates are rising. The problem is that only the short-term rates are rising. The longer-term rates are only marginally higher. If the Fed keeps raising the fed funds rate and the 10-year US Treasury doesn’t increase as well, the Fed could end up with an inverted yield curve. This could lead to a slowing economy. At the least, it could lead to some lenders not funding more loans because their net interest margins are shrinking– that alone could potentially slow down the economy. For commercial real estate, increasing rates will affect the spread between cap rates and borrowing rates– the smaller the margin between them the harder it is to find profitable investments.

GDP is growing at a better clip. GDP growth in recent quarters has been around 3%. Some are predicting 4% for 2018. Not everyone shares those forecasts, but one forecast from Goldman Sachs seems to think at 4% the economy will also be more productive– that’s a most welcome word (let’s read that again, productive) that hasn’t been spoken in a while and can replace the disruptive word we have heard so much for the past several years. The Wall Street Journal recently published a great article on how productivity might rebound. Do watch for technology to lead out increased productivity– no, surfing the net doesn’t count! Here’s one article discussing the forecasts of economists from several commercial real estate brokers.

The labor market is tight. Yes, unemployment is the lowest in years and could go lower below 4%. However, that also means wages should be going up and that could lead to inflation. So while everyone is looking at unemployment, it will be important to look at wage growth and inflation. The one thing that helps keep those in check is… here’s that word again, productivity. The more productive the labor market is the less pressure there will be on higher inflation. Of course, if you are developing anything, you are already keenly aware of the shortage of construction labor.

The CMBS market survived the wall of maturities. The CMBS market is looking strong. A great article on the CMBS market is out at Three items to watch here. One, improvements in servicing agreements. This should make CMBS more user-friendly. Two, B-piece buyers are being more selective, more credit sensitive. As a result, CMBS loan candidates really have to meet or exceed underwriting requirements.  Third, the declining delinquency rate on CMBS to continue. The third one, with so much new volume coming into CMBS, delinquency would be expected to come down as new vintages of mortgages are funded and packaged into CMBS pools. This time around, delinquencies may remain lower as lenders and investors have been more conservative in their underwriting and deal selection.

International trade agreements. President Trump has pulled the USA out of some important trade agreements that could have an impact on our economy– its a bit early to tell. So this is a story to follow in 2018. Shipping and ports are the busiest they’ve been in years! So time will tell on this one.

Trends by property type

Multifamily will continue to be a hot market. However, watch out for rising vacancies as an early sign of the market softening. Another important development with the revised tax laws will be affordable housing credits. Keep looking for opportunities to serve the middle class, row houses, transit-oriented developments, and affordable rental units in most areas of the country would be a very welcome development. Finally, check out the chic micro units! These could be a very lucrative sector of multifamily– think luxury hotel rates with leases that last more than one night.

Retail continues to transform itself. As strong retail sales end the holiday season, it will be important to see how retail continues to transform itself with more attractions and creative tenants to draw traffic. Traffic is the key to retail’s success. Tenants are also finding ways to bridge the gap between physical stores and online sales through the omni-channel strategy. It has been said that consumers like to be able to return online purchases in physical stores because of the convenience. And retailers like it because the consumer ends up purchasing three times as much while returning the one item purchased online.

Industrial space has been in high demand with online retailers seeking locations closer to their customers. Expect that to continue, however, watch out for supply. With average construction times at less than 12 months, additional supply can be made available quickly and outstrip demand. So watch the available space in your market and the time it takes to fill up that new space. Look for rents to increase at a slower pace for signs that the market is becoming more balanced.

Office sector seems to be in a sweet spot. Tenants are using new office buildings in the suburbs to attract talent. There are new buildings being constructed in urban areas too. Construction cranes are in the air in most primary and secondary markets. Can demand absorb all the new space? Watch out for short-term oversupply. Watch the trend in the office flex product; it might become more than that as tenants and employees continue to redefine office work.

Rents have been increasing in 2017. Expect that to continue in 2018, unless the economy softens. Watch those vacancy rates in 2018 for any early signs of trouble in 2019!

Finally, look for emerging technologies to improve all aspects of the commercial real estate industry. Technology will provide easier access to data allowing more informed decisions and better service. At least that’s the hope. So embrace it before it embraces you.

We hope 2018 will be a great year for you. Happy Holidays and a prosperous New Year to you from us at Tower Commerical Mortgage!


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)

What is a high volatility commercial real estate (HVCRE) loan?

