Five Tips on Sizing the Borrower for Income Property Loans
Chicago, IL-- (ReleaseWire) -- 06/15/2007 -- In today's overheated realty capital markets, most of the underwriting focus is on property location, physical issues and cash flow performance. And in specific instances - particularly long-term, net leased properties - these variables are sufficient enough to accurately underwrite an income-property loan.
Yet the 'people' variable can't be ignored. Sponsorship operating expertise, track record and net worth are critical factors for sizing the ownership. Most properties require qualified ownership expertise because physical maintenance, cash flow management and other important variables require 'hands on' attention including hospitality, apartment and multi-tenant commercial properties.
As with other underwriting variables, sponsorship requirements are more liberal now than in the past. The following requirements provide overall guidelines for analyzing borrowers today:
1) Net Worth -- ideally sponsorship should have a net worth equal to the loan amount. This requirement is generally waived if the project cash flow is supported by qualified tenants with longer term leases of 10 years or more.
2) Liquidity - twenty percent of the net worth should be in cash or equivalent liquid assets.
3) Expertise - should have market presence and at least three to five years of operating similar types of assets.
4) Reputation - self-explanatory. Numerous borrowers active during various economic cycles have been stained by property performance issues. However, if such problems occurred including bankruptcy and foreclosures, detailed explanations should be immediately disclosed.
5) Guarantor – Although most income-property loans are non-recourse, a guarantor is required for carveouts (fraud, waste and mismanagement) and environmental conditions. Lenders generally adhere to strict guidelines for environmental guarantees, although insurance can be purchased by borrowers with insufficient financial resources.
The five variables mentioned above are measured and balanced in tandem. Nat Zvislo, research director of the Real Estate Capital Institute, suggests “Sponsorship should have strong documentation backed by qualified references."
The Real Estate Capital Institute is a volunteer-based research organization that tracks realty rates data for debt and equity yields. The Institute posts daily and historical benchmark rates including treasuries, bank prime and LIBOR. Furthermore, call the Real Estate Capital RateLine at 7RE-CAPITAL (773-227-4825) for hourly rate updates.