The Logistics of Obtaining Commercial Loans for Apartment Buildings

Getting a commercial loan for an apartment building is considered one of the easier loans to get with respect to other investment properties. This is due to the fact that commercial lenders focus primarily on the subject property as the repayment source with the borrower being a secondary repayment source. As apartment buildings have historically been a very stable asset class, they typically can get some of the best lending terms.

Many property investors focus on single family homes, rather than apartment complexes, because it is often easier to manage. Financing can be difficult to obtain from the commercial lenders for single family homes, and it can be difficult to get the business off the ground. However, many investors recommend that when borrowing from commercial lenders, you take the focus off yourself, as it is with single family homes, and put it on the property, like an apartment building.

Often, even with little capital, a loan will be approved, because of the high return on apartment buildings, and the low risk from defaulting on a commercial loan. Before you go out and try and purchase an apartment building, you should know what qualifies as an apartment building under commercial loan guidelines. One to four family dwellings are usually not considered commercial loans; this would include duplexes and four-plexes. However, if there are five or more units in the building, this would be considered a commercial loan.

Apartment buildings can have tremendous profitability if managed correctly. For example, if you have a gross income of $100,000 from rental income on a building, and you deduct $60,000 for operating expenses and vacancies, you still come away with a $40,000 profit off of it. Dividing by a 7 percent cap rate, will give you an estimated value of the property, which would come close to $570,000. Often commercial lenders will look at statistics, like this, to determine the cash earning potential on apartment complexes. Naturally, it is not hard to see why these types of loans are approved so quickly and easily.

Now, just because it can seem relatively easy to get a commercial loan for an apartment building, this does not mean you should not do your research. Going to a commercial lender with a detailed plan of action for the apartment building, along with your own cash projections, will make the process move much quicker. Doing your research can also benefit you. For example, if you are going to fix up the apartment property, you will therefore increase the value greatly. A property with a high vacancy can have the greatest upside potential; however it will probably require that you put more money down that you would have to with a stabilized property. This is because most lenders underwrite to a debt service coverage first and a high vacancy can limit your supportable loan amount. As with any loan, researching and being prepared when meeting with the lender, will only benefit you and help your business become more successful.

- Omar Ansari, Commercial Finance Advisor

Maturing Debt and Refinance Risk Top Concerns for Real Estate Private Equity Fund Sponsors, According to New Survey by Ernst & Young

NEW YORK, May 28 /PRNewswire/ -- Mortgage financing and the ability of fund sponsors to refinance maturing debt on commercial properties in the next 12 to 18 months is the single most important concern in today's market, according to results of a survey of more than 40 major funds released today by Ernst & Young LLP.

In fact, the firm's 2009 Market Outlook - Trends in the real estate private equity industry is dominated by concerns over financing with three of the top five strategic priorities for 2009 identified by respondents as debt-related. In addition to refinance risk, the ability to procure acquisition financing and an overall deleveraging of fund portfolios occupied the fourth and fifth highest priorities, respectively.

"It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs it appears, there is still very little if any lending taking place in the real estate industry right now," says Gary Koster, head of the Real Estate Fund Services Practice at Ernst & Young LLP. "Our survey suggests that fund sponsors are not obtaining non recourse financing on new deals."

Another key concern for fund sponsor respondents centers on valuations. According to the survey, capitalization rates for stable income-producing commercial properties in the US are expected to continue to expand this year furthering the value declines experienced in 2008. Of the fund sponsors surveyed, 41% indicated that cap rates would increase by up to 100 basis points with another 33% of respondents indicating that cap rates would increase by more than 100 basis points. Says Koster, "Two years ago values were based on peak earnings at peak multiples in 2007. Today our survey suggests that values this year may reflect declining earnings at depressed multiples." Koster adds that the decline in values to date in the commercial property sector have largely been the result of the increasing cost of capital and have been amplified by the amounts of excessive debt leverage employed.

"The great concern for 2009," Koster says, "is declining real estate fundamentals and their impact on net operating income."

The survey found 92% believe that there will be no economic recovery in the US until after 2009. Says Koster, "The upside to a market with severe liquidity constraints and depressed asset values is that the outlook for investing in distressed assets is becoming increasingly attractive. Fund sponsors are scrambling to raise capital to build up their war chests in order to take advantage of what may be the best buying opportunities in decades."

Fund sponsors indicated that raising capital for a new fund is the second highest strategic priority for sponsors in 2009. "During the past five years capital was plentiful and fund sizes grew dramatically with each new raise, but now we are going to see fewer and smaller funds coming to market," Koster concludes.

Deloitte Reports Commercial Real Estate Remains a Potential Target for Sovereign Wealth Fund Investments

U.S. Commercial Real Estate May Be Seen as an Attractive Asset Class for Sovereign Wealth Funds

NEW YORK, May 4 /PRNewswire/ -- Despite turbulence in U.S. and global financial markets, U.S. commercial real estate may have both near- and long-term appeal to sovereign wealth funds (SWFs), according to Deloitte's Sovereign Wealth Funds: Real Estate Partners in Growth?, released today.

"Many industry observers believe U.S. commercial real estate is an attractive long-term investment for SWF managers because it can create a hedge against currency depreciation with the potential for capital appreciation when the markets recover," said Guy Langford, Deloitte's U.S. head of Real Estate Mergers and Acquisitions. "There is clear evidence of increasing size and visibility of SWF investments in U.S. real estate, including a focus on five-star hotel properties and Class A office buildings in gateway cities -- a trend that may continue."

"Notwithstanding current U.S. and global macro economic conditions, which will likely impact SWF and other global investors' short-term investment strategies, SWFs may present a significant source of new capital flows into U.S. commercial real estate and the overall U.S. economy. Real estate firms that strive to understand and build relationships with SWFs may benefit from this access to capital and expanded opportunities for growth," said Dorothy Alpert, Deloitte's U.S. Real Estate leader.

Findings include:

• SWFs are shifting strategy to pursue more active real estate investment opportunities by forming joint ventures, assuming controlling and non controlling stakes and committing development capital and hybrid debt financing.
• Some large SWFs allocate between 5 and 10 percent of their assets to real estate investment.
• The United States sits in the "middle of the pack" in imposing regulatory restrictions on SWFs.
• An overview of the Santiago Principles, which were established to promote operational independence in investment decisions, transparency and accountability and may result in the elimination of any remaining barriers to increased SWF investment in U.S. real estate.

A copy of the report is available on Deloitte's website www.deloitte.com/us/realestate.