Trying to get an understanding of how to underwrite loan pricing for multifamily value-adds if you were to convert to permanent financing post-renovation.
When looking for agency debt, say 60-65% LTV, to have DSCR coverage to lenders calculate it from a P+I perspective even if the loan is interest-only for the full-term of the loan? If that's the case, how does anyone refinance bridge loans at 70%+ with DSCR that is calculated only off interest payments?
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If you size at a 1.15x DSCR in Year 1, the property should have a >1.15x DSCR in subsequent years especially if it's post-renovation.
Sure, but if you are at 1.15x DSCR on an interest only bridge loan in year 1 at 70% LTV, and want permanent financing in Year 2, even if your NOI increased 10%, you may not hit 1.25-1.30x DSCR agency lenders need to provide permanent financing at 60-65% LTV.
Should you only ever calculate DSCR on a P+I basis? I guess I am confused on how value-add multi buyers can even hold post-bridge loan.
I'm a bit confused at your question...
Lenders generally will not size debt based on interest only payments. The DSCR requirement is typically based on P+I regardless of what your actual payment structure is (i.e. I may have an I/O loan for 5 years, but the DSCR is based on what payments would be once that I/O period expires). So in sizing the loan, you need to calculate the maximum size based on what your debt service would be if the loan was amortizing.
Some lenders (debt funds?) may size on interest payments only, but I've personally never seen it.
Not sure that answers what you're asking.
Correct, I made the mistake of only doing I/O calculation for my DSCR initially, I was confused, so ignore that portion of my question.
Essentially, the premise of my question is, pre-2022 you could get a bridge loan at ~70% LTV with a 300-350 spread + SOFR and have a rate cap in place that could have you cash flowing year 1 fairly easily. My question is how are groups with this type of leverage able to refi into permanent financing if they would like to hold? I'll use an example below as this is a case study for a deal I'm looking at:
Price $55M
Loan: $40M (72.7% LTV) at 300 + SOFR with a 50bps rate cap (3.5% fixed for 2 years)
Equity: $15M
NOI at Yr 1: $2.5M
Debt Service: $1,419,444.44
Net Cash Flow: 1,080,556 or 7.2% CoC
Now that's great for investors during the 2 years of the rate cap, but this deal was bought at a 4.5% cap and could be selling at a 5.25% cap now and the IRR may not be attractive. Say you want to hold, but to refi with permanent financing at 60-65% your max debt service is $2,000,000 (1.25x DSCR) which equates to less than $30M from an agency lender at a 5.5% interest rate.
What options are there in these cases, and what can operators do to extend their hold?
Whats the formula to calculate max debt service if you had the NOI, Min DCR and rate like you had in your example? How did you get to the less than $30MM number? I am not sure I am getting it right.
The answer is that these owners are fucked. This is exactly how people get into trouble in real estate, by overleveraging assets that they bought at an already aggressive cap rate and getting caught with their pants down.
Your options here are work with the existing lender to extend your term and hope capital markets normalize in the extended term, move to perm financing and layer mezz on top and likely carry negative leverage for awhile, or give back the keys.
Didn’t read all of these responses but the answer is very simple imo. Assume a HUD takeout with 35-year am. DSCR needs to be 1.17 or 1.18 for market rate projects. I believe these are pricing around 4.9-5.3% w/o mip. If you’re underwriting this two years out or so, I think 5% is a good assumption.
If you’re proceeds with these assumptions is still not sufficient for takeout.. sucks.. More equity or extensions on the bridge
I may be missing something here, but in general, your 70% LTC floater is going to size to a 1.15x DSCR on Y1 NOI and IO debt service. In a value-add, you stay on your floater until you execute the business plan and then either sell or refi. When you go to refi into perm debt your NOI (and value) should be materially higher. If your NOI misses projections or if rates go up on you, well you are in the situation that just about every person who bought MF in 2021 with floating rate bridge debt is in currently - facing large cash-in refis that need be bridged with pref/mezz or add'l capital or you just sell the property.
I figured some form of gap financing/pref equity infusion would be needed to fill any agency debt takeout, but do agency debt allow for another layer of debt below their stack typically?
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