Lending Advice
by Various Authors
Q. What are typical charges for closing costs in an apartment-house transaction?
A. Escrow fees typically start at $1,000 for a million-dollar purchase. They can increase with the complexity of the transaction. However, since escrow companies in Northern California sell title insurance, they can be negotiable for larger transactions. The escrow company is a neutral third party that, for a flat fee instead of a lawyer's hourly rate, coordinates the title process and the loan signing and funding after loan documents are obtained. Title insurance assures the lender that the borrower is the legal owner of the property and that the lender is in the proper position in the chain of title. It typically costs $2.60 per $1,000 (of the purchase price) of insured value for both owners and lenders title insurance. Lenders title insurance for a refinance is about $1.80 per $1,000 (of the loan amount). Discounts are available if the property has previously benefited from any title insurance during the previous five years. And discounts may be available for larger transactions.
Other third-party costs include a payment (about $75) to a tax-service company that will alert the lender if the borrower is in arrears on property taxes. For roughly $15, a company can certify to the lender whether the property is in a flood zone—a federally mandated requirement. Lenders may charge a wire-transfer fee, typically $50. Lenders secure the personal property (such as appliances), and a Uniform Commercial Code filing is recorded with the state at a charge of $22.
To offset the costs of making loans (such as compensation to originators, salaries to underwriters and office expenses), lenders typically charge a loan fee of 1% of the loan amount. Fannie Mae, the industry leader in securitizing mortgages, requires all lenders who originate for its Delegated Underwriter and Service program to charge a full point for loans under $9 million. Most lenders will also embed the loan fee in the margin (the amount added to the index to determine the interest rate for adjustable-rate loans) and offer a no-point or reduced-fee loan at a higher rate.
Other costs that lenders incur and pass on include: appraisal costs; legal costs for drawing custom loan documents; costs for environmental reports; and costs for physical assessment and seismic reports. My firm does not require physical assessment reports and seismic studies, and offers standard loan documents. Because of our volume of business, we are able to charge a processing fee that covers all necessary reports (except Phase I reports for loans over $5 million) for costs greater than $900 or 10 basis points (1/10 of 1%) for portfolio loans in major metropolitan areas.
– Mark Lipsett
Q. What are the pros and cons of interest-only financing?
A. Interest-only debt has become the financing du jour. It does not matter if you want floating or fixed, low leverage or aggressive leverage, long term or short term, because everyone wants interest-only debt.
The reasons are simple. More cash flow. More cash flow. More cash flow. Lenders have responded favorably to the borrowing community's request. Interest-only debt is available for those who ask.
The obvious risk that developers and lenders take by using interest-only financing is the debt will always be there and at the end of the loan term the balance will be exactly the same as it was when it began. There will be no principal pay down. This can be problematic if cap rates return to higher levels and/or a property's income deteriorates.
The reason why lenders have become more comfortable with interest-only financing is that they know the debt burden is significantly less to the borrower with interest-only payments as opposed to principal and interest payments. Not all developers will do the right thing all the time, but lower payments allow owners to invest more in real estate itself; and simultaneously, they give owners more comfort during tougher times. This means lenders are more likely to receive their payments.
Mortgage bankers and brokers are not accountants or attorneys but, from a taxation perspective, interest-only financing is efficient. Principal payments are not usually tax deductible like interest payments are. You must confirm this with your tax advisor, but most agree that interest-only debt is one of the most tax-efficient ways of borrowing.
Many who are refinancing out of their adjustable-rate mortgage, or those who are electing to prepay their fixed-rate debt and pay the prepayment penalty, are electing to refinance with fixed-rate, interest-only debt. In one recent transaction, the borrower increased his debt and used the proceeds to invest in a new property. Simultaneously, the borrower reduced his payments by 25%. The new fixed rate that the borrower locked in was in the lower 5% range. The numbers work.
– David Levine
Q. How does an owner prepare for a loan?
A. As logical and simple as this may sound, in my experience, loan preparation is often overlooked by most borrowers. The battle to “achieve the best darn loan available” is won or lost in the preparation stage of your loan hunt. It's like the foundation to your building. Without a strong foundation, all that is built thereafter is unstable. When preparing for a loan, without complete preparation and research, all that happens thereafter is at the whim of the lender. And when a lender has concerns about your loan package or building, you will not receive the maximum benefit of the doubt. The result is that you will likely fall short of your borrowing goals.
The majority of the borrowers who call my office immediately start the conversation by asking about today's rates. In my experience, that is not the most important question to ask. What owners should ask is, “How can I best prepare my financial and credit resumes as well as my building to optimize my loan goals?”
Strong preparation should minimally include: checking your credit report for any issues that may need resolving; having your personal and property financials current within 30 days (lenders dislike tax-return extensions); preparing detailed rent rolls and at least a two-year operational history of the building being financed (purchase or refinance); explaining in written detail any inconsistencies; and preparing your building to look its best.
The opportunity to “achieve the best darn loan available” necessitates the best preparation on the part of the borrower. When any one or more of these ingredients for a strong lender presentation are missing, you are ultimately working against yourself and your borrowing goals.
– Rene Boisvert
The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of a lending professional for any specific problem. Mark Lipsett is with Washington Mutual Bank, 510-891-4545. David Levine is with ARCS Commercial Mortgage Co., L.P., 415-974-1378. Rene G. Boisvert is with Boulevard Equity Group, 510-444-8420. Copyright © 2005 by San Francisco Apartment Magazine. All rights reserved.