Apartment Financing – Conventional

Conventional loan options on apartment financing is currently much more scattered than in the past. Previously rates, programs and loan to value, etc where very similar between competing lenders and banks. Now however, with the issues on credit markets we are seeing wide differences in offered loans.

For example, when we would shopped loans for our clients just a year ago, the difference in interest rates, from one source to the next would be maybe only 5% or so. One bank may have quoted an effective rate of 5.95%, the next 6.1%. Now it is not uncommon to see one source quote rates 100 basis points over the next, with wide differences in term, fixed period and even amortization schedule.

The reasons here are complex and wide reaching. For example, here in the Midwest, we had a prominent bank that did a lot of apartment financing, had their own status downgraded to “junk”, which had an immediate and negative impact onto their cost of capital and in turn what rates they could offer to borrowers.

As far as what lenders want on a conventional basis for apartment financing, think clean and stable. Most renovation loans are very difficult now. Capital sources want to see current, actual occupancies levels at around 90% – 95%. The building itself needs to be in good repair as well. Lease “seasoning” is another unfortunate reality within apartment financing (meaning many lenders want to see that the tenant has been around and in good standing for 2 -3 months before they count that income.)

Debt coverage ratio on conventional are pretty much limited to 1.2, with many banks beginning to creep this up to 1.25 and we have seen a few traditional portfolio banks raise this up to 1.3. Though they are probably just “cherry picking” and not funding a lot of loans.

Borrowers should also give very careful consideration to the validity of bank/lender. The risk here is getting started with the bank, i.e. term sheet signed and good faith deposit sent in, only to have the bank pull out. This is happening more and more (especially in other areas of the business like on owner occupied office building, industrial, etc.) and borrowers should try to protect themselves from this.

Often the warning signs are obvious. Have they reduced or eliminated parts of the country they will look at deals in? Have they laid off many of their loan officers? Have they tightened underwriting standards drastically? Have they done all of this but it’s been spread out over months? That’s a bad sign and they will likely make the next announcement that they are no longer considering loan request.

Much of this info will be hard to get as the bank LO’s won’t want to reveal this to you. The individual still wants your business as most of their pay is dependent on closings. Working with, or getting recommendations from seasoned professionals, such as your CPA or a commercial mortgage broker can help you pick the right source.

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