The commercial corner: Multi-family commercial properties: Helpful hintsMike Boggianocommercial property, multi-family
The Mortgage Press is pleased to present "The Commercial
Corner," a monthly column by Mike Boggiano of Silver Hill Financial
LLC, dedicated to answering your questions about the commercial
mortgage marketplace. If you have a question that you would like
answered in a future installment of "The Commercial Corner," please
e-mail
[email protected].
Each commercial property type has nuances in arranging
financing, and mortgage brokers who learn how to navigate through
these details will experience a smoother transaction. Now that
you've decided to broker small-balance commercial deals, here are
some tips on what you need to know about the most vanilla
commercial property - multi-family.
Q: What documentation do I need for multi-family
commercial deals?
A: Multi-family is one of the most common small commercial
property types, especially for brokers getting into commercial from
the residential side. After all, multi-family properties (which are
considered commercial if they contain five or more units) are most
similar to residential and the easiest to lend against, with
comparisons usually readily available in the marketplace.
Each lender has specific requirements for borrower
documentation, but in general, you will need:
- A rent roll documenting the tenancy of the property. Simply
defined, the rent roll is a register of rents listing the names of
tenants and the amount of rent that they pay.
- Two years of operating statements to determine the expense load
on the property (two years is a general rule for most lenders);
and
- A valid Real Estate Purchase and Sale Agreement (which is not
required for refinances).
Q: Can you elaborate on what I need to know about the
rent roll?
A: Lenders generally look for the following to be included
in the rent roll:
- Schedule of all tenants in a building, documenting occupancy
status;
- For each unit, the tenant name, unit number, number of
bedrooms/bathrooms, term of the lease, rent amount and expenses the
renter is responsible to pay, such as gas, electric and other
utilities (with multi-family properties, tenants are typically
responsible for paying utilities, but units are generally not
metered separately for water);
- Current occupancy status; and
- Rents in alignment with market value. Most lenders utilize market
levels for their underwriting guidelines. The normalizing of the
rents allows for the recognition of the upside in value for rents
that are below market value. Conversely, rents that are
above-market need to be brought in line to properly reflect the
true economics of the lease. For example, if rent is listed as
$1,000 per month but the market supports a lower monthly amount,
most lenders will use the market value.
Your responsibility as a broker is not only to provide a
completed rent roll, but also to understand how it affects the
transaction. For instance, if the start dates of the leases are
subsequent to the financing, this is a fairly good indication that
the transaction is a construction loan or the stated occupancy is
not accurate. This will impact the available financing options, as
some lenders do not offer construction loans.
Another point about rent levels is that if a variance from the
market exists, an explanation must be provided. Below-market rents
often indicate either mismanagement or deferred maintenance that
need to be corrected before an upward adjustment can be made. On
the other hand, rents that are substantially above market may point
to ghost renters. Keep these tips in mind when reviewing the rent
roll.
Ask your lender for a Multifamily Tenant Rent Roll and
Certification Form. Most should have one available online or by
request.
Q: What type of evaluation is required with a
multi-family commercial property?
A: Environmental concerns are rare for multi-family
properties, so look for a program that allows the less expensive
and quicker transactional screen (versus a Phase 1 Environmental
Site Assessment - see "The Commercial Corner: Environmental issues
with commercial deals," The Mortgage Press, July 2006).
Being aware of these common requirements for multi-family
commercial deals helps you establish credibility with property
owners, as they realize that you've done more than just add
commercial lending to your business card. By educating yourself
through online resources, professional organizations and
lender-sponsored training, you will enhance your role as a trusted
advisor and earn the respect of commercial borrowers and lenders
alike.
Mike Boggiano is senior vice president, national sales
manager for Silver
Hill Financial LLC. He may be reached by phone at (877)
676-1562 or e-mail
[email protected].
