The largest source of capital for real estate comes from the debt lender, but investors tend to spend little time speaking with lenders to understand their requirements. On this episode, we speak with Scott Williams of Aline Capital on how to qualify for commercial loans. He shares great tips for syndicators and shares why the interest rate is not the most important metric you should evaluate.
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Key Market Insights
- Provides both equity and debt financing
- Equity: returns fluctuate with the property; Debt returns are fixed
- Institutional equity is deal based but the operator must have experience
- Grew up in commercial real estate, father was a commercial appraiser
- Received a real estate degree out of Clemson
- Worked as an outsourced underwriter for Fannie Mae, Freddie Mac, and CMBS
- Common mistake operators make is seeking the lowest interest rate
- The #1 thing to make or break returns on a deal are pre-payment fees
- Yield maintenance: typically on CMBS
- Step-down, open pre-pays
- Operators seeking maximum IO (interest only)
- Maximum IO comes with longer loan terms, even on a step-down, you will have a higher pre-payment in the early years
- Markets shift, watch prepayment for flexibility
- Assumable loans help, but you want to ask if a second loan is acceptable
- Fannie Mae loans are assumable, supplemental loans are permitted
- Get comfortable with the stress metrics
- What has to happen for this deal to fail? How likely is this scenario?
- Pay attention to real estate taxes – in South Carolina, it is a point of sale state where the property is re-assessed at the point of sale
- You do not need to disclose to the lender that you are syndicating the deal
- Lenders want to know that borrowers have skin in the game
- To get a non-recourse loan: net worth equal to the loan, liquidity and post-close liquidity (9 -12 months of debt service to 10% of loan proceeds)
- Having a partner with liquidity is the #1 reason syndicators add partners
Partner: Check out the Passive Income through Multifamily Real Estate podcast with Kyle and Lalita Mitchell
Bull’s Eye Tips:
Winning the Best Commercial Loan: Work with someone before you find the property
Tracking Market Changes: Constantly evaluating interest rates and programs
Daily Habit: Only have 3 priorities per day
Resources:
Best Business Books:
Traction by Gino Wickman
Digital Resources
Podcasts
Tweet This:
“Common mistake operators make is seeking the lowest interest rate”
“The #1 thing to make or break returns on a deal are pre-payment fees”
“You do not need to disclose to the lender that you are syndicating the deal”
Places to Grab a Bite:
Connect with Scott:
Website: Alinecapital.com
Phone: 864-729-3990
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