Multifamily Loan Assumption (Amortizing Debt, assume or prepay?)
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?
What makes you think he didn’t maximize IO? All loans need to pass GSE’s refi test, so for new construction/lease-up that’s new to market, the property need some amortization to pay down the debt to pass the refi test and 2 years IO sounds about right
Typically only the very strong performing properties or borrowers with very good relationship can get full IO loans, full IO loans only account for less than 15% of GSE’s volume
My take is the deal is not for your shop, there are buyer out there like Blackstone who’s willing to buy lease-up portfolios and wait till the rents improve
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?
It’s not a crappy loan for the right buyer Lease-up loans are usually financed at low LTV If the loan your talking about have high LTV, it might be perfect for a buyer who doesn’t have tons of hard cash equity And 4.25% is a great rate in today’s environment
The loan was put in place after the property was stabilized. It's 65% LTV. Again, if I am buying core Class A MF in today's market, the only way to make a positive spread on debt constant vs cap rate is to do interest only, otherwise what's the point??
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