By | Commercial Real Estate, Construction financing, Regulation

Defined by federal regulators, an HVCRE loan is any commercial mortgage loan used to acquire, develop, and construct (ADC) commercial real property prior to a conversion to permanent financing as HVCRE where there was not at least 15 percent cash contributed by the developer. Watch out for this requirement on commercial mortgage loans that are considered high volatility commercial real estate. It’s just one of many insane rules bankers are having to comply with today. No wonder smaller banks are selling out to larger banks.

Banks must now hold 150 percent of their capital for all HVCRE loans—typically CRE loans are 100% capital weighted. The new rule went into effect back on January 1, 2015, but for whatever reason, banks are only recently (within the past year or so) rejecting loan requests that cannot meet the HVCRE requirements. The new rule is designed to protect the lender by increasing the developer’s equity cushion above the lender’s loan amount.


This could be a big surprise if you haven’t sought a commercial mortgage loan in recent years. The new requirement for obtaining a commercial mortgage has restrictions on the use of land as equity and regulators want to see 15 percent cash contributions from borrowers.

How it impacts developers

Here’s the biggest shock that will be a challenge. Your contributed capital into the commercial property must be at least 15 percent of the “as completed” appraised value in cash or unencumbered readily marketable assets! Yep, you heard that right; dirt, land, or ground isn’t of any value to bank regulators back in Washington, D.C. It should be noted that the “as completed” value is typically lower than the “stabilized value.”

In other words, what this means is, if you land banked some property for the past 20 years and now want to develop it and build a commercial building on it, you will have to demonstrate that you have paid in 15 percent equity of the “as completed” appraised value in cash or prove that the property was recently acquired with a sales contract showing what you paid for the property.

The other scenario where this would come into effect is you buy land and it appreciates while you are getting ready to raise debt. The bank would not be able to use that appreciated equity above what you paid for it.

Remember any and all cash into the project has to be documented, such as land purchase and soft costs. If you cannot show that what you paid for the property represents 15 percent of the “as completed” appraised value, the lender is now forced to ask you to pay cash or contribute unencumbered readily marketable assets (stocks and bonds, or cold hard cash) of 15 percent into the project before they lend a dollar.

For example, let’s say you found the perfect commercial project and use of your land that you have held for the past 20 years—say it was inherited. And let’s say it is now worth $750,000. You determine your construction budget will be $5 million. You think perfect, my land is 15 percent of the total costs and I have another 10 percent in soft costs and cash—thinking a LTC of 75 percent. So you call up your local banking friend and ask for a construction loan.

He says, sorry, we cannot accept that land as equity, so you will need to deposit $750,000 in the bank as collateral instead. And then, he looks at your balance sheet and says, hmm, you won’t have enough liquidity in your balance sheet after the deposit, so I am sorry, we have to decline your construction loan request. Huh?

Land isn’t considered tangible equity… Say what???

Why? It appears the regulators do not like to see a borrower requesting a commercial mortgage from a bank without having “tangible equity” in the project. Regulators would argue that one of the factors that led to the last financial crisis was borrowers claiming they had equity in a property (because of the land’s appreciation) when really the equity or capital they contributed was really just price appreciation. When real estate prices were moving up so fast that you could buy a property and within 6 months the property increased by 20 percent or more, that inflated price they would say is not really an equity contribution by the borrower. Ok, that’s understandable. But, shouldn’t the land still be worth something? In short, the regulators are arguing that the borrower didn’t really have any of their own capital or cash in the deal—no skin in the game.

A few exceptions

There are a few exceptions if the loan is secured by:

  • 1-4 family residential projects.
  • Properties that qualifies as a community development project.
  • Agricultural land

So basically, if you have a multifamily property that qualifies as a community development project for low to moderate income residents, then any bank that would finance the property would not be subject to this regulation. Unfortunately, this leaves out all other commercial properties that require financing. And of course, an SBA 504 loan may also be exempt from the HVCRE rule if it meets the requirements for community development and fits into the lender’s community develop act lending activities.

Therefore, real estate that does not have any tangible contributed capital is considered highly volatile commercial real estate. It is highly volatile because the borrower has not paid in enough of their own tangible cash. Apparently, there isn’t enough pain in the deal for the borrower. The borrower could theoretically walk away and not suffer a significant loss.

Of course, this is short-sighted at best. The regulators have not completely thought this through because they are not considering the value of the developed project—maybe “as completed” value but not the intangible value of creating something from raw, undeveloped land. The value of the end product as completed does provide skin in the game—not to mention the land contributed. Just ask anyone who lost their shirt during the financial crisis in 2008-2009 and they will tell you they did suffer some pain—even if they didn’t contribute 15% cash into the deal.

