“The key to success in commercial real estate investment funding is creativity!”
Recently, I have had the pleasure of working with a group of top notch, top drawer clients who were looking to purchase a multi-residential portfolio.
We were looking to fund the acquisition price in addition to capping in all fees, legals and renovation costs in conjunction with a vendor-take-back mortgage (VTB) – ergo in excess of 100% financing.
Traditional “Big Five” lenders will only fund a percentage of the lesser of the purchase price or the appraised market value (AMV). In direct contrast, alternative funding sources will give credit to “at completion” values and will fund off of this amount.
The scenario dictates that there must be a bump in the value of the building(s), obviously, based on increasing rents to market rent capacity and ensuring expenses are rationalized, thus increasing the net operating income (NOI). If the aesthetics of the building are improved measurably from the rehab, the cap rate can sometimes be improved as well to conform with its peers. The bump in value must be sufficient enough such that at 75-80% (optimally) of the “at complete” AMV, the alternative funding plus vendor-take-back mortgage (VTB) can be retired.
This particular group brought a lot to the table in terms of management expertise and innovation in their product offering. That was the easy sell. It was clear, however, from the onset, that there was no cash readily available to dedicate towards this project. So how do you go to market looking for funding with no cash in you say?
I am sure everyone has heard the statement “ you need to have some skin in the deal” from lenders on the block. Generally speaking this is true. Most, if not all, lenders want to know that you, the borrower, have something to lose if the deal goes south….ergo, your skin in the game. What trumps this equity necessity in some cases is a firm take out strategy in the form of a letter of intent (LOI) or additional collateral. In this case, an LOI was attained to secure and close the deal. As a private/alternative lender, if you can figuratively look through the front door and see a person at the back door with a cheque ready to pay you out at completion, this would give you great comfort that your bridge funds will be repaid in a timely manner and on a predetermined schedule.
In this particular case, the purchasers stand to net a significant windfall once we refi out.