Applying for a Loan? Think Like a Lender

Chris Mavros. Photo courtesy of Case Real Estate Capital LLC

For the past few years, investors with a position in New York City multifamily properties have been on a roll, thanks to the dwindling number of units that were still subject to onerous rent control regulations. But their joy was dashed this summer when controversial new laws instituted rent control on a permanent basis. The new rules also gave cities throughout New York State the ability to opt into rent stabilization programs.

The caps, which affect about 1 million apartments in New York City alone, spurred landlords to file a federal suit that argues rent stabilization laws “effect a physical taking of property in violation of the Constitution’s Takings Clause,” a violation of the Constitution’s Fifth Amendment.

Take a deeper look

This illustrates the need for multifamily investors to go beyond the basics—like the condition of a property and its current rent rolls—and put themselves in the shoes of a lender when they look at an opportunity. Multifamily investors should also think about the political climate, and other issues that may not always appear on a standard checklist. A borrower wants to show projections that predict a steady cash flow, but curveballs like this can disrupt their plans.

Geography is another important issue. Consider two Florida cities: Miami and Fort Myers. There’s a lot of multifamily housing in both, but Miami is a mature market, while Fort Myers is one of the state’s fastest-growing cities. Investing in Fort Myers could offer bigger returns, since the demand for multifamily is still on a steep growth curve, but will it flame out? In contrast, a mature, congested city like Miami offers a long track record and will likely continue to exhibit growing demand, even if it’s at a constrained pace. But the returns are likely to be lower than what Fort Myers offers.

Another choice is whether to invest in a luxury building or a “workforce” one. A luxury development will probably command higher rents, and perhaps steeper increases. But if you’re in an area that already has stiff rent control guidelines, it may be safer to invest in workforce properties since tenants are likely to stay put, even if there’s a recession.

Who’s your buddy?

And as you draw up a budget, do not forget ancillary fees. Your broker or other advisor can help you to determine these, so you can incorporate them in the business plan you’ll be turning over to a lender. And be prepared to provide a lender with a survey of the land, since they want to know about issues like easements or encroachments, evidence of use by other parties, and whether the property is accessible by existing roads. You should also provide current zoning or other approvals that are necessary to conform with the planned use of the property, as well as a formal appraisal of the property that’s been done by an independent third party.

A lender will likely require financial statements, such as three years of tax returns, income and expense projections; three years of business and personal financial statements for you and for any guarantors; and the aforementioned business plan.

Most lenders also want to see an exit plan that includes issues like anticipated cash flows, how long you plan to maintain the investment, and how you plan to exit it. Be prepared, however, to offer a personal guarantee.

Finally, think about your comfort with leverage. To reduce their exposure, lenders often want a borrower to put as much equity in as possible. A higher down payment will generally reduce your monthly payments, which is a good thing, but will also reduce your cash cushion.

With low interest rates and a fairly robust employment rate, many CRE borrowers find it is a good environment. Simultaneously, lenders appear to continue to be increasing their activity, although cautiously, so tenant demand and CRE funding are in a nice balance. But experience has shown us that diligent investors who think like a lender are more likely to continue to score successes across all kinds of market conditions.

Chris Mavros is managing director, principal & CFO of Case Real Estate Capital LLC.