APARTMENT FINANCE TODAY presented four hypothetical examples of loan requests to a panel of expert lenders to get their responses. We asked them if they would be likely to offer the borrower a loan, and if so, on what conditions. We also had them tell us what were the hot buttons in the property’s description that affected their decision making.

We asked a broad array of lenders, from representatives of government-sponsored enterprises’ programs to conduits to commercial banks and more (see sidebar). Their responses to these examples are informational only, but they should give borrowers an all-too-rare opportunity to see how lenders make their decisions.

EXAMPLE 1: A San Antonio refinancing

Example 1: San Antonio Financials




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Example number one is a 123-unit, 1970-vintage complex of 14 buildings located just 10 minutes from downtown San Antonio. It is near several major thoroughfares and has a swimming pool, a clubhouse, and covered parking. It has historically been 88 percent occupied. Its current debt is $2.3 million.

The borrower is cashing out $365,000 and will reinvest the proceeds into the project. The improvements are expected to increase occupancy and boost monthly rents by $10 per unit. The borrower, who lives in another state, has a 670 credit score and minimal multifamily experience.

To refinance the property, the borrower is requesting a $2.7 million loan (a 75 percent loan-to-value [LTV] ratio) with a five-year term and 30-year amortization.

Lenders’ responses

Kerry Walker, vice president of National Apartment Finance, Inc., a Fannie Mae lender, said the full $2.7 million loan request could be met. In fact, though the request was for a 75 percent LTV, she could do a maximum of 80 percent, with a debt-service coverage ratio (DSCR) of more than 1.25x. Based on mid-May rates, she said the five-year interest rate would be 6.15 percent.

She would like to see the property increase physical and economic occupancy, noting that “the 88-percent occupancy is a concern, but probably is acceptable if justified by certain market conditions.” But she said the property had good current cash flow and a strong DSCR.

Steve Bram, president of George Smith Partners, Inc., a mortgage brokerage firm, said lenders like the Texas markets of Austin, San Antonio, and Dallas, “in that order.” But having an out-of-state owner “with little experience may cause heartburn,” he added.

He estimated that the property could get a loan up to about $3 million, assuming a 6.35 percent interest rate and a 1.15x DSCR.

The inexperienced, absentee owner isn’t the only challenge. “Despite the $300,000 in upgrades, the building is tired,” said Bram, “A major facelift [to provide] more upside in rents might be a good idea.”

“It appears … that the borrower is going to make some property enhancements, which should enable the management team to raise rents in an attempt to offset the rising expenses,” said Brady O’Donnell, director at Johnson Capital Group, a Freddie Mac lender. He agreed a loan could be made and said the highest he would be likely to go would be $3.3 million based on a 1.20x DSCR. The best possible interest rate would be 115 basis points over the five-year Treasury.

“The rising repair and maintenance [R&M] numbers would indicate that the age of this property is requiring more and more upkeep,” O’Donnell added. If the owners use their cash-out proceeds to attend to any deferred maintenance, they could decrease R&M costs in coming years.

The lack of borrower experience and out-of-state ownership “will concern all lenders looking at this transaction,” said Charles Krawitz, head of originations at LaSalle Bank’s Multifamily Finance Group and the moderator of the panel. Lenders would likely want to see the $365,000 cash-out proceeds “placed into a restrictive escrow to ensure that the [improvements] work is actually completed,” he said. “The problem is that most lenders will want the work completed and paid for prior to the release of the escrowed funds, and the borrower may very well lack the financial wherewithal to do this.” He cited the 670 credit score as being below what lenders would like to see and as evidence that “the borrower may not be overly diligent in paying his bills.”

Krawitz also sees the 30-year amortization period as overly aggressive considering the likely useful life of the 36-year-old property. “Offsetting this is the property’s stellar location in close proximity to downtown San Antonio’s employment center, and the historically consistent cash flows, both on the income and expense sides.” That optimism is undercut, he noted, by the 88-percent historical occupancy.

“At the end of the day, the length of time that the property was owned by the borrower will determine a lender’s willingness to structure a proposal that meets some, if not all, of the borrower’s request,” Krawitz concluded.

Example 2: An Alabama acquisition

Example 2: Alabama Financials




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Example number two is a 194-unit, four-year-old complex of 20 buildings in Phoenix City, Ala. Traditionally boasting 95% occupancy, the property is located three miles from the city center, and it includes a swimming pool, clubhouse, fitness center, basketball court, and parking for boats. There is a possible tax reassessment associated with the sale.

