Lending

By Ben Barker, McQuaid Associate Broker

Many of my current conversations with apartment building owners revolve around if their apartment assets have held their value during this economic downturn. This of course depends on many factors including location, gross income, and condition of the building. Buyers are scrutinizing buildings more and do not look at the upside of a building as they did a year ago. Most importantly, lenders have raised their criteria to 60% loan to value which minimizes one of the large advantages of owning apartment buildings, leverage. So, there are two natural ways to keep leverage in a deal: seller finance and assumption of an existing loan.

I recently took a client through the loan assumption process for a University District apartment building which was at least as difficult as originating a new loan. Even though the buyer had very strong financials and was in a better position than the existing borrower, the bank still asked for over a 15% pay down of the loan. This wasn’t acceptable to my buyer. So, even after I had gotten the seller and buyer to come to agreement on price and terms, this began an entirely new round of negotiating. We were able to get Chase to reduce their pay down requirement to about half of what they originally requested. Without our work with the bank, the buyer could not have assumed the loan and the deal most likely would have fallen out of contract.

So that leaves seller financing. Only owners who have owned their buildings for quite a while without pulling any equity out are eligible to operate as the note holder since there is no loan balance to pay off. Since this does not involve a bank and their oversight, the assurance that a broker brings into a deal becomes even more meaningful. What are your goals? As a seller, to be paid off quickly or to have guaranteed long term income? As a buyer, will the additional price of seller financing be capitalized in the buyer’s holding period? How does the note need to be structured so that the seller’s and buyer’s goals are achieved? These are all questions that both the use of an experienced high integrity broker and the open market will best address.

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