By Cory Carlson
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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.