Banks must comply

Why do Bank’s care about this rule? First, they have to comply or be criticized by their banking regulators which can cause increased deposit insurance premiums, limit new branches, or limit any new products they might want to offer. Second, even if they made the loan, capital weight restrictions on the amount of the loan at 150 percent of the bank’s capital, reduces their already thin margins. 150 percent capital weight creates an additional cost of capital because it ties up 50 percent more capital that could otherwise be lent out to other bank customers. So, if they don’t follow all aspects of the regulation, bank examiners would likely criticize the bank for not following the regulatory guidance. Banks aren’t happy about this rule either, but it is the current regulatory environment they must operate in.

How can a borrower avoid being classified as HVCRE?

There are three conditions anyone of which triggers HVCRE:

1) The LTC is less than or equal to the maximum LTC requirements found in the Interagency Guidelines for Real Estate Lending. For construction loans, its 80 percent LTC, but most banks are lending at lower percentages.

2) The borrower contributes at least 15 percent of the “as completed” value of the property in cash or unencumbered marketable assets prior to any lender’s advance. Some banks are accepting soft costs as part of this contribution.

3) The borrower’s contributed capital and any capital generated is contractually required to remain in the project until the project is completed, stabilized, and converted to permanent financing.

If you’re looking to a bank for a construction loan and have held the property for a while, be prepared to show your skin in the game!

Good news!

We have non-bank construction lenders who aren’t under such silly regulations. Give us a call if you have banked some land years ago and now want to develop it.

Helpful links

This article isn’t meant to be legal advice and does not answer all the questions about the HVCRE rule. So if you want to learn more here are some links to the regulation, guidance Q&A and others interpretations.–US-Federal-Banking-Agencies-Release-Answers-to-FAQs.pdf


What Commercial Real Estate Trends To Focus On For 2017

By | Bond Market, Commercial Real Estate, Economy, Federal Reserve, Interest rates, Regulation

2017 is almost here! We will be watching the following commercial real estate trends in 2017. These will be important especially if you need financing or are looking for a new property to develop or buy and need financing to do it.


One of the biggest trends to watch will be unemployment– particularly over the next two years. If you followed only unemployment you would have a good feel for where commercial real estate values are headed. Cap rates tend to follow the unemployment rate. So understanding the health of the labor market is an important indicator. It affects how much office space a company needs, the sales volume of a retailer, the industrial space needed for distributors and manufacturers, how many travelers are booking hotel rooms and household formation which drives occupancy and affordability of multifamily. All of this is dependent upon how many people are employed. Closely related unemployment is interest rates.

Interest Rates

What the Fed does will influence interest rates for sure. But unemployment is also what the Fed is watching that influences them to take action too. The Fed’s dual mandate to influence unemployment and control inflation is only done by changing interest rates. The Fed has the ability to change short-term rates by changing their federal funds rate. That’s on the short end of the yield curve. They can also influence the longer end of the market through their HUGE multi-trillion dollar bond portfolio.  It’s the long end that can impact borrowing rates. Raising short-term rates has a direct impact on long-term rates.


Recently interest rates spiked up because of the Fed’s anticipated decision to increase the federal funds rate. But it was also because of market factors such as an increase in commodities and President-elect Trump’s election win and commitment to infrastructure spending.  The bond market has had a big reaction to those two events. It will take time for both increasing commodity prices and any infrastructure spending to impact an increase in prices generally that would lead to inflation. At this time, inflation is still not a concern. But with low unemployment, the largest drivers of inflation is wage growth and with low unemployment, employers have to pay more to get qualified workers. More people working with rising wages will eventually lead to inflation. So we are watching this closely too.

Tax Reform

With President-elect Trump, tax reform is a top priority. The benefit of this is he’s a commercial real estate developer and operator too! So we can expect that whatever actually happens to tax reform, there will be some beneficial change that is positive for commercial real estate. One of the likely benefits is the 1031 exchange will remain. That’s a close item of the tax reform that we will be following, in addition to lower tax rates– another plus for economic growth.

Financial reform

The Dodd-Frank Act, unfortunately, is not going away. But with President-elect Trump, some of its provisions hopefully will. By reducing the regulations that banks are under they will be more nimble to expand their commercial real estate lending in smart ways. Banks do not need regulations to force them to make better loans. Banks are very cognizant of making safe and sound loans. The fewer regulation banks are forced to comply with allows them to make loans that make sense for both them and their borrowers. Yes, there may have been some bad actors, but generally speaking, less banking regulation will allow our economy to function more efficiently, productively and grow at a healthier rate.

To much success in 2017!

Happy new year!


