Hey Guys, I have a deal I'm underwriting that I'm thinking might work as a $0 down investment. I'm probably off the mark on the execution so would love to hear what I am missing from the analysis. Here's the set up:
Purchase Price: $1.25M
Existing Assumable Debt: $300K (22 years remaining on 30 year amortization, 4% I/O through life of loan)
$95K In-Place NOI
I am looking to purchase the building with leverage of course. My senior lender will underwrite their piece to 75% LTV which is about $937,500. The deal will be contingent on the existing debt subordinating to the senior which they have done in the past on many deals.
If the execution is successful, I should be able to get $1,237,500 in total leverage.
The challenge is coverage. Hypothetically, if rates were low enough, say 6.0%, would my lender allow me to get into the deal at $0 down? In reality rates are more like 6.5% - 6.75% last I shopped around which would put me at $75,000 down, $875,000 senior and $300,000 subordinate on a $1.25M purchase, assuming the above. There's the opportunity to push rents a bit to get to a $115K NOI conservatively.
How would a lender view this execution? I am sure they'll ask for credit enhancement or seek to reduce leverage or increase coverage. What should I be prepared to hear back from the lender? Is there an alternative execution that I should be considering?
You seemed to have missed the part where I said the deal is contingent on them subordinating and that they have done so many times in the past
Please let us know how you get on with them. As the other poster has said, if they’re willing to subordinate their loan to a 75% senior I want to borrow from them. I can’t even imagine how that conversation would go with credit committee, I wouldn’t even have the balls to suggest it if I was in their position. Materially increasing their risk for no additional return doesn’t make any sense.
The best person to speak to would be your lender as there are too many unknowns and questions that only your lender can answer. However, assuming you are somehow able to get the existing $300k subordinate to your new loan (who is the lender on the $300k? Is it a local bank? If so, highly doubt they would allow it), your first issue is coverage as you mentioned. My banks require my stabilized properties to hit a 1.20x-1.25x DSCR. In my experience, this is usually what prevents higher leverages from being achieved even if the appraised value allows for it. Your 2nd issue is the LTV. Even if the existing $300k becomes subordinate, your total LTV will exceed 80%, which in my experience, banks do not like. The banks I use have a hard stop LTV at 80%. Doesn't matter if the property's value or NOI allows it to exceed 80% LTV, the language my banks always use when financing is "the lesser of 80% of the appraised value or 80% of the acquisition price." Banks also want you to have skin in the game even if the value/NOI allows for LTV's over 80%. Now if your lender is a private lender, then they can do whatever they want.
Thank you this is helpful. For context my lender is private and able to be flexible. I’ve done another deal with them where they saw enough upside to loan funds to me at 90% LTV and they were first dollar in.
The $300k loan that I would like to subordinate is quasi public-private and from an entity whose sole mission is bridge the gap between market value and intrinsic value to create more housing opportunities hence the 30 year I/O.
I will make the ask and will talk to my lender and update the thread as the deal develops.
Are you guaranteeing any of the debt? I can't really fathom the lender(s) allowing you to buy a property without some skin in the game. But as Fredburger same it's really dependent on your lender, especially a private one.
Highly unlikely you are going to be able to subordinate the existing debt or convince a lender to treat it as equity while financing a new senior
Sir, dis is not possible with 0% down. I see what you did there but with assumable debt there are some conditions which would require you to put some $$$ down. Although, your situation might be unique. Talk to your senior debt lender & read the loan docs. Very interesting approach I give you that
Is your senior loan amortizing? If so and you do in fact receive max proceeds ($937,500) and your rate is say, 6%, you will have below a 1.0x dscr before even considering the 4% IO payments on the subordinate debt. That will remain the case even after (if) you push NOI to $115k. The operative word here is mortgage constant, rather than blended interest rate, vs your yield.
Based on how you describe this deal, it sounds like Affordable housing or there is a cap on how much you can push rent. You’d be feeding the debt service shortfall out of equity, and probably for quite some time (potentially forever) until a refi opportunity arises via materially falling cap rates and/or interest rates. Is that really a risk worth taking? To me sounds like the deal is overpriced at its current 7.6% cap
I don’t think the senior lender would agree subordinate their debt on a mortgage they would love to get out of unless there are some serious conflicts of interest at play.
But 100%+ LTV deals happen on occasion. It’s usually about creating value on the front end prior to closing. The most obvious example I can think of historically is Jeff Sutton securing long-term leases with investment grade tenants prior to closing and instead of making a down payment, he’d walk away with the lender cashing out some of his equity (not sure if any of these have happened in recent years). Another one off example I can think of is a developer who won a deal via RFP, got the dirt for basically nothing, and cashed out equity on the construction loan.
This is a bad idea but please keep this thread updated on how it goes.
You’re going to get sharked on terms and that senior will have heavy recourse and convertible-like attributes - id imagine more participating mezz/pref and less traditional senior - and if it doesn’t, please keep us updated on who the lender was
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