Commercial and Residential Lending in the Era of COVID-19
About This Episode:
In this episode, Lance and commercial lending expert Rick Cabin discuss various topics related to commercial lending, especially in the era of COVID-19. They specifically address the essential differences between commercial and residential lending (including loan qualifications), the importance of Debt Service Coverage Ratio (DSCR), the distinctions between recourse and non-recourse loans, types of lenders, the fixed rate options for commercial loans and the general criteria used to qualify for them. Commercial lending has been a whole different experience this year, and Lance and Rick get into the nitty gritty about how things have changed.
Guest Speaker: Rick Cabin
Rick Cabin is an expert in commercial lending and engages in a lot of residential lending as well. He works with Skyline Associates, a commercial real estate firm that specializes in representing tenants and investors. Its niche is incorporating an advisory approach with its transactional expertise.
The company’s mission is to first understand its clients’ overall objectives and then use their experience and market knowledge to negotiate and drive the best transaction terms, and with an attention to detail that instills confidence so clients can feel comfortable keeping the focus on their business.
What you’ll learn in this episode:
- Rick explains the essential differences between commercial vs. residential lending. Residential financing applies to any type of property that it four units or less, and the lender must be licensed by the state in which the property is located. Commercial properties, on the other hand, can receive assistance from a lender located anywhere in the world. The licensing requirements are completely different.
- When someone is purchasing a residential property, they have to qualify for that property in terms of their income, their credit, their cash reserves and the size of their down payment (or how much equity they have if it’s a re-fi). With commercial property, the income generated by the property is the income that is used to determine the loan amount.
- Debt Service Coverage Ratio (DSCR) is a measurement of a firm’s available cash flow to pay current debt obligations. It shows investors whether a company has enough income to pay its debts. In the late 2000s, lenders dealt with DSCRs as low as 1%, and now, depending on various lenders, it can be as high as 1.5%. There is a formula every commercial lender uses to determine how much of a loan a property can service. There are five variables to consider, including allowing for vacancy and expenses, and the debt to cost ratio. Generally speaking, he uses 1.35 as a DCR in calculating, or backing into, the loan amount.
- There’s been a shift in commercial lending during the pandemic, including lenders who don’t want to be asked questions or engage in arguments. Rick has been dealing with lenders who are just looking at property and making a gut call. It reminds him of what underwriting was like for residential in the 80s and 90s before credit scores came out.
- During this time, commercial lenders want to see six months of housing expenses as a minimum in cash reserves. Anyone looking at purchasing should anticipate that amount. If it’s an office building, the focus would be on the costs for the principal and interest on the mortgage, the cost of the property taxes and insurance.
- Rick explains the essential and then very detailed differences between recourse and non-recourse loans. Essentially, it’s about guaranteeing or not guaranteeing the loan. With residential, the person who borrowed on the loan is responsible for it. That person is guaranteeing the loan will be paid, or they will be foreclosed on. With commercial loans, the building is the borrower, and the approval is based not on any individual’s cash reserve but the building’s income. Non-recourse means you are not guaranteeing the loan. With non-recourse loans, lenders include a small add on of, for example, 10 basis points. Instead of an interest rate of 3.5%, you get a non-recourse feature and pay 3.6%.
- Rick can be reached at RCabin@SkylineAssociates.net. His direct office line is 949-644-6240. His 800 number is 800-398-1694. Cell is 714-318-6962.
- Rick talks about the different kinds of lenders, from Fannie and Freddie to small private investors, and the ranges in terms of what the money is used for and the kinds of property involved. The most common properties to give loans for are office and apartment buildings. Generally, the down payment is going to be a minimum of 25%, with a 75% loan to value on commercial properties.
- Commercial loans generally come in the categories of fixed rate periods of three, five, seven and ten years. Most commercial lenders are not keen on “cash out” unless their investment is being improved as a result. The short-term fixed loans don’t necessarily have balloon payments at the end of those periods. Five-year swaps is a type of index that is sometimes used in commercial loans. Lenders will calculate what the new five-year fixed rate is and fix it again for another five years and then have a balloon.
- Rick says it’s not business as usual with commercial loans during COVID-19. Everything came to a screeching halt. The major investors were heavily involved with PPP loans, emergency loans and government loans. They took personnel off commercial loans and reassigned them to emergency programs.
- Otherwise, the process of getting a commercial loan hasn’t changed in the 20 years Rick has been doing them. The first task is to find lenders that will loan on the property the person wants to buy or refinance. The criteria include: what kind of property is it? Where is it located? What is the size of the loan? Once he has the required documentation, including a letter of interest (LOI) that includes the interest rate and the environmental appraisal, he submits it to underwriting and it’s 45-60 days till the close of escrow.
- 95% of the LOIs Rick generates are based on very basic information: the current rent roll, operating statements for the subject property (profit and loss) and photos of the property.
Resources:
Email: RCabin@SkylineAssociates.net
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