The borrower is seeking a $4.6 million loan toward the purchase price of $6.1 million (a 75-percent LTV), for a 10-year term with 30-year amortization.

Lenders’ responses

“Once a lender gets over the disappointment that this well-occupied property is located in Phoenix City, Alabama, and not Phoenix, Arizona, they will realize that there are other convincing attributes that carry the deal,” said Krawitz. The recent construction and a dynamic local community are strengths of the property.

The $4.6 million loan amount is acceptable to National Apartment Finance’s Walker, who estimates that would be at an 80 percent LTV, a DSCR of more than 1.25x, and an interest rate of 6.35 percent. “Mezzanine financing could be offered on this transaction, making the combined LTV 85 percent,” she said. Areas of concern – or at least those that require further exploration – include the property’s age and quality, and the possible tax reassessment, which could affect the net operating income.

“Tax reassessment is okay, but the hit you will take is key to knowing if the deal still works,” said Bram of George Smith Partners.

It’s a relatively new building with high occupancy, so Bram thinks it could get a loan up to $5.4 million (an 80-percent LTV), a 1.15x DSCR, a 10-year term, and 30-year amortization.

This loan size is in the sweet spot for Keith Van Arsdale, BMC Capital’s director of southwest operations, who focuses on loans between $500,000 and $7 million. He, too, can go up to 85 percent LTV if needed, and can go as low as a 1.0x DSCR.

Noting that the property “resides in a small market with a high percentage of military residents that are subject to deployment at any time,” O’Donnell said he’d be willing to consider a loan up to $4.6 million (based on a 1.25x DSCR) if no more than 25 percent of the households were military. His loan can go up to 80-percent LTV, with an interest rate of 6.34 percent (115 basis points over the 10-year Treasury, as of mid-May).

“With operating expenses running at 60 percent of collections, an experienced operator will create value by cutting costs while simultaneously raising rents,” said Krawitz.

Example 3: A high-LTV request

Example 3: Oklahoma Financials




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Example number three is a 144-unit community of nine buildings built in 1999 in Guyman, Okla. Historically 95 percent occupied, the property is located two miles from the city center and its amenities include a swimming pool, a clubhouse, a basketball court, and covered parking.

The borrower is seeking a $4.3 million loan toward the purchase price of $5.3 million (an 80% LTV), for a 10-year term and 30-year amortization.

Lenders’ responses

This example elicits only a “maybe” from Walker. She notes the slight downward trend in effective gross income and net operating income, and an increase in expenses, and said more scrutiny would be necessary before financing could be arranged. “If the market conditions have stabilized, and the increased expenses could be explained, a deal may be able to be structured,” said Walker. The age and condition of the property are both positive factors, she added.

The high payroll raises a question in Bram’s mind about the possibility of outsourcing some of the services. “Also, with the huge increase in utilities [expenses], it might be a good time to introduce [direct billing] to the property,” he said. But he likes the occupancy level and the recent vintage of the property, and estimates it could get up to $4.1 million (just below the borrower’s asking amount), a 76.8-percent LTV, 1.15x DSCR, with a 10-year term. He estimated the interest rate at 6.20 percent.

Freddie Mac “would most likely pass on this loan opportunity,” said Johnson Capital’s O’Donnell. In explanation, he cited the small population of the community (only 10,730 residents, according to his research), the fact that it has only one major employer, and its decreasing effective gross income and net operating income.

Krawitz cites the expression “Don’t catch a falling knife” when considering this deal’s cash flow. “A lender will have to learn far more about this rural community and determine if the rental income is in a chronic state of decline, or did a one-off event occur that has now run its course?” he said.

“Another question any lender should ask is ‘Who’s buying the property?’” he added. If the buyer has a good experience level with rural properties, that could help alleviate the lender’s fears.

Example 4: A Silicon Valley refi

Example 4: Silicon Valley Financials




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Example number four is a 164-unit, 23-building complex in Sunnyvale, California. The property was built in 1973 and renovated in 2003. Its amenities include a swimming pool and spa, a clubhouse, three laundry rooms, covered parking, excellent landscaping, and green space. Its historic occupancy rate has been 98 percent. The property currently carries $14.2 million in debt.

The borrower is seeking to refinance the property with a loan of $14.2 million (a 55-percent LTV), for a 10-year term with 25-year amortization.

Lenders’ responses

Walker finds this property, located in the hot Silicon Valley market, to be a strong candidate for funding, and suggests a $15.2 million loan (or higher “if the client wanted cash-out”) at an 80% LTV.

