As reported by CoStar: “Given that the multifamily market’s reliance on the enterprises has moved to a more normal range, to move forward with the contract goal, we are setting a target of a 10% reduction in multifamily business new acquisitions from 2012 levels,” Edward DeMarco, acting director of the Federal Housing Finance Agency (FHFA) said. “We expect that this reduction will be achieved through some combination of increased pricing, more limited product offerings and tighter overall underwriting standards.”
Heidi N. Moore was talking with a investor who specializes in buying distressed commercial mortgage-backed securities (CMBS) and I was reminded of something Warren Buffett said back in 2007:
“When people start dropping shoes you really don’t know whether they’re a one-legged guy or a centipede.”
The investor was saying that the commercial real estate (CRE) market has been under the same pressure as the housing market but the CRE market hasn’t crashed. Why hasn’t that shoe dropped… and why won’t it?
The investor said that CRE was “rife with all the same corruption as the housing market: banks didn’t do their homework before signing loans, ratings agencies were overly generous in classifying weak loans as strong, but when it came [time] to mark down the value of the struggling commercial real-estate loans, many banks simply refused. They inflated the values of the loans to make their balance sheets look good.” [And therefore could keep all their bailout funds at work speculating in derivatives and jacking their bonuses instead of being set aside to cover losses.]
MHN Online has a nice piece out this morning talking about what institutional and private equity equity providers are looking for in their apartment building investment deals. According to Brian Ward, CIO of TCG Capital Markets, the requirements are much tighter than just a few years ago. Here are the high points:
Align the style and needs of the capital source with the operator. A long term operator shouldn’t be matched up with private equity that needs short term holds to clear their return hurdles.
Loan-To-Value Ratio (LTV) = Total loan balances (1st mtg + 2nd mtg) / Fair market value (as determined by appraisal). For Multifamily mortgages, LTVs seldom exceed 80%.
Debt Service Coverage Ratio (DSCR, aka DCR, DSR) = Net Operating Income / Debt Service. Most lenders insist that this ratio exceed 1.2 with a few a allowing 1.15.
Personal Debt Coverage Ratio (PDCR) = Monthly Personal Debt / Monthly Personal Income. The Personal Debt Ratio compares the amount of bills that the borrower must pay each month to the amount of income they earn. Personal Debt Ratios seldom are allowed to exceed 50% in practice.
Property Taxes can be one of the largest fixed costs in apartment building investing. Properly accounting for them when running the numbers on a potential purchase (called the ‘underwriting’ process) can make the difference between a nicely cash flowing property and an expensive headache. Multi-Housing News has a good article with the five key questions investors should have answered before making an apartment building investment:
How often are values reassessed? Is there an automatic reassessment triggered by a transaction?
What is the exact millage rate? How are they set? How often do they change?
Are there limitations to the increases in assessed values during the hold period (a la Prop 13 in California)?
What is the timing of the assessments and when exactly are bills due?
What is the appeal process and how long does it typically last?