What Trump’s Election Could Do for Commercial Real Estate

By | Commercial Real Estate, Economy, Regulation

Now that the election results are in and our country’s president and congress makeup has been determined, we can look forward to a further period of growth and opportunity in commercial real estate.

Trump’s acceptance speech

It was reassuring to hear President-elect Trump’s acceptance speech right after the election results were in. He immediately highlighted the need for more government spending:

“We are going to fix our inner cities and rebuild our highways, bridges, tunnels, airports, schools, hospitals. We’re going to rebuild our infrastructure, which will become, by the way, second to none. And we will put millions of our people to work as we rebuild it.”

For those unfamiliar with American politics, the idea that a Republican president would put more government spending at the top of his agenda is anathema to the party’s traditional “smaller government” stance. Unfortunately, as Milton Friedman said, “We are all Keynesians now.”  While a smaller federal government with a smaller budget would be ideal, if increased growth and prosperity results from more of this type of spending (rather than the prior eight years of transfer payments) it should improve the outlook for our country.

In case you nodded off in your Economics 101 class, Keynesian Economics is the theory that the government should increase spending (and cut taxes) to stimulate a slow economy, and conversely, should cut spending (and raise taxes) when the economy is at risk of overheating.  Of course, that’s theory.


The one thing that matters about what Trump said, is that he wants to actually develop and redevelop our infrastructure. That to me means that where ever that happens, the properties close to it will also rise in value or be a great redevelopment site as well. That translates into more opportunities for all.

Commercial real estate plays an important role in the U.S. economy. As new policies are written and legislation moves forward and as regulatory burdens are lessened, it will be good for the industry, your tenants, and the economy generally will benefit from fair and steady government policy that incentivizes growth.

We at Tower Commercial Mortgage are optimistic that the president-elect will develop and successfully advance a pro-growth agenda for all Americans. What is good for commercial real estate is good for our country!

Much success!

Best Package Delivery Management Services

By | Commercial Real Estate, Multifamily housing, Property Management

What is package delivery management?

Ask any onsite property manager or leasing agent and they can give you a good definition of a package delivery management system. Basically, it provides residents with an efficient, convenient, secure way of receiving their delivered packages. With greater use of the internet to purchase most anything, it becomes more important to deal with all the incoming packages ordered by residents. Some residents may just have their stuff delivered at work or another location. But being able to safely have packages delivered at the property provides residents with peace of mind. So offering package lockers with emails that are sent out when parcels are delivered is a value add in many locations.

Millennials, in particular, value this amenity when searching for a property, but really it is any tenant that buys stuff online and has it shipped to their apartment. It creates what is being called package anxiety because of the potential theft of the package if they are not home when it actually arrives or they get home late and the property management office or leasing office is closed. According to the NMHC/Kingsley first-ever survey on package delivery, it ranks second on their list of sought after amenities.

It could also be argued that a good package delivery management system could reduce operating expenses because of the staff’s time that has to be devoted to managing and storing the incoming packages. A package delivery management system is more critical in larger high-rise properties, and could be an important amenity for garden style properties too.  In any case, during the holiday season, a package delivery management system can leave residents feeling grateful indeed.

So what can you do?

It only makes sense to have a system for managing package deliveries. So I have tried to find some reputable products that are designed to solve this problem of all the incoming packages. Here are a few solutions that you should find helpful.

First,are Parcel Pending and ActiveBuildings EGG. These two companies have this problem figured out! It is self-operating and eliminates any contact with your property manager or leasing office. Residents are able to receive their package essentially 24/7 after it is delivered and they are notified when it arrives so they know it’s been delivered at the locker. These are most fitting for the garden community properties. High-rises typically already have central delivery and a storage room, whereas garden communities do not. So lockers make sense for that property type.

Second, is Notifii. They are a software company providing a partial solution. Think of it as a centralized mailroom that sends out push notifications when packages arrive. They do not provide a device to store the packages. So you’ll still have to have storage space (as you will with parcel pending or the EGG) but, you will also have to figure out the security and who will operate the physical storage. Not as easy for this to be “maintenance free.” For smaller properties or garden community properties this might night be a good option because of the lack of storage space, but it works well for high-rise.

Third, storage lockers from USPS. These are lockers, called gopost units located at convenient locations to accommodate a busy lifestyle. The Postal Service is currently installing units near certain Post Offices, grocery stores, pharmacies, transportation hubs, shopping centers and more. The downside is two things, it’s not an onsite amenity and it may not be available near the property or even in the city for that matter.