“This is a nice property in a good area,” agreed Bram, who estimated a loan amount up to $15 million (at a 70-percent LTV), a 1.15x DSCR, 6.2-percent interest rate, a 10-year term, and a 25-year amortization rate. He saw no significant drawbacks to the property, and liked the increase in effective gross income from 2003 to 2005.

“This property would be a great fit for Freddie Mac based on the size of the loan, requested loan to value, property location, and strong operating history,” said O’Donnell. He estimated a maximum loan of $16.1 million (an 80-percent LTV) and said Freddie could offer its high-leverage loan product, which would provide a 75-percent senior mortgage with a 10-percent mezzanine piece secured by partnership interest. He, too, would go with a 1.15x DSCR, an interest rate based on 90 basis points over the 10-year Treasury, and the option for interest-only payments during the entire loan term.

Lenders will be “falling all over themselves” to fund this “highly conservative and well-located deal,” said Krawitz. He said a hyper-aggressive conduit was likely to win out, “all the while angling to provide more proceeds regardless of the borrower’s desires.

“As an offshoot of the conduit’s effort to lend maximum dollars, a seed may be planted with the borrower that may inadvertently lead the borrower to flirt with a Fannie Mae execution due to the ability to secure supplemental financing down the road, should the borrower’s leverage desires change,” Krawitz concluded.

The lender panelists 

Moderator: Charles Krawitz, head of originations, LaSalle Bank Multifamily Finance Group, Chicago, www.lasallerecm.com


Kerry Walker, vice president, National Apartment Finance, Inc., a Fannie Mae lender, Pleasant Grove, Utah, www.nationalapartmentfinance.com

Brady O’Donnell, director, Johnson Capital, a Freddie Mac lender, Denver, www.johnsoncapital.com

Keith Van Arsdale, director of southwest operations, BMC Capital, a commercial bank, Houston, www.bmccapital.com

Steve Bram, president, George Smith Partners, a mortgage brokerage, Costa Mesa, Calif., www.gspartners.com


APARTMENT FINANCE TODAY would like to thank Krawitz for his help in preparing this article. Krawitz also moderated a popular panel on lenders’ evaluations of prospective loans at Apartment Finance Today’s Developer Conference in San Diego in March.

Dealing with DSCR constraints

By Glenn Housman

With the Federal Reserve pushing short-term rates higher (affecting floating-rate loans), and the 10-year Treasury now near 5.15%, most borrowers are finding their transactions are debt-service-coverage ratio (DSCR) constrained, especially in markets where the prices are historically on the high side. But there are ways to leverage more dollars if you know current lender underwriting parameters.

It was not too long ago that the minimum DSCR was 1.25x, and a 30-year amortizing constant was the norm. Most lenders continue to strive to fit their higher leverage deals into this ideal box. But because the availability of capital remains excellent in 2006 and the competition very stiff, normal underwriting constraints have been relaxed. Borrowers should be aware that Freddie Mac and Fannie Mae are now using a 1.20x DSCR and in some cases 1.15x using a 30-year amortizing constant.

The conduits start at 1.20x but easily get to 1.15x on an amortizing constant. Some conduits will go near to breakeven coverage on some transactions. A few conduits will now underwrite using the actual interest-only (IO) constant, which by way of comparison is approximately equal to a break-even DSCR on a 30-year amortizing constant.

That is a remarkably aggressive position for a lender. The agencies have not been willing to do this for any loans. Thus, the few lenders underwriting to an IO constant have a significant advantage on leveraging dollars. Most of these deals are five-year deals. The key is to get the loan underwritten to qualify for IO for the full term of the loan. If it does not qualify for the entire term, they underwrite using the amortizing constant. On a $10 million loan, the difference in proceeds is more than $1 million at current rates.

With respect to the underwritten net operating income, it’s not uncommon in the current market to see underwriting based on the trailing three months of performance, and in some cases just the trailing 30 days. Most lenders continue to evaluate the past 12 months and longer but have been relying heavily on the most recent history (assuming it is the most favorable).

Interest-only financing is readily available from almost all lenders for 80 percent, 10-year deals for the initial two to three years and in some cases up to four or five years. For 70 percent leverage, IO for the full term is available in the market. There usually is only a very small premium (maybe one to three basis points, if any) for an IO option. Lenders using partial IO are stressing the loans based on the amortizing constant. For a typical 10-year loan with three years of IO, the loan starts amortizing at month 37 on a 30 year constant and the NOI is stressed at that constant.

Glenn Housman, MAI, is director of CBRE/Melody Capital Markets, an investment banking firm; www.cbremelody.com.