Tiller Hill Capital has closed a $1.84M Refinance of an owner-occupied light industrial property in Santa Cruz. The refinance enabled the property owner to lower there monthly debt service considerably while also consolidating business and property debt.
Rates have dropped for multifamily loans as lenders compete aggressively for new business. Lenders are offering rates as low as 3.58% for 10 year fixed, 3.45% for 7 year fixed and 2.78% for 5 year fixed on multifamily loans of $1 million or more in many markets throughout California. Underwriting remains tight and not all properties will qualify. But these are the lowest rates we have seen in months and given widespread expectations that the Federal Reserve may start to increase interest rates later this year, offer an excellent opportunity for multifamily investors to lock in low rate and improve cash flows.
Tiller Hill Capital has closed a $924,000 commercial real estate loan to refinance a two unit dental office property in Palo Alto, CA. The owner wanted to lock in today’s low rates for a as long as possible. We delivered a low mid 4% rate loan fixed for 15 years.
Securing approval of a new commercial real estate loan or multifamily loan is often a challenging process. The problems that delay or derail the process can often be avoided with a little advance planning.
- Start Early. While it is possible to close a commercial real estate loan in as little as 30 days to 45 days, delays often crop up that are not the fault of the borrower or the lender. If your existing loan is coming due you risk not closing before the maturity date of your existing loan. If you are purchasing a property, a delay in securing a loan commitment can cause you to lose the deal. Start shopping for a new commercial real estate loan at least 120 to 150 days prior to your target close date.
- File Income Tax Returns on Time. Many investors routinely file for extensions of Federal Income Taxes. But if you are considering a new commercial mortgage, it is best to finalize your tax returns as early as possible. Lenders look at property financials as reported to the IRS with much greater confidence than interim financials, even if they are prepared by a third party such as a property management firm or a CPA. This is particularly important if you are relying on an improvement in operating results in the most recent year to support the requested loan amount. Lenders will sometimes not want to issue a loan commitment until the final previous year’s tax returns are available. If the property’s income is reported on other than your personal tax return’s Schedule E, then both personal and business tax returns will be needed.
- Review Your Credit Reports. Check your credit report and score with the three major credit bureaus – Equifax, TransUnion and Experian – on a regular basis. There a numerous low cost services available and the credit bureaus are required by law to provide you a copy of your credit report annually upon request. You can request all three for free at www.annualcreditreport.com. Incorrect items show up frequently. Previous liens and judgments, long since paid, may appear as still valid. Clearing up incorrect or incomplete items that may involve writing letters to the credit bureaus and/or the reporting party to request that they update their report to the bureaus. This takes time. For derogatory items that cannot be removed, prepare a written explanation along with supporting documentation and have that ready to provide to lenders.
- Pay Property Taxes on Time. Most commercial real estate lenders will not issue a loan commitment on a property with past due property taxes. If you cannot bring taxes current, see if a payment plan can be worked out with the county. Some lenders will allow payment plans if they are agreed to in writing and you are up to date with the payments.
- Maintain Up-To-Date Interim Financials. Some property owners do not maintain interim year to date and monthly income statements for their properties. Instead, they accumulate records at the end of the year only for tax preparation purposes. Commercial real estate lenders will want to see interim year-to-date and monthly financials for the current year.
- Keep Important Records Accessible and Organized. Keep records such as tax returns, commercial leases, rent rolls, loan agreements, loan statements, interim financial statements and insurance policies in a readily accessible and organized location. For tax returns and leases in particular, make sure you have complete copies. Ideally, have all these documents available in PDF or other common electronic format.
Avoiding these six common issues takes some advance planning, but will help insure your commercial real estate loan process is as quick and hassle-free as possible.
The yield on 10 year treasuries fell to 2.19% for the week ending October 17, the lowest level of the year. They rose slightly last week to 2.25%, but still the 10 year yield is well below the high for the year of 3.01%. Treasury yields have been falling since mid-September. Yields on 7 and 5 year maturities have followed a similar pattern, as can be seen in the following chart.
This is good news for for investors in commercial and multifamily real estate because rates on commercial loans tend to move up and down with treasury yields. We have seen lenders drop rate in recent weeks. And we have seen some lenders waive or reduce fees to entice investors to take out new loans before year end. The result is that some of the most attractive deals of the year are now available.
Tiller Hill Capital has closed a $950,000 commercial real estate loan package for the acquisition of a mixed-use property in Fremont CA. The borrower is the current tenant of the commercial portion of the property, operating a bar specializing in craft beers. The property includes both commercial and residential structures. The commercial real estate loan enabled the borrower to acquire the mixed-use property at an attractive price with minimal down payment.
Investors in multi-family properties often overlook agency financing when shopping for small balance ($1 to $5 million) multi-family loans, instead considering only commercial bank loan offerings. In some situations, agency financing from Fannie and Freddie, may be the best choice.
Agency financing offers some unique advantages. First, agency debt offer longer fixed terms. It is possible to lock fixed rates for up to 30 years. Commercial banks usually offer only 10 year fixed rates, occasionally 15 years. Current multi-family interest rates for 30 year fixed are in the 5.25 to 5.3% range. Recently commercial banks have been raising their rates on 7 and 10 year fixed options, causing many investors to opt for more attractively priced 5 year fixed options. Even for investors seeking 7 or 10 year fixed options, lower rates may be available with agency debt. Second, agency debt is generally non-recourse. This is an important consideration for some borrowers. Third, agency debt offers the potential for higher leverage. Loan-to-values up to 80% are possible provided the property satisfies other underwriting criteria, including a minimum debt service coverage ratio of 1.25.
There are some disadvantages to agency financing. First, the transaction expenses tend to be higher. There is often an underwriting fee in addition to the costs of third-party reports. Second, like CMBS loans, in some markets, the collection of replacement reserves may be required, in addition to impounds for taxes and insurance.
Borrowers looking for long-term fixed rates and/or a non-recourse loan should compare agency and bank options to determine which better meets their financing objectives.
Tiller Hill Capital has closed a $1.2M loan secured by two single tenant properties under NNN leases in Oakland. One of the buildings is occupied by a restaurant, the other a beer garden. The refinance allowed the owner to retire an existing note that had come due and replace it with lower cost financing, fixed for five years.
Tiller Hill Capital has closed a $1.95M loan secured by two commercial buildings in Oakland. Both buildings are single tenant under NNN leases, one a bank and the other a restaurant. The refinance allowed the owner to retire non-related debts, lock in an attractive current rate and maintain flexibility to allow for future redevelopment of the properties.
Tiller Hill Capital has closed a $1,000,000 refinance of a 17 unity apartment property in Oxnard CA. The refinance allowed the owner to lower their interest rate and monthly payment and to take cash out for other investments. Rates were fixed in the mid 3’s for 5 years on a 30 year amortized loan with a declining prepay penalty.