In this video, I discuss the general lender requirements on multifamily investments.
Hi this is Devin Elder and today I want to talk very briefly about multi-family lender requirements. So when we go out and purchase a multi-family asset as an investment, we’re typically leveraging bank debt for 60, 70, 80% of the total purchase value. Let’s say we’ve got a $5,000,000 asset, we’re going to borrow 80% of that, so we’re going to get a $4,000,000 loan. So what does the bank want to see if you’re borrowing $4,000,000?
There’s two metrics I want to talk about at a high level. There are, of course, variables. Depends on what the lender is. Is this a Fannie Mae or Freddie Mac product? Is this a HUD product? Is this a seller-financing? There’s lots of variables. But at a high level I want to talk about two things. Typically, the lender is going to want to see net worth of the key principals equal to the loan amount. So the sponsor might have a net worth of a million or two million and they may bring on another key principal to get them to that net worth requirement of four million. Also the lender’s probably going to want to see either 10% of the loan amount in liquid cash at closing. This is called post acquisition liquidity, meaning that after you close on a property you need to be able to demonstrate that you have 10% of this amount in the bank, cash.
Or, sometimes the bank might ask for 9 or 12 months of principal and interest payments to be shown in cash and usually that’s a little bit lower. But the bank’s going to see that you’re not using every last nickel that you have to get this deal closed, that you’ve got liquidity after you actually close. They’re going to want to see that. So, this presents an opportunity because the sponsor might not have themselves a net worth of the $4,000,000 to get it done. Maybe they have a million. They can bring on another key principal to basically bring their balance sheet together. Combine it and hit those requirements for the bank. This presents an opportunity for that key principal, because they’re going to get a piece of that deal for becoming a key principal on that project.
Also another opportunity it presents for that key principal, is just bringing on their balance sheet is that it’s going to check their card for them for Fannie Mae or Freddie Mac and in the future if they want to do their own deal, that’s going to look really good on their resume that they’ve been a key principal on a multi-family deal. Now, how about risk. If you’re coming in as a key principal and your signing on that balance sheet, there’s some risk there, so one of the things that we love about multi-family projects is, we can get non-recourse debt. Meaning that the guarantors or the key principals are not personally liable on that loan. And it’s the reason people can have $100,000,000 in multi-family debt and still be able to sleep at night because these are non recourse loans.
Now, there are some bad boy carve-outs. If there’s fraud or there’s environmental damage introduced to the property, that can negate a non-recourse loan, but in general these non- recourse loans are very attractive on multi-family because we’re talking about large dollar amounts here. Nobody wants to be personally guaranteeing those amounts and a non-recourse loan allows you to do that. So some properties that we target that are 90% plus occupied, we can get the non-recourse loan, day one, right out of the gate. It’s fantastic. Other properties we might need to use a community bank or a bridge loan to go in and clean it up first over a period of say, 18 months and then we can refinance into non-recourse debt. But non-recourse debt is really the gold standard in multi-family. It’s what we like to see because we’re not personally liable for this debt and it’s another reason that key principals can come on and help guarantee the loan, because their personal assets aren’t actually at risk on that project.
So, that’s a high level overview, some of the lender requirements. Obviously it’s going to change based on market conditions, based on the lender, based on the loan product, but in general the lender’s going to want to see net worth equal to the loan amount and 10% of the loan amount in cash reserves or 9 to 12 months of the principal and interest.
So, I hope that helps you understand some of the lender requirements for taking out multi-family project and we’ll see you next time.