Refinancing Multi-family under tax abatement
I am wondering how lenders view the the value of a multi-family property when there is a tax abatement in place, specially during a re-finance. I am modeling a re-fi scenario where there is about four years remaining on an abatement. Few questions:
Do lenders look at the unabated taxes when valuing the property or will they just take the current tax bill, inclusive of the abatement?
Is there some NPV calc applied for the remaining value of the abatement?
How do lenders look at debt service when there is an abatement in place specifically when the unabated tax is insufficient to service the debt?
No direct experience, but I imagine lenders look at unabated taxes. Not sure if they can technically do an NPV analysis on the tax abatement because it would likely require a re-apraisal/re-valuation every year as the abatement burns off. If the loan is IO and you could run into the scenario where you have an LTV bust as the abatement burns off. On their DSCR sizing, I imagine they have to look at unabated taxes as well.
Typically in underwriting lenders will use the abated taxes to underwrite if the abatement runs at least the length of the loan and will use unabated taxes if it ends during the loan term.
And yes, there is usually a NPV calc applied in the appraisal that a lender should take into account.
I work for a securitized lender, so we will underwrite how Moody's looks at taxes. They often look forward 10 years, and do an NPV calc of the "savings" and discount that back. Last time I work on a deal with an abatement, the discount rate was ~6%, but that could have easily changed since then.
Typically, I've seen lenders/appraisers use the cap rate as the discount rate. If you're saying the NOI/Cap Rate = value, then it s only logical to use the cap rate to determine the "value" of the abatement.
That's fair - I have seen that approach, but I have also seen lenders/appraisers use a wider cap rate than the underlying appraised property.
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