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Apartment (5+ Units) & Commercial Financing
Cory Carlson
October 2, 2024
Commercial & Apartment Mortgage Brokerage - We represent you in sourcing, securing and negotiating your loan.
In addition to Real Estate Brokerage, we offer Mortgage Brokerage services too. We can arrange financing for your acquisition and refinance on commercial and apartment buildings. Leverage our relationships with national, regional and local institutions. Commercial financing is different than residential (1-4 unit) financing and the unique nature of real estate investments brings specific considerations into play. Commercial loans have some negotiation factors and we can play with the levers to structure a loan that fits your specific needs and strategy.
Underwriting -
Commercial/multifamily financing is usually an asset-based loan product. The lender underwrites the borrower based on their net worth, experience and the performance of the property. For instance, if a borrower is looking to secure a $2,000,000 loan they must show that their net worth is equal to or higher than the desired loan amount. This will be shown on a Personal Financial Statement (PFS) outlining all cash, savings, equity in real estate, retirement funds and personal property. Usually banks will apply a percentage of the total value to illiquid assets such as retirement. For example, if a million dollars is in your IRA, the bank may apply 70% to its value and it will contribute $700,000 towards your total net worth. We have a Personal Financial Statement template that we can provide you.
A schedule of real estate owned (SREO) is also requested early in our engagement. This outlines the properties already owned, their financing and general outline of income and expense items. We can provide a schedule of real estate owned template. These are available on our website.
Debt service coverage ratio (DSCR) is how lenders are determining the max loan amount. They take the annual mortgage principal and interest and multiply by their DSCR. This is usually 1.2-1.25. For example, if the annual debt service is $100,000 the property must show a net operating income of $120,000 (1.2x the debt service). Net operating income (NOI) includes vacancy, taxes, insurance, repair/maintenance/turnover, management, utilities, reserves, and other operating expenses. The lender will back into and stress test a max loan amount by adjusting the loan amount up to where the DSCR equals the NOI. Sometimes lenders have other overlays or special underwriting considerations that can skew max loan amounts.
Recourse vs. Nonrecourse -
Recourse or nonrecourse loans often involve different types of collateral. Recourse loans may require personal guarantees from the borrower, while nonrecourse loans are typically secured by the specific property being financed. The choice between recourse and nonrecourse financing depends on factors such as the borrower's risk tolerance, the property's value, and the lender's requirements. Generally the lender will apply a small premium to interest rate for nonrecourse products. This can range from 5-15 basis points.
Fixed Rate Periods & Amortization -
Commercial loans usually a fixed rate period where the rate is locked for a certain amount of years before it starts to adjust. The available fixed rate periods are loan type depending. For example, SBA loans offer fixed rate and amortization schedules than an apartment loan. Apartment loans generally have a 3, 5, 7, or 10 year fixed rate period and 25 or 30 year amortization. Commercial loans oftentimes have a 25-year amortization. When a loans fixed rate period is over and begins adjusting, most borrowers refinance, 1031 exchange or depending on the market let it adjust. Sometimes the loan would adjust ever 6 months, and if pricing is similar or lower the monthly mortgage will adjust accordingly.
Pre-payment Penalties -
Pre-payment penalties are the costs associated with paying off or refinancing a loan product within the first X amount of years of origination. This is usually described in step-down basis; For example, a 5,4,3,2,1. This means if you were to sell the property or refinance in the first year a 5% cost of the loan amount would be applied. Year 2 it would be 4%, year 3, 3% and so on. This is negotiable to some extent, and can be front loaded if the strategy points towards a sale in year 3. Also it is possible to negotiate the fee away towards the end if you refinance with the same lender. We can discuss the pro's/con's and help negotiate the pre-payment penalties.
Origination & Other Fees -
Origination fees are calculated as a percentage of the loan amount and generally range from 1%-2% including Constant Commercial's fee. Sometimes lenders will waive or lower their origination fees and we can just charge our fee. Other fees incurred during the transaction can be appraisal, credit checks and underwriting fees. The lender will provide a few appraiser options with different costs and timelines.
Process & Timeline
The process starts with gathering the documents needed to submit to the lenders that best match your loan criteria. The documents include your personal financial statement, schedule of real estate owned, borrower letter (brief description profiling borrower & experience), property financials and CCRE's quick underwrite. This loan package is presented to the potential lenders that we deem fit.
We are now waiting for them to send a term sheet. Sometimes this just comes in an email with the general rate and terms offered. Here is where CCRE can leverage the price and terms provided to see if lenders are willing to compete. The next step would be a formal term sheet that is a summary of the intentions of the lender and borrower and includes more details. Term sheets are not a commitment to provide funding nor provide a binding agreement. After term sheets are reviewed and a lender is picked, a borrower has the option to rate lock. Generally rate locks are for 60 days and they protect against the downside of rising rates, but do not protect borrowers of the upside of rates going down.
The lender will provide a loan application that requests borrower information. The previously submitted personal financial statement and schedule of real estate owned can be used if the loans applications are asking for that information again. Part of our job is to save you time and fill out the known information on your behalf (if so desired).
Following the loan application and property information the loan will go into underwriting. Here the underwriter will ask for bank statements to verify the personal financial statement and borrower liquidity. The appraisal is ordered and usually takes a few weeks to be completed. The complete loan process can range depending on the loan type. Some loan types can be completed in just a couple/few weeks while other conventional financing options can take 45-70 days. Some lenders are more streamlined then others.
Our Commitment to You
With our representation we are committed to securing financing that fits your strategy and needs. Our job as your broker is to leverage our relationships, save you time, money and guide you through the process. We pride ourselves on thoroughly going through the pro's & con's and aiding in making a decision that benefits you.
