Commercial real estate loans on apartment properties can be tailored to satisfy a variety of borrower needs. However, borrowers are often frustrated by hearing “no” from the first lender or two with whom they speak. They may then assume their need cannot be met and may settle for a new or stay with an existing loan that does not fully meet their needs.
Getting to “yes” is possible – but it requires identifying the lenders best suited to the situation and then approaching them in the most effective manner. The latter is critical, as once a loan package has been reviewed by a lender’s internal staff and rejected, it is often very difficult to get them to reconsider, even when the basis for the rejection can be shown to be incorrect or easily mitigated.
Here are examples of situations where “yes” is possible with the right approach to the right lenders.
- Credit Challenges – Borrowers with less than perfect credit – late mortgage payments, loan modifications, foreclosures, short sales, BKs, low credit scores, tax liens, etc. – can often be accommodated. Lenders look positively toward borrowers that “hung in there” and worked their way through difficult situations. Rates may be a little higher than the lowest available apartment loan rates, but still attractive and significantly lower than those from private or hard money lenders.
- No Prepay Penalty – Some borrowers are unsure about their future plans for an apartment property and want to avoid incurring a large prepayment penalty should they sell or refinance. But they still want the peace of mind that comes with having a fixed rate apartment loan. Five and seven year fixed rate loans are available with no prepayment penalty. The rates are often competitive with similar loans with step down prepay penalties.
- Interest Only – Borrower’s may wish to have a lower payment at the first 1 to 3 years of the loan, particularly on a purchase money loan. The lower payment frees up cash for improvements or to allow time to adjust rents upward as units turn. Some lenders offer a period of interest only payments in the first few years of the loan, generally, for no increase in rate. The difference in payment is significant. For a $1 million loan at 4% on a 30 year amortization, the interest only payment would be roughly $1,400 less per month.
- No Personal Guarantees – Some borrower’s prefer “non-recourse” apartment loans, meaning that in the event of a default the lender’s recourse is limited to exercising its rights related to the mortgaged property or other collateral securing the loan. As such, the borrower cannot be forced to make up any potential shortfall out of other non-pledged assets. Such “non-recourse” provisions have exceptions, often referred to as “bad boy” carve-outs. These carve-outs include situations where the borrower commits fraud, misrepresentation or material omission when applying for the loan or in connection with on-going financial reporting required by the loan, attempts to transfer ownership of the property in manner not permitted under the loan, wastes or abandons the property, fails to remit rents or insurance proceeds to lender to satisfy the loan, or fails to maintain proper insurance on the property. Non-recourse loans were much more common in the past. They are less common today, but they are available.
- Longer Fixed Rate Terms – Many lenders offer commercial multifamily loans with rates fixed for 3, 5, 7 or 10 years. In smaller, tertiary markets, local lenders often offer only loans where the rate is fixed for 5 or 7 years, and then with an amortization period of 25 rather than 30 years. This can be frustrating to long-term holders seeking to lock up today’s low interest rates for as long as possible and/or those who prefer the lower payment of a 30 year amortization. However, there are 30 year amortizing options with rates fixed for 10 to 30 years available in almost all areas of California.
Tiller Hill Capital provides commercial real estate loans for apartment and commercial properties throughout California. We help owners navigate the complex world of commercial mortgages and secure low cost commercial real estate loans to acquire new or refinance