Multi-Housing News - March 2009 - (Page 21)

finance & investment Need a $750K Loan? Don’t Panic There is one dominant source of small-loan financing still available, if you can pass the test By Keat Foong, Executive Editor MHN ONLINE Not all borrowers need despair. Those seeking to refinance, say, a $750,000 loan for a multifamily walk-up, but who find their local banks shutting their doors to them, have at least one alternative source of small loan financing: Fannie Mae. Fannie Mae’s small multifamily loans program is applicable for loans of $3 million ($5 million in certain markets) or less and is available for the purchase or refinance of multifamily properties of at least five or more residential units. Borrowers can turn to a list of 18 mortgage bankers who are authorized by Fannie Mae to underwrite, close and deliver small loans under its program. Charles Krawitz, managing director of Key Bank Real Estate Capital, a Fannie Mae Delegated and Underwriting and Servicing (DUS) lender authorized to make small loans and who is active in the sector, says that he often hears a “visible sigh of relief” when a borrower finds out about the agency program. “They have a loan with XYZ commercial bank that is now telling them the loan will not be renewed and they do not understand why,” when their loan is performing well at 65 percent LTV. According to Boxwood Means Inc., which specializes in researching the small loans market, $34 billion (18 percent of it multifamily) in small loans of $5 million or less was originated in the third quarter of last year for all commercial real estate. This number is down 9.3 percent from the second quarter 2008, but still 6.4 percent greater than the same period in 2007. “There is still a fair amount of healthy lending” in the small balance space, says Randy Fuchs, principal and co-founder of Boxwood Means. Fuchs comments that many lenders are originating the financing with Fannie Mae as exit strategies, although many banks continue to originate the loans and hold them in their portfolios. Nevertheless, lenders say players that have, in the past, been sources of small loans financing have pulled back from the sector since the financial crisis. This includes national, regional or local banks that would have made the loans on their balance sheets, as well as lenders that securitized the loans for the secondary market. The gap may be filled by Fannie Mae, whose small loans originations are stepping up, although some of its small loan lenders may be more active than others. The agency had in recent years made a move for the sector, seeing it as an additional business opportunity. In the first half of 2008, Fannie Mae’s investments in small loans surged to nearly $5 billion, out of a total $18.2 billion of its total investment in multifamily rental housing. Terms and Requirements For borrowers who can obtain the loans, terms are still very attractive. According to Jay Porterfield, vice president of Arbor Commercial Mortgage LLC, another DUS small loans lender, although spreads have widened, all-in rates can still be obtained in the 6 to 6.5 percent range. Terms of five, seven and 10 years are available. However, interest-only terms are not provided unless the leverage is very low. Debt Service Coverage (DSC) requirements of 1.20 or higher and Loan-to-Value (LTV) requirements of as high as 80 percent are available, for seven or 10 year deals, Porterfield says. For a five-year term, DSC requirement will be closer to 1.25. Within Fannie Mae’s small loans category, loans of less than $750,000 are regarded as “micro loans” Sign up for MHN’s Finance & Investment digital newsletter at www.multi-housingnews.com/newsletters and are subject to slightly different underwriting criteria such as lower DSC, and the borrower’s credit score and liquidity may be emphasized even more. Generally, for all Fannie Mae small loans, borrower or property strength is one of the most important considerations. Krawitz says the key criteria Key Bank Real Estate looks at are a solid net worth, track record, and ownership and management experience of like assets. All in all, the owner’s proximity to the property trumps most other considerations, says Krawitz. “It is very important that the borrower is local to the asset. That gets us over a lot of other issues. They have to be watching the shop There will certainly be no opportunities for inexperienced borrowers buying the property from out of state.” Key Bank examines first the borrower’s FICO score (a score of at least 680 is preferred). A net worth equal to at least the loan amount, if not 1.5 times the loan amount, is desirable. An occupancy of at least 90 percent for 90 days is preferred. Arbor’s Porterfield says that there is generally stricter enforcement of FICO score, net worth and liquidity requirements today. “In this market, you have to hit all three requirements. There is not much room [for variances],” says Porterfield. Krawitz advises borrowers to spruce up their properties before the site inspection—patching up the asphalt, manicuring the landscaping, repairing the ceiling tiles and getting rid of mold in residents’ bathrooms. He also advises against steering lenders to certain units over others in an inspection. MHN To comment, email keat.foong@nielsen.com www.multi-housingnews.com | Mar ch 2009 21 http://www.multi-housingnews.com/newsletters http://www.multi-housingnews.com

Table of Contents for the Digital Edition of Multi-Housing News - March 2009

Multi-Housing News - March 2009
Contents
From the Editor
Executive Insight: Jonathan Rose
Profile: How Owners are Riding Out the Storm
Market Report: Southern California
Development Case Study: A City in the Sky
Finance: Small Loans
Property Management: Marketing Magic
Products: Submetering
Kitchen & Bath: Water and Energy Conservation

Multi-Housing News - March 2009