What ever happened to home ownership? Wasn't that the foundation of the American Dream?
Well times have certainly changed! The mortgage meltdown has reshaped the American Dream where millions of "former" home owners are not renters. With credit profiles damaged by mortgage defaults, a majority of those "former" home owners will not be back in the home buying market for years. And with the number of mortgage lenders dwindling to just a handful of large banks, new home buyers are finding it increasingly difficult to qualify for ever more tighter credit requirements. The pendulum has swung fully to the other extreme - easy money has given way to almost no money.
All this translates to a need for more residential rental units across the nation. Apartment builders and developers are the most active group of builders in an otherwise devastated building industry. And in many parts of the country there are shortages of rental units. Many dormant or "mostly-empty" condominium buildings are going through "reverse conversions" becoming new rental projects.
The market is also seeing a fair amount of transactions involving multi-family residential buildings as they change hands among investors and property operators. And many older rental projects are seeing vast renovations and even re-positioning to satisfy the needs of their markets.
All this activity in this asset class requires financing. Banks who have refused to lend since 2008 are more apt to lend for multi-family projects and rates are near historic lows. Lending from private funds is near an all-time high as more pension funds, insurance companies and private equity players look to take a piece of this growing market. And finally government-backed mortgage programs are also available to owners of this asset class.
There are a variety of loan programs that cater to the differing needs of multi-family property owners:
FULLY AMORTIZED: This refers to the traditional commercial mortgage in which the borrower pays monthly principle and interest to the lender.
INTEREST-ONLY: This type of commercial mortgage allows the property owner to pay only monthly interest on the mortgage versus principal and interest (fully amortized), thereby keeping more of the hard-earned rental income. In many instances where a property owner expects a major expense for the property such as a new elevator, roof, or a renovation, an interest-only mortgage will allow the property owner to save more cash to pay for the expense. With today's rates hovering around 5%, a $5 million mortgage borrower will have more than $250,000 in additional cash flow savings using an interest-only program vs. a fully amortized one.
NON-RECOURSE: Many property owners today are burdened with heavy debt loads that weigh down their balance sheets. When a property owner personally guarantees the commercial mortgage on his multi-family project, his or her personal balance sheet gets dinged and that guarantee is shown as a liability. This makes the property owner less attractive to a new lender. One way to resolve this problem is for the property owner to refinance its existing full-recourse loan(s) with non-recourse financing that does not require a personal guarantee from the borrower. Non-recourse loans are rare but available and if you are a property owner, you owe it to yourself to use one for your next purchase or to refinance an existing mortgage.
EQUITY CAPITAL: Although banks are prohibited from "investing" in their borrowers' projects, private lending groups have the flexibility and the desire to invest equity in their borrowers' multi-family projects. Property owners looking to acquire more apartment buildings but lacking adequate down payment (20 to 30 percent of the purchase price) may rely on private equity to enhance their capital stack and qualify the borrower for a market-rate commercial mortgage.
In closing, if you own multi-family properties, you can take advantage of many attractive financing programs today. And make sure to look into private capital funds for your next mortgage; they can be as affordable but more flexible than bank financing.
Monday, January 2, 2012
In 2012, commercial property owners should finally do what they should have done years ago - look for their next commercial mortgages from non-bank lenders! As traditional commercial banks continue to refuse to lend, "private" sources of capital are playing increasingly larger role in filling the void. Private equity firms, pension funds, insurance companies and others continue to pour billions of dollars into commercial mortgages nationwide.
"But private commercial mortgages must be expensive!" This is simply not true. Privately placed commercial mortgages have always competed favorably with traditional bank loans. Unlike banks, private funds have the ability to customize mortgages to the needs of the property owners; there is no such thing as one-size-fits-all mortgage program.
2012 will continue the recent retrenchment in commercial real estate. Depending on the market, commercial property values may be continuing to fall or may be stabilizing. In a handful of markets such as Washington DC, prices may actually be rising. But regardless of the property's value, mortgages continue to come due, requiring property owners to refinance. So don't lose heart if your bank refuses to refinance your mortgage or if all the banks you've contacted show no interest in refinancing your maturing loan. Instead broaden your horizons and look into private commercial mortgages which can range from a $100,000 to hundreds of millions of dollars. You'll be happy you did.