Max LTV from lenders?

Currently looking at buying a property that is coming into my market for my family. Looking to do a cash out refi on one and then use that capital to buy the other. Was doing the calculations and need about an 85% LTV, which I know sounds ridiculous, but I am being told that since we are still considered small business, we could get an SBA loan that offers that.

I am very familiar with CMBS and other conventional types, that allow leverage up to 75%, but wanted to see if there are any banks that can lever up even more if we provide personal guarantees. In my career, my fund only does CMBS and conventional debt so still trying to under the SBA world. It would even be better if we can do it outside of a SBA structure and if lenders just do pure conventional at that leverage. I know SBA rates tend to be quite high and amortization of 20 years is pretty bad, so would like to stay away from this by just getting a conventional with similar leverage. Anyone with experience in this field?

 
TeddyTheBear:
Was doing the calculations and need about an 85% LTV, which I know sounds ridiculous, but I am being told that since we are still considered small business, we could get an SBA loan that offers that.
Really? I have seen this work for owner-occupant buildings (because, presumably, the occupant actually runs a true "business") but not for a pure-play real estate investor or speculator.

Hotel maybe, yeah, but hotels are different.

 

Lol, should have clarified, these properties are hotels. I would think that since its a mix of real estate and operating business it would qualify for higher LTV. From underwriting this thing, the going in debt yield is higher than 11% with a DSC greater than 1.6x. So that might be enough to get a lender to be comfortable. The question is still can it be done outside of a SBA structure. This means 85% cash out refi on one property and use that to purchase the other property with a 85% LTV, interest rates under 5%, and a 25 yr amort.

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I'm fairly certain few banks will lend you 90% LTV on a commercial/investment property, especially on a hotel. That's not to say there aren't banks that would LOVE to lend you at that leverage, but they answer to regulators. 90% on hotels is so far above the regulatory maximum that I doubt you'd even get much of a hearing.

With regard to SBA, banks are allowed to be more conservative. The vast majority of banks would not lend to the SBA maximums.

 

We got a lender thats willing to do 80% leverage on conventional, but we are looking for 85%. Yes, 90% is ridiculous, can't imagine a bank lending that high yet, but I imagine 85% would still be within regulation? I wonder if we could get it done if we throw in sweeteners like cash flow sweep for first two years or so.

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I haven't done a real estate deal in a few years so I don't know where lenders and regulation are now but can you get some mezz in there to increase leverage?

The problem I've always had with government backed loans is the time it actually takes to get them. I'm not sure about SBA but we did a USDA loan a few years ago and it made regular banks look like The Flash.

 
TeddyTheBear:

This is new to me. If this is true, I am simply amazed at the CMBS market then. Could you PM me your friends shop?

We don't finance many hotels, but I'm not seeing that leverage... You can't securitize an 85% LTV senior loan. I'm sure there are mezz lenders out there willing to hold sub debt up to those levels on quality hotels, though. And given where rates on first mortgage CMBS and mezz debt are today, you probably won't feel like you're paying much for the additional leverage if you can get it.

 

Question comes down to the rate. I imagine a mezz lender here will take add in 10% more leverage assuming the first lien holder agrees. Typically will need a intercreditor agreement. The first lien holder most likely won't care as long as they are not impacted. The issue is these guys will throw rates at 14%+. I thought about this idea and some issues that arise are related to how would it work if the mezz is non-recourse yet the first lien is recourse. It begins to become quirky. Also I don't think the mezz piece will be big enough. I'm saying around $700k or so.

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DCDepository:
reLA:

Plenty of first lien holders allow mezz. Or (again if the loan is big enough) just tranche it with an ibank and get a whole loan at a higher price.

If you're talking about institutional quality assets. If you're talking a $3 million family-owned hotel, maybe not.

Hence my quote that you quote "again if the loan is big enough". Doesn't sound like it is. Thanks for pointing that out though!

 

Teddy - I work at a Healthcare RE developer/investor, so what I am saying could be slightly off. I also don't know how familiar you are with RE loans, so forgive me if this sounds patronizing.

With CRE, NOI is all that matters. If you can get your DSCR to around 1.25 in the ramp up period, then that will decide your leverage. So, that is really what you need to consider. The lenders will also likely do a stress test at different vacancies to see what a worst case scenario could support. If this is a preexisting, class A asset in a heavy traffic area and a proven NOI track record, then there is no reason why you shouldn't be able to get 85% if DSCR is 1.25. If this is a new development then things get a lot trickier.

I would avoid SBA loans, because they take forever to get. I have heard of people giving up, getting mezz, and then being approved a year later.

Wtih regards to mezz, I haven't experienced many lenders willing to be subordinate to banks at that LTV. There is only so much rent increasing and cost cutting you can do, and with hotels I would imagine its less favorable that NNN healthcare.

Not sure if anything I said is useful to you, and if not I apologize. If it is and you have any questions feel free to PM.

 

I'm working for a very active B piece buyer right now and we are absolutely seeing mezz getting stacked on top of CMBS debt up to 100% LTV, but only for Class A properties in core markets. Small hotel in a small market your best bet is trying to beat up the appraiser a bit.

 

We got a good local lender that will do it, but it all comes down to the appraised value. Some appraisers are sophisticated, some just blindly through up the average cost per key and multiply number of rooms. Hopefully the appraiser the bank uses knows their hotel valuation. I hear some appraisals are stubborn as a mule as well.

Also 100% LTV with mezz is ridiculous. Those core market cap rates are like 5%-6% on the high end. The mezz piece cannot have a interest rate greater than 6-7%. Otherwise the debt service on both pieces would put this thing at a coverage less than 1.

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TeddyTheBear:

We got a good local lender that will do it, but it all comes down to the appraised value. Some appraisers are sophisticated, some just blindly through up the average cost per key and multiply number of rooms. Hopefully the appraiser the bank uses knows their hotel valuation. I hear some appraisals are stubborn as a mule as well.

Also 100% LTV with mezz is ridiculous. Those core market cap rates are like 5%-6% on the high end. The mezz piece cannot have a interest rate greater than 6-7%. Otherwise the debt service on both pieces would put this thing at a coverage less than 1.

We must be missing something here. He must be talking about a development deal or maybe stretching the definition of class A or core. I can't imagine a normal, non "luxury" hotel going for a 5 cap.
 
ausy21:

You could always bring in another equity partner? What is your reasoning for only putting up 5-10% of the equity?

They're out of money because they are just now putting it into another deal.

Agree that size is going to limit you severely. Unless you can swing some sort of SBA debt, which I've seen people use to buy properties at a pretty high LTV. But that's over my head and I doubt a pure-play real estate speculator qualifies. If it's truly a good deal, though, you should be able to find a partner.

 

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