the current property operations. When borrowers are unable to secure adequate proceeds, bridge debt has been a common solution to achieve the desired leverage. It is important to guard against overleveraging when placing bridge debt on an asset that presents stabilized operations. Always make sure there is adequate forced appreciation to increase value in the short term and facilitate your exit strategy. Additionally, the bridge debt options bring more risk considerations such as refinance risk, and they may reduce your investor distributions in the first few years. If find your expected proceeds are reduced from maximum leverage, you may decide to increase your equity injection or pivot to a bridge loan—whichever option best aligns with your investment strategy. In either case, the goal is to know your options as early as possible to avoid surprises once under contract and, ultimately, to avoid the major re-trade. To avoid last-minute surprises and build credibility with lenders and investors, stay connected with Atlantic Investment Capital at www. Atlanticic.com to discuss your investment strategy and dial in the most attractive loan terms to maximize your returns.
leverage-constrained approach only to find that the cash flow from the property will not support the request. The anticipated LTV is a staple of any underwriting template, but you should also run the necessary calculations to confirm current income will support the anticipated loan amount. This is the proceeds-driven approach mentioned earlier. This approach determines the maximum loan amount the in-place cash flow will support, given a lender’s underwriting criteria. An industry standard underwriting approach is to annualize the trailing three (T3) months of rental collections and add the trailing 12 months of other income to determine the underwritten total income figure. Always remember to use a minimum of 5% vacancy loss, even if the historical vacancy is less. You may be able to reduce that to 3% vacancy in some top markets, but make sure to clear that with your lender before moving forward with that assumption. Most lenders will consider your budgeted expenses, including a reassessed property tax estimate when determining the underwritten NOI. Note that budgeted expenses will need to make sense and fall in general alignment with both the appraiser’s budgeted expenses and the historical expenses. If a line item is way out of proportion
with historical expenses, a logical explanation as to the operational plan is needed to support the change. This approach depends on underwriting assumptions and brings with it a greater chance of changing during processing. This is not a function of the lender intentionally “retrading” your loan; it’s more a function of cash flow variables changing during processing. Given the typical 60-day closing timeline. The T3 income often fluctuates and, since it is annualized, a minor change in collections can have a material impact on proceeds. On the expense side, the final insurance quote is another line item that can greatly reduce proceeds. It is crucial to communicate with your insurance broker as early as you can to determine where the annual premium will land. You should also connect with your broker or lender to confirm the debt service coverage ratio typically used in your target market. In top markets like Boston, New York, and San Francisco, lenders often use a DSCR of 1.20. In standard markets like Dallas and Phoenix, you can expect a 1.25 DSCR. This is a typical DSCR on a national level. Lenders may increase the DSCR requirements in smaller markets and lower leverage loans. Note that this applies to underwriting a permanent loan and is a representation of the health of
Eric Stewart is the owner of Atlantic Investment Capital, Inc., a full-service commercial lending advisory and brokerage firm. Stewart has been
structuring finance solutions for both commercial real estate investors and business owners since 1996, with products ranging from equipment leases to commercial real estate loans as well as assumption representation and consulting. Atlantic specializes in structuring finance solutions for investment opportunities in commercial real estate nationwide. The company leverages direct relationships with both agency and conduit lenders for permanent loans as well as hedge funds and insurance companies for interim financing. Atlantic also provides equity funding solutions for select properties within the domestic United States. Stewart also provides an advisory platform for commercial real estate investors. It is based on more than two decades of working with clients who are dealing with the challenges of financing commercial real estate acquisitions.
4 :: INVESTOR REVIEW :: NOV-DEC 2022
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