Multifamily Value Add Financing
I am currently a junior and will be interning at a sponsor focused on value-add, multifamily executions. When sourcing debt financing for this type of execution, is the loan based on LTV or LTC (inclusive of renovation costs). If LTV, are you able to get a much higher LTV that leads to a fair implied LTC. Are these loans generally fixed or floating? When you all are underwriting a multifamily value-add deal, what assumptions do you typically make on the debt. Also, if the property has a high occupancy, does the overall project budget need to include an interest reserve. Do you usually refi upon stabilization with a fixed rate, 10 year loan?
You're trying to generalize something that is highly situational.
This all depends on the current lending environment. When rates are low and the money is flowing, then an acquisition loan is frequently based on LTV and then you may be able to get an additional revolving facility to fund future capex for your value-add initiatives (or for commercial properties, good news funding to fund TI/LCs for big spaces).
In an environment like today, your loan size is 100% going to be determined by DSCR. Generally speaking,1.25x is the standard for a relatively strong borrower. You might still be able to get the revolver/good news funding if you're a really strong borrower, but wouldn't count on it as your base case.
This is all high level from someone with minimal exposure to value add. I'd imagine with a substantial value add execution that goes beyond your typical "slap $40-50k into each unit to redo the kitchen, bathroom and floors", then you might be able to get an LTC-based construction loan (would still be DSCR based on potential stabilized NOI at today's rents in current environment), and if its a big enough ordeal that you need a construction-style loan your occupancy definitely isn't high enough to not carry an interest reserve.
Refi at stabilization would depend on your strategy and current environment. You might do 10 year, you might do 5 (I don't want to lock into a 10-year if rates are high or if I'm planning to sell in 2-3). You might be able to get a loan with I/O payments for a period of time. Etc. etc.
For the purposes of modeling this out, would you apply the DSCR constraint to T12 NOI, F12 NOI with in place rents grown at market rate rent growth, F12 NOI with renovated rent premiums accounted for? Just a bit confused on how to size the loan for purposes of analyzing a value add acquisition.
It's still very situational. For lenders that I talk to these days, it's usually on an "in-place adjusted" NOI metric, like using the current rent roll minus T-12 expenses, adjusted for any obvious future expense variations (such as property taxes if you are buying in CA). This is for banks (regional and national). If you are talking to a debt funds, they could have a lower DSCR requirement (say 1.0x) but give more credence to your portfolio (I.e. your stabilized DSCR/DY). And on the flip side, generally insurance companies are the strictest and will have the highest coverage requirements (1.3-1.5x+).
Here is an example to answer your sizing question:
Every lender is going to have their own set of requirements - there is no one-size-fits-all model.
For value-add bridge, you're likely to run into sizing constraints based on:
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