Stated Income Apartment Mortgage Loan

Post date: Feb 24, 2014 10:7:52 PM

Apartments

Apartment buildings are generally distinguished by factors of age, size and location.

Class A

These types of facilities are large apartment complexes in the most favorable locations featuring many amenities. They are also the most favored of the investment properties. The continuous demand to rent or purchase living space makes large complex apartments a very safe investment once the units have reached a certain level of occupancy.

Most apartment loans of $3 million and higher are sold by the lender. However, some lenders are conduits or lenders who collect loans for a pool and then sell financial interests to institutional investors in those pools.

To achieve the low rates quoted for these loans, lenders underwrite them in narrow bands – or tiers – of risk. Rates are then quoted for each tier. As the risk increases (due to factors of occupancy, market, age and confidence in the borrower), the rate increases. Everyone quotes the best rate, but few properties qualify.

Fortunately, the difference between rates is only a few basis points. One percentage point equals 100 basis points. Rates vary according to term and amortization, but the general rule is: the longer the term, the higher the rate. A fixed-rate loan can be obtained for 30 years, but most are 10-year loans where the rate is lowest.

Not to be outdone, the Federal Housing Administration (FHA) also offers guarantees to lenders for qualifying apartments. These loans usually offer low rates and longer terms – some as long as 40 years for a fixed-rate loan. FHA-guaranteed loans also offer very high loan-to-value as opposed to loans sold to conduits. Although advertised differently, most conduit loans are 70% of the value. FHA loans, however, usually fund up to 85% (and sometimes higher) of the value of the facility.

One of the most thwarting features of conduit or FHA loans is the limitation on secondary financing. Mezzanine loans are used to bridge this gap between equity and the primary loan. They are usually for 10 years or less and cost twice the amount in interest of the permanent loan. In a way, they are like equity because they have no lien on the property. Almost all apartment acquisitions consider mezzanine financing because of the low loan-to-values of conduit loans and the prohibition against secondary liens on the property.

Class B

This class of apartments can and does include all of the former Class A apartments plus those that were never defined as Class A because of size and market location. These complexes are well maintained and have a history of performance catering to the middle class apartment dweller.

In recent years, demand for this product has provided non-recourse financing at pricing rivaling the middle tiers of the risk scale for Class A apartments. Very attractive 10-year financing and FHA-guaranteed financing is also available for these units. FHA financing, while very inexpensive on an annual percentage rate basis because of the long term, has a transaction cost threshold that is not beneficial when the number of units decline below a 100.

Most of these loans are made under secondary market criteria. The major banks, life companies and conduits all provide capital for this market, and some of these sources will accept loans less than $2 million at rates designed for larger loans. If the complex qualifies, this can be a real bonus to the owner.

Modest Apartments

Modest-sized apartment complexes number 15 to 50 units, characterized by a lack of amenities and a mid to lower range of rent. These complexes are identified by the size of their loans, which are usually valued no less than $500,000 and no more than $2.5 million. Because this size is uneconomical to construct in today's environment, units this size are older and do not command the highest incomes.

Nevertheless, there are a lot of complexes this size, and there are many loan programs available to them. If the loan is over $400,000, there is even non-recourse financing. Every loan will require due diligence paid for by the borrower in the form of a Phase I environmental report and appraisal. Some investors have special programs to cap the closing costs, but that feature is also reflected in a higher rate. Those with a lower rate often have higher costs.

The recourse loans available for the acquisition and refinance of these facilities often reflect an 80% loan-to-value with an adjustable feature. There is also long-term fixed-rate financing available for these units. For every $500,000 in loan amount, the number of loans available increases and the interest rates decrease.

Small Apartment Complexes

These facilities range in size from five units to 14 units. The number of units is indicative of the value and probable loan size. Many modest apartment lenders do not have programs for this size project; however, there are national specialty lenders who do seek these loans. Local banking institutions also are especially active in this market. There is no non-recourse financing unless it is located in an exceptionally high-value area, whereby the loan amount will be similar to that of modest-size apartment communities.

There is a significant difference in payment terms available to these units. Local banks feature a low fee basis and limited third party reports, but these savings are offset by adjustable rate loan programs amortized over a 15- to 20-year period. National lenders offer a 30-year loan that significantly lowers the debt service to the borrower. To be competitive on the fee size, these institutions are now offering on par loans and limiting the third party costs by employing their own reviewers.

Apartment Construction Financing

There are special types of construction financing available to apartments in addition to the regular apartment loan. This loan is oriented to the Class A and B apartment communities. It features 90% financing, non-recourse and a fixed rate. The fees for the service are higher than permanent financing but cover both stages of the financing because there is only one closing. This product is thought to contain the most value of any on the market, as its terms are flexible and its overall cost significantly less than any other program.

Smaller apartment financing loans are also available with lower loan-to-values but do permit seller financing of the land if subordinated. These loans are recourse throughout the construction period, and they require the borrower to invest his equity at the time of the first draw in cash or in kind. If the borrower owns the land and it is equal in value to 80% of the total cost, he can use the land as the equity injection instead of cash.