Fourth, Amazon storage lockers located near the property. The great thing about this solution is that it is an offsite service provided by Amazon– no cost nor fuss from a property management perspective, but it has the same downside the USPS lockers.

While there are many others, I have tried to highlight the various types of package delivery management options available. The costs range from expensive to free, and the benefits are zero to a highly sought after amenity. I hope you’ve found this article helpful. Below are a few links to other articles that might help you when researching this important issue.

Additional information

Package Locker Industry lifts off

Taking Package Delivery Management out of the leasing office

NMHC/Kingsley Package Delivery Presentation

Package storage systems help properties and residents handle deliveries


Current Multifamily Trends

By | Commercial Real Estate, Multifamily housing, Property Management

The multifamily market is as strong as ever driven in part by this article’s current multifamily trends. While disruption is occurring in many industries, multifamily properties are seeing the benefits of it. New technologies are only helping property owners and tenants alike occupy and enjoy a place to call home. Here are seven trends that should be considered with both existing as well as new properties being designed.

Walkable and urban setting.

Most new construction activity is in or near urban centers. Renting is the only affordable way to be close to an urban center in many cities. They want everything within 20 minutes. Many properties provide access to locations that are not otherwise available; such as employment, shopping, cultural centers, entertainment, sporting events, etc. Another aspect of walkability is proximity to public transportation. The result is a greater sense of community that a couple large demographic segments are seeking.

Largest tenant segments: millennials and empty nesters.

Today’s demographics have these two large segments; millennials, and empty nesters, on the demand side of the multifamily market. So it is important to address their needs, concerns, and desires in a property. Both are looking for smaller space. These two segments are where you will find Generation Y enjoying the company of their parents as well as their friend’s parents. Combine these two segments and you have what is called a multi-generational apartment.

Tenants seeking affordable luxury: smaller units with more elaborate unit amenities.

One of the unique aspects of this current market is the desire for small luxury space that is affordable. So, to get that, developers are creating “micro” units that are 250-350 square feet and rent them for $900 a month. It works for millennials because they don’t spend a lot of time at home. It works for empty nesters to a degree because they are downsizing. The key is the location according to the new Urban Land Institute report ‘The Macro View of Micro Units.” Amenities in the units might include, high-end flooring, tall ceilings, in-home washer and dryer, marble bathrooms, stainless steel appliances in micro kitchens, private balcony or terrace, and spacious walk-in closets.

Tenants are looking for more.

While traditional cable and satellite utilities are on the decline, it’s hard not to continue offering them. However, a fast internet access is vital and becoming a larger source of highly selective media, entertainment, and sports. Another desire is to have greater control over HVAC and lighting controls by using technology to allow better control for both tenants and property owners. Having green features speaks to tenants who value energy conservation which is also an added benefit, but it’s a subject of a future report.

Package delivery management.

With greater use of the internet to purchase most anything, it becomes more important to deal with all the incoming packages ordered by tenants. Some tenants may just have their stuff delivered at work or another location. But being able to safely have packages delivered at the property provides tenants with peace of mind. So offering package lockers with emails that are sent out when parcels are delivered is a value add in many locations. Millennials, in particular, value this amenity when searching for a property. See my article on this here.

Get ready for this list of amenities.

Most amenities involve some sort of common area, and most of these also involve some sort of social aspect or have a common area for working. Multifamily tenants today are looking for common space that can act as an ad hoc living space with both indoor and outdoor living. Many amenities involve a service. Millennials and surprisingly enough empty nesters both are devoted to pets and their mobile devices. So technology is another aspect of this. These are some of the amenities being found in new properties: car-sharing service, bike storage and repair, child-care service, concierge service, cooking classes, dry cleaning/laundry service, Free WiFi, pet grooming, personal shopper, rock-climbing wall, rooftop terrace, spa/massage center, tech/business center, extra storage space, and yoga/aerobics/wellness classes. Notice all the “service” amenities?

Short-term leases.

When thinking about these current multifamily trends, it is hard not to think of Airbnb! There might be some high-profit margin units with a strategy like this. The key will be a location to local attractions to draw these short-term tenants in. A large consideration for these tenants is that the unit needs to be furnished. One of the drawbacks to this is the sense of community, mentioned above, would be lost. In thinking about these short-term leases, it might be good to keep the number of these units to a minimum or you will upset the longer staying resident tenants. Finally, there has been some discussion of allowing tenants to sub-lease out their longer-term lease in this fashion, but this is a legal topic worthy of its own report.

Hopefully, you can find ways to capitalize on these current multifamily trends and add value your property and greater satisfaction for your tenants. Let us know if you are seeing other trends that are happening in your area.

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.