We are seeing signs that the market real estate store has bottomed out as users and investors cautiously begin buying value added commercial/industrial properties. However, lenders are taking a very conservative advent in underwriting these deals in today's volatile real estate market.
Loan-to-Value (Ltv) continues to play an foremost role in determining the loan whole and down cost required for the purchase. The appraiser plays a key role in assessing the value of the property and ultimately the loan amount. Traditionally, users/companies can expect to buy a property with as wee at 10% down or a 90% Ltv and investors can expect to put down 25 - 30% or a 70 - 85% Ltv. This has not changed and is still the case today.
Sba Loan
Users/Companies continue to gravitate towards Sba financing (Small firm Administration loans) which allows them to fetch a accepted loan at an 80% Ltv with the Sba loaning 10% in a second position and the borrower having to put down only 10%. Obviously the company's financials are heavily scrutinized and whatever owning more than 20% of the firm must personally warrant the loan. This has been and is still the case today.
Investors are having a much more difficult time obtaining loans to buy wage producing properties. Lenders do factor in the Loan to Value (Ltv's) on these loans as well as the investor's financial wherewithal, but the biggest concern is with the property's potential (income) to afford the loan payments. Debt Coverage Ratios (Dcr's) are now at the forefront in determining how much the lender will loan on the property.
In the past Dcr's were used to decide the loan whole for wage producing properties but lenders were less stringent in allowing investors/borrowers to make an conference for time to come wage (actual rents vs. store rents) in determining Noi (Net Operating Income). This, coupled with rising property value, had both appraisers and lenders being overly aggressive in projecting a property's store value in which to base the Ltv and that is what ultimately resulted in a lot of nonperforming loans you see today.
Case Study:
Earlier this year we recently represented an investment group buying an market building leased to a food processing firm in the Vernon, California market. This is a single tenant building with a ten year Nnn lease. The yearly Noi (net operating income) was 1,000 with fixed rental increases every 12 months. The property was showing an 8% return based on a .74 million buy price. The investment group had budgeted 25% down or 85% Ltv.
The Lender analyzed the property in the following manner to decide the loan amount:
Gross Rents of 1,000
Less Vacancy of 10% or (,100)
Less Reserves of 3% or (,230)
Less management of 3% of (,230)
Property Taxes to be paid by tenant
Property assurance to be paid by tenant
Total Expenses (,560)
Noi was now calculated to be 8,440
A Debt Coverage Ratio (Dcr) of 1.2 was applied to the Noi
Calculated Debt assistance Noi / Dcr = ,700
The lender told us this property would keep ,700 or ,225/mo in debt service. With interest rates near 6% and a 25 year amortization this translates into a loan whole of .27 million. When subtracted from the .74 million buy price the investor can expect to put down 0,000 or 27% of the loan amount.
When the real estate store was at or near its peak in 2007, we were seeing capitalization rates (return on investment) hovering colse to 5.75 - 6%. It's easy to understand why lenders had to circumvent the Dcr recipe in calculating the loan whole in order for a property to accomplish a 75% Ltv:
If you take this same property at a 6% return (or 4,400 Noi) and applied the same underwriting criteria you would have the following:
Gross Rents of 4,400
Less Vacancy of 10% or (,440)
Less Reserves of 3% or (,132)
Less management of 3% of (,132)
Property Taxes to be paid by tenant
Property assurance to be paid by tenant
Total Expenses (,704)
Noi was now calculated to be ,696
A Debt Coverage Ratio (Dcr) of 1.2 was applied to the Noi
Calculated Debt assistance Noi / Dcr = ,080
At ,080 (or ,090/mo) in debt assistance based on a 6% return and a loan amortized over 25 years, it equates to a 5,209 loan amount. This would wish the investor to put down 4,790 which is a 46% Ltv.
In this instance, investors were unwilling to put 46% down and would make the conference that in the near time to come the 8,440 Noi (as stated above) was achievable. Lenders wanting to make the loan would buy into this conference allowing in part the Dcr to be applied to the increased rents. The evaluation report would keep this whole by using comparable sales to users, not investors to keep an 85% Ltv. Lenders would make the loan with an investor allowing them to only put 25% down when in reality they should have put 46% down as stated above. As lease rates and property values prolonged to plummet, these same properties no longer cash-flowed. With only 25% invested in a property that lost as much as 50% of its value we can see why so many investors walked away from their loan commitments.
speculation Properties - Loan-to-Value (Ltv) Vs Debt-Credit-Ratio (Dcr) And What Has Changed? Sba Loan
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