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Maximizing Profits with Constant Commercial Real Estate’s List-Back Services
Delaware Statutory Trusts (DSTs) have gained significant popularity among real estate investors, particularly those looking to defer capital gains taxes while maintaining passive income from real estate holdings. A DST is a legal entity that allows multiple investors to own fractional interests in high-quality, institutional-grade properties. It provides a hands-off approach to real estate investment while offering potential tax advantages under the IRS 1031 Exchange guidelines. This article will explore the profile of an ideal DST investor, the tax treatment of these investments, a step-by-step guide on how to execute a DST exchange, and the critical role of an experienced real estate broker in facilitating the transaction. Who Should Consider a Delaware Statutory Trust? DSTs are not a one-size-fits-all investment. They are best suited for a specific type of investor, typically those who: Are Nearing Retirement or Seeking Passive Income: Investors who want to step away from active property management but still earn rental income find DSTs an attractive option. Have Highly Appreciated Investment Properties: Those looking to sell a property that has appreciated significantly and want to defer capital gains taxes through a 1031 Exchange. Seek Portfolio Diversification: DSTs offer access to diversified, professionally managed commercial properties, including multifamily apartments, medical offices, retail centers, and industrial facilities. Want to Avoid the Hassles of Property Management: DSTs eliminate the burden of dealing with tenants, repairs, and ongoing property oversight. Are Looking for Predictable Income: Many DSTs offer stable, projected distributions, making them an appealing choice for income-focused investors. Have a Low Risk Tolerance for Real Estate Investments: Institutional-grade properties with professional management often provide a more secure, stable investment compared to direct ownership of real estate. Tax Treatment of DSTs One of the main attractions of investing in a DST is the ability to defer capital gains taxes via a 1031 Exchange. Here’s how DSTs are treated from a tax perspective: 1031 Exchange Eligibility: The IRS recognizes DST interests as “like-kind” property, meaning investors can exchange their real estate holdings into a DST without triggering immediate tax liability. Tax Deferral: By utilizing a 1031 Exchange, investors can defer capital gains, depreciation recapture, and state taxes on the sale of a relinquished property. Potential for Step-Up in Basis: Upon the investor’s passing, heirs can receive a step-up in basis, potentially eliminating deferred taxes altogether. Depreciation Benefits: Investors receive depreciation pass-through benefits, which can offset taxable income from distributions. Passive Income Taxation: Income generated from the DST is reported on Schedule E, and depreciation deductions may help reduce taxable income. How to Execute a DST 1031 Exchange A 1031 Exchange into a DST follows a structured process. Below is a step-by-step guide: Step 1: Sell the Relinquished Property The first step is to sell the property that you intend to exchange. The sale proceeds must be handled by a Qualified Intermediary (QI) to maintain 1031 Exchange compliance. Do NOT list the real estate until you have FIRST communicated with a QI. Step 2: Identify the DST Investment Within 45 days of selling the relinquished property, you must identify potential replacement properties. Investors typically work with a an experienced real estate broker specializing in DSTs and 1031 exchanges to review available options. Step 3: Conduct Due Diligence Before committing to a DST investment, it’s crucial to analyze: The quality and location of the underlying real estate. The financial strength and reputation of the DST sponsor. The projected income and risk factors. The loan structure, if any. Step 4: Work with a Qualified Intermediary (QI) The QI facilitates the transaction, ensuring the funds are properly transferred and that all IRS regulations are met. The investor never takes possession of the sales proceeds directly from the relinquished properties. A QI needs to be involved early in the engagement to ensure title and escrow is set up to remain compliant. Step 5: Close on the DST Investment Once the due diligence is complete and the paperwork is finalized, the investor formally acquires a fractional interest in the DST property. The transaction must be completed within 180 days from the sale of the relinquished real estate. Constant Commercial Real Estate can assist in multiple property dispositions if it pertains. Step 6: Receive Passive Income and Tax Benefits After the exchange is finalized, the investor begins receiving distributions, typically on a monthly or quarterly basis. They also continue to defer taxes as long as they remain invested in the DST. Why an Experienced Real Estate Broker is Essential A real estate broker with experience in DSTs plays a vital role in ensuring a smooth and successful exchange. Here’s why their expertise matters: Navigating the Complexity of 1031 Exchanges: A broker familiar with 1031 rules helps investors avoid costly mistakes that could disqualify their tax deferral benefits. Access to Institutional-Quality DST Offerings: Brokers have relationships with reputable DST sponsors, giving investors access to high-quality properties not easily found on the open market. Objective Investment Guidance: An experienced broker helps evaluate DST options, considering factors such as market trends, sponsor track record, and risk assessment. Tailored Investment Strategy: Brokers work with investors to align their DST choices with long-term financial goals, ensuring a suitable fit for their portfolio. Streamlining the Identification Process: Given the strict 45-day identification window, a broker can expedite the selection process, helping investors make informed decisions under time constraints. Compliance with IRS Regulations: Working with a knowledgeable broker reduces the risk of missteps that could jeopardize the exchange. Conclusion Delaware Statutory Trusts provide a compelling investment vehicle for real estate owners seeking tax deferral, passive income, and diversification. However, executing a 1031 Exchange into a DST requires careful planning, thorough due diligence, and strict adherence to IRS rules. For investors looking to transition from active property management to a passive investment structure while preserving wealth, DSTs can be an excellent solution. Engaging an experienced real estate broker is key to identifying quality DST opportunities, navigating the 1031 Exchange process, and ensuring compliance with all regulatory requirements. With the right guidance, investors can leverage DSTs to optimize their real estate portfolios while enjoying long-term financial benefits.