|The Fed has increased rates and set a plan of continued changes in monetary policy to control inflation, while the war in the Ukraine creates uncertainty that could cause increased commodities costs and downward pressure on the economy. How will this impact commercial real estate? Please enjoy our quarterly newsletter addressing these issues and more.|
COMMERCIAL REAL ESTATE NEWS
Monetary Policy Tightening Underway
The first of many expected Federal Reserve hikes of the short-term federal funds rate was announced today. Combined with future balance sheet runoff, these monetary policy moves will lead to higher mortgage rates in 2022 and 2023 as the Fed attempts to curb elevated inflation.National Association of Home Builders – Full Article Here
Here Are the Implications of the Invasion of Ukraine on Commercial Real Estate
Although some ripples will likely be felt by investors, hard assets have historically demonstrated durable results in times of turbulence and uncertainty. Setting aside worst-case scenarios, the war in Ukraine likely holds little direct risk to U.S. commercial real estate.AZbigmedia – Full Article Here
Multifamily Production at a Two-Year High as Single-Family Starts Remain Firm
Despite production bottlenecks and rising construction costs, total housing starts led by a strong multifamily reading posted a solid gain in February as demand stays strong and existing inventory remains at low levels.Yield Pro – Full Article Here
LIBOR rates are no longer being published in AAI Quarterly Newsletter.
In 2017 in the United States, the Alternative Reference Rates Committee (ARRC), convened by the Federal Reserve Board, officially endorsed the Secured Overnight Financing Rate (SOFR) as the preferred benchmark interest reference rate replacing LIBOR. SOFR’s price is based on borrowing rates for overnight U.S. Treasury repurchase agreements, or repos.
On March 5, 2021, the Financial Conduct Authority, the financial services regulator in the UK, announced the cessation of LIBOR.
Global Debt Service Coverage
When applying for a commercial loan, the lender will want to know the profitability of the business or the real estate depending on the type of commercial loan that’s being requested. The lender will want to ensure that the business or the property will generate sufficient cash in order to make the required periodic payments of the loan. This is called the debt service coverage ratio.
Lenders will also calculate a global debt service coverage ratio when underwriting a loan. The global debt service coverage ratio combines available cash flow from the borrowing entity, all affiliated entities, and all guarantors to give a global combined picture of the cash flow available to meet all of the debt service obligations of all parties.
In order to calculate the global debt service coverage ratio the lender will require several documents including:
- Financial statements and tax returns of the borrowing entity and all related entities
- Tax returns of all individuals that will be guarantors of the loan
- Debt schedules of the borrowers, all related entities and the individuals that will be guarantors
- K-1s from all entities and individuals
The global debt service coverage ratio gives a lender insight into the risk profile of the borrowers and the guarantors. While the business or property that is the primary reason for the loan may be able to generate adequate cash flow, other related entities or other properties owned by the same borrower may not. Lenders want to ensure the cash generated by the business or property aren’t being used to support another business or property. If the borrower needs to rob Peter to pay Paul, the lender does not want to be Peter.
Most of the information a lender will need to assess the guarantor’s ability to generate cash and to understand the individual’s debt obligations can be found on the personal financial statement. Lenders will usually provide the applicant with their own version of a personal financial statement form for guarantors to complete. The personal financial statement is a document that details an individual’s assets, liabilities, and debt payment obligations. The lender may also request pay stubs, credit reports, bank statements and other forms of verification for information provided on the personal financial statement.
By reviewing the global picture of the borrowing entity, affiliated entities, and guarantors, lenders can gain a better understanding of the risk profile related to the loan request.
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $11,250,000 Multifamily Takeout – Pasco WA – 44.12% LTV
- $5,906,250 Industrial Construction to Perm – Richland, WA – 75% LTV
- $928,800 Business Acquisition SBA 7(a) – Lansing, MI – 90% LTV