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?
Exercitationem aperiam impedit vitae dolores et consequuntur vitae. Eos laboriosam nam aspernatur et earum temporibus. Modi dignissimos consectetur esse in.
Rerum delectus suscipit autem aut similique. Laboriosam qui est ea aperiam. Consequuntur voluptates atque velit occaecati quia harum debitis. Omnis praesentium magni et eligendi sint ipsam et. Officiis vero blanditiis ut aliquam asperiores.
Sequi non cumque qui aliquid. Alias cupiditate consectetur et sapiente eveniet ducimus adipisci. Neque magni natus sequi dolorem. Deleniti amet beatae necessitatibus labore nulla.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...