20A — June 8 - 21, 2012 — Mid Atlantic Real Estate Journal



By Bruce J. Coin, Bruce Coin Consulting, Inc. The current commercial mortgage market


hile some analysts are still reporting that a significant

vate and mezzanine sources and even credit unions are all lending. Cassidy Turley’s Spring 2012 U.S. Multifamily Report stated “of the 50 major markets tracked, 26 closed 2011 with vacancy rates be- low the 5 percent mark…and every metropolitan area sur- veyed posted rent increases over the past year. Although apartments are currently the lending community’s pre- ferred asset type there are some interesting aspects to contemplate. As the 10 year bench-

mark U.S. Treasury has now dropped well under 2 percent into the low 1.70s, 10 year fixed rates of 4.25 percent and in some cases in the 3.50 – 3.95 percent range may be attain- able for existing, well leased, classAor B apartments. Such low rates should continue to be available through the bal- ance of this year. Fluctuation in treasury rates will obvi- ously impact that from time to time. For underwriting purposes multifamily loan to value ratios typically range from 65 to 80 percent with

the latter generally being available from the “Agencies” or conduit/CMBS sources. Debt service coverage ratios are primarily1.20 times with exceptions to 1.15 times. While apartment lenders are currently being extremely competitive some are begin- ning to pay attention to the lessons of the past and ap- ply them to the future. For underwriting purposes they are also thinking about a property’s potential future ability to refinance because the odds are great that rates

and cap rates will increase over the next 5 years. Rents and especially annual net operating incomes may or may not increase as rapidly to compensate. Each institution will apply its own forecasting concept but as an example if a 75 percent LTV mortgage was underwritten today with a 4.25 percent interest rate and 30 year amortization the bal- ance of that loan in 5 years will only be about 90 percent of the initial amount or about 67.5 percent of the initial ap- praised value. If the 5 percent overall cap rate that was used to margin the loan at 75 per- cent LTV was to increase by only 150 basis points to 6.5 percent (as pressured by high- er interest rates and equity dividend requirements) the annual net operating income would need to increase by ap- proximately 17 percent or by 3.4 percent a year to support a refinance at 75 percent LTV of the future appraised value. The questions are; can this property achieve that value and what happens if there is another recession? Lenders can use a lower initial LTV ratio, shorter amortization schedule or a combination to offset concerns.. Some lenders including the “Agencies” and conduit/CMBS sources permit mezzanine fi- nancings to supplement their first lien mortgages. This expensive money is typically provided with a “pay rate” of anywhere between 8 and 10 percent accompanied by a targeted 5 year IRR of 15 percent or more. At the end of their typical 5 year term, the difference is expected to come from either a substan- tial percentage of the equity or in some cases from actual accrual. Refinancing may be able to provide enough funding to repay the first lien and mez- zanine piece as well as to pay that 15 percent IRR but in most cases, especially if rates and cap rates do increase, the property will not be able to attain that via refinance. This is an aspect that all buy- ers, investor’s and lender’s should also be thinking about when contemplating a loan or purchase in this low rate environment. Bruce J. Coin is director of Bruce Coin Consulting, Inc. ■

amount o f investment capital is “sit- ting on the sidelines” the demand for high quality commercial m o r t g a g e lending op- portunities is

Bruce J. Coin

increasing. The “Agencies”, insurance companies, banks, conduits, CMBS lenders, pri-

$3,470,000 Acquisition Monroeville, PA Rite Aid – Retail 13,000 S/F

$5,850,000 Refinance Philadelphia, PA Multifamily 100 Units

$3,900,000 Acquisition Newark, NJ Garden Apartments 90 Units

$2,360,000 Acquisition Newark, NJ Multifamily 45 Units

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