Rising interest rates, inflation and government action continue to be the primary news themes. Please enjoy our quarterly newsletter discussing these themes, their impact on commercial real estate, and more.
COMMERCIAL REAL ESTATE NEWS
What Interest Rate Hikes Mean for Multifamily Property Investors
Inflation—and rising interest rates—are at the center of the American economic conversation. And for good reason. In 2022, the Federal Open Market Committee (FOMC) raised rates by 75 bp four consecutive times between June and November. In December 2022, the Fed raised rates by 50 basis points, bringing the target federal funds range to 4.25% to 4.50%.Full Article from JP Morgan Insights
How a Looming Recession Impacts CRE Deals
Transactions are down as investors grapple with higher debt costs and increasing uncertainty. But opportunities can still be found. Commercial real estate investors and economists are expecting more interest rate hikes as the Federal Reserve continues to try and tame stubborn inflation, avoid a recession and attempt a softer landing for the turbulent U.S. economy.Full Article from Commercial Property Executive
Lower Housing Costs Will Not Bring Inflation Down
Inflation optimists are betting that lower housing costs will bring down inflation. They seem to have some arithmetic on their side, but their theory of why inflation rises or falls is fallacious. Declining home prices and rents will not dent our inflation problem.Full Article from Forbes
The C’s of Credit
You may have heard of the C’s of Credit when it comes to underwriting a commercial loan. The C’s of Credit are a simplified list of things commercial loan underwriters review in a credit application. Each item begins with the letter “C”. Different experts will provide a different number of “C’s”. Normally there are 4-5 that are discussed: Cash Flow, Collateral, Credit (History), Character & