RECI Offers Tips on How Investors Can Price Properties Under New Lending Guidelines
(CHICAGO, IL) -- New mortgage metrics are redefining capital markets today, reports The Real Estate Capital Institute.
"Mortgage availability is emerging as the key funding variable," says RECI Research Director Nat Zvislo.
"Starting more than a year ago, dramatic re-pricing of mortgage markets still leads to a downward spiral of property values of which the full impact is yet to be felt," Zvislo says. "Lenders and buyers alike are trying to understand new pricing realities that are based on more conservative mortgage underwriting parameters.
"Furthermore, given today's unpredictable markets, lenders seldom rely upon any current sales transactions for appraisal purposes. Most properties sold prior to the mortgage market meltdown are based on metrics using more favorable mortgage terms and leverage not available now."
While many investors are uncertain how to price properties based on current
leverage, Zvislo offers the following underwriting benchmarks "currently in favor" with the funding community:
- Actual Cash Flow: Current cash flow is mandatory. Three years operating history preferred, if available. Projects with deferred cash flow require additional collateral and/or recourse.
- Properties: Gravitating toward conventional property types (apartment, industrial, office and retail). Properties with too much "story" avoided as risk aversion prevails.
- Valuation: Cap rates priced 50 basis points or more above more over mortgage constant.
- Leverage: 65% or less loan-to-value for commercial properties; 75% for apartments.
- Debt Coverage: 125% debt service coverage or more for conventional properties (apartment, industrial, office and retail); 140% or higher for special-purpose.
- Guarantees: Life companies continue providing non-recourse debt. Full recourse required as well as deposit relationships with banks and most other financial institutions.
- Sponsorship: Seasoned borrowers with established track records sought. Qualified borrowers typically normally support net worth statements equaling the loan amount. Liquidity test of 25%+/- desired.
"As strange as it sounds, pricing is not mentioned above," notes Zvislo. "The availability of funds is the most important criteria, above all else.
"In fact, a standard contingency in most purchase contracts today is buyers to prove to sellers that reliable financing is in place. Buyers need to specifically disclose their funding source and provide reasonable proof that loan proceeds are available at closing."