How Are Long-Term & Short-Term Rates Determined?

How Are Long-Term & Short-Term Rates Determined?

There are obvious differences in pricing for money that is lent for 5 years versus that which is lent for 15 or 20 years. What factors go into pricing the costs of these funds? In this article, we’ll give an overview of short-term versus long-term money, how’s it’s priced, and what influences the costs.

Another Deal Closed with Venture Mortgage: Commercial Real Estate Finance

Lucas Goring, Vice President at Venture Mortgage, recently closed financing on a retail center in Maplewood, MN.

Maplewood, MN

Maplewood, MN

Compelling components of this financing package include the 78% loan-to-value and the 3.85% interest rate, which is fixed for 5 years. The loan amortizes over 25 years.

Contact Lucas now to discuss your commercial real estate finance needs.

Recent Commercial Real Estate Financing by Steve Petersen

Another day, another deal closed with the Venture Mortgage team...here, we present a multi-million dollar deal closed by Steve Petersen, Vice President.

Burnsville, MN

Burnsville, MN

The subject property is a large office building located in Burnsville, MN. The deal closed at an attractive 70% LTV, with a fixed rate of 3.86% for 5 years and a 25 year amortization.

Contact Steve now to get the conversation started about your commercial real estate financing needs.

Multifamily Properties: What Are Lenders Looking For?

By Venture Mortgage Corporation

See the first article in this series entitled, "The Foundations of Commercial Real Estate Financing".

Now that we’ve gone over the basics of commercial real estate financing, it’s time to discuss how a lender comes to agree to mortgage your commercial property.

In this article, we’ll discuss the lender’s point of view on a multifamily loan and find out what they are looking for when considering the investment.

Lenders need details, so you should be prepared with as many records as possible to allow for a full understanding of the lending situation.  For this property type, lenders look at several components when deciding whether a property is a good investment and if the loan is likely to be repaid as agreed:

1)      Current and Historical Cash Flow: Lenders want to know that the property will generate sufficient cash to make the monthly debt service (mortgage) payments. In the case of the multifamily property, lenders will analyze the current rent roll (a consolidated report showing the names of tenants, rent amounts, and lease termination dates) and expenses to determine net operating income. Net operating income, or NOI, is defined as income minus expenses before mortgage payments. Lenders use a ratio known as the debt service coverage ratio (DSCR) to ensure that cash flow is sufficient to cover the mortgage payments with some additional cushion, and they generally like it to be >1.20. DSCR is the NOI divided by the annual mortgage payment, and a positive DSCR reflects a property with a positive cash flow.

2)      Borrower’s Financial Situation: A lender will need to feel confident that the borrower, borrowers, or borrowing entity is in good financial standing. This generally means having liquid capital (read:cash in the bank) available for at least 20% down toward the purchase price of the property and the equivalent of 6-9 months’ mortgage payments worth of capital reserves. Additionally, lenders will often look at a borrower’s personal credit score: anything under 680 will raise questions about repayment willingness and ability. Any past adverse credit action (foreclosures, short sales, liens, judgements, and collection accounts) will need to be documented, explained, and corrected to the lender’s satisfaction.

3)      Condition of the Property: The lender will want to look at the property and the surrounding area. Is the area rapidly decreasing in population or in an economic decline? Does the population support an acceptable (low) vacancy rate? Are the current rents reasonable and sustainable? Are the amenities of the property available in line with other comparable properties, ensuring that it attracts occupants in the market? Is there deferred any deferred maintenance (i.e., a roof that will need to be replaced in the next six months)? An appraisal will evaluate the market value of the property considering these and other pertinent factors. Remember, lenders base loan amounts on the appraised value of the property and its ability to cover the debt service (i.e., a DSCR >1.20), not the price that the seller is asking. If the appraisal comes in far below what is expected, the lender will hold to the loan-to-value metric based on the appraised value.

This is a fairly extensive, but not exhaustive, list of lender considerations regarding multifamily properties. A lender would not be doing you, or itself, any favors by accepting mortgages on properties that are unlikely to cash flow and increase in value. Additionally, a poor multifamily investment can spell financial ruin for a new (or any) investor, especially one without sufficient capital reserves to weather an unexpected storm.

1031 Exchange: Tips & Pointers

Venture Mortgage is proud to feature this guest post by Jeff Peterson, President of CPEC1031 - Commercial Partners Exchange Company, LLC. Jeff is a licensed attorney in Minnesota, and is a renowned expert in 1031 exchanges and tax considerations in commercial real estate. Here, Jeff speaks to the nuances and benefits of 1031 exchanges for commercial real estate investors.

The Foundations of Commercial Real Estate Financing

By Venture Mortgage Corporation

Are you considering the purchase of your first commercial real estate property? It’s an attractive proposition: the first rule of building wealth is to increase assets and limit liabilities, and income-generating real estate, properly managed, will add to one’s net worth and increase one’s economic security. However, it is important to be a well-informed investor, and there are some key considerations that are especially vital for first-time commercial property buyers to understand. In the first segment of this series, we will begin to understand the wide world of commercial real estate financing.

1)      Understand property types: What type of property are you pondering? For many first time buyers, multifamily rentals are the default choice, as they are familiar with residential property as renters and/or homeowners. It could be that office, industrial, or retail properties are a better fit for your goals and career experience, but do keep in mind that the cost of acquisition for these property types are often significantly higher than the multifamily sector. Commercial properties are generally divided into five general categories: retail, office, multi-family, industrial, and special use (land and land development are a separate phenomenon that beyond of the scope of this writing). Within these categories, properties are further divided based on location and condition. The type and classification of the property you decide to buy is a very important consideration when it comes to obtaining financing and in calculating potential return on investment. Speaking of financing…
2)      Commercial real estate financing is potentially quite complex : Most commercial real estate buyers are familiar with the process of obtaining a residential mortgage, but financing a commercial real estate property is generally very involved and can be intimidating to first time investors. The loan origination process is unique to each property and buyer, and there are many lending sources, each with its own advantages and disadvantages. Investors should expect to come to the table with at least 20% down for the majority of properties, as lenders are generally not willing to go over an 80% loan-to-value (the ratio of the outstanding debt to the value of the property). This means that, for a $1,000,000 property, one should be prepared with a minimum of $200,000 toward the purchase. Appraisals are usually required, as well as a number of other third-party inspections and reports as a part of due diligence: these typically include environmental reports, title searches, an American Land Title Association (ALTA) survey, and more as requested by the lender. These third party reports, combined with loan fees and legal costs, can add up to thousands of dollars very quickly. Lenders consider a wide array of factors when they underwrite loans: for example, a particularly risk-averse lender may be uncomfortable lending on an 80 unit apartment building to a first-time borrower with no property management experience, even if said borrower comes with a considerable down payment. This is why it is vital to…
3)      Know your lending options: Did you know that you can borrow money from a life insurance company to purchase an office building? How can you tell which bank is best for a property in a secondary market? Do credit unions even do commercial real estate loans? How do you know if the rate you’re being quoted is a good one? Which lender is the best choice for me and my situation? There are ways to answer these questions and make informed decisions. A commercial real estate mortgage banking firm is a company that has established relationships with a wide variety of capital sources for the purpose of securing commercial real estate financing for borrowers. By shopping an investment to life insurance companies, banks, credit unions, agencies, and commercial mortgage backed securities (CMBS) lenders, the firm is able to inform the investor about the options available, simplify the origination process, and secure the most favorable rates and terms for the client. In some cases, such as with life insurance company lenders, loans are only available through commercial real estate banking firms (which will act as a conduit); by not consulting with a mortgage banker, borrowers are potentially excluding lenders who will offer the best available loan package. A consultation with an experienced mortgage banker at Venture Mortgage regarding a potential purchase is always complimentary. In fact, Venture Mortgage is only paid a fee if we secure financing and close a loan for you on your terms, and our many satisfied clients speak not only to the savings they realize with us, but also to the superior service they receive during the origination process and throughout the life of their loans.

In the upcoming segments, we will take a closer look at the loan approval process and answer the question, “What Are Lenders Looking For?”

We will also begin to the understand the fundamentals of the different property classes in “Property Types: How Commercial Real Estate is Defined and What It Means For Financing”.