Curious how those buying multifamily would approach this situation:
Off-market deal in Tier I MSA (the submarket is probably a B/B+). Original developer, built two phases (150 units each) and is in process of building third phase delivering next year. Wants to sell the entire 450+ units to one buyer. Opportunity to buy off-market.
Developer put 10 year Fannie money on first two phases. Decent rate (4.25%), but the issue is that only first 2 years are I/O and then 30 year amortization kicks in. Loans are both less than 12 months from burning off I/O period. At a decent cap rate (5.25-5.5%) the deal makes sense on the surface, but with amortizing debt, the constant is roughly 6%. It's Class A product, so it's not as though a buyer could juice rents through a value add play upfront. Basically negative leverage until the rents catch you up. Developer's stance is that it's "cheap debt", but I don't think he grasps the concept that this deal is basically a coupon clipper cash-on-cash deal, which means the debt structure is super important (specifically maximizing I/O).
The total prepay today would be roughly $5MM, and I'm assuming that asking developer to eat the cost would be rejected immediately. That being said, whether it's a prepayment or a lower purchase price to compensate for the amortizing loans, in the end it means a credit of some sort from the seller.
Any thoughts on how you would approach the situation?
Fair enough, but I am seeing (and have financed deals for my own firms the past 3-4 years) that were 10 year GSE deals with anywhere from 5-10 years I/O. The I/O period was typically a function of leverage, at 55-60%, we were always offered a full term I/O option.
Now, perhaps this particular developer was unable to qualify for full term I/O (they are primarily a commercial retail developer, they have done a couple of apartment developments over the years but it is not their core development business).
I am not looking to buy the deal for my shop, I am looking to shop the deal to another buyer looking for off-market and willing to pay me a finder's fee for bringing them the deal. That being said, as a buyer myself, I am trying to determine who the buyer profile would be on a Class A portfolio with a sub 5% cash yield and 8 years left on the loan maturity. With full term IO debt at 4.5%, the deal would produce a 6%+ cash on cash yield. I'd think most core buyers would want the deal sold free and clear versus assuming this crappy debt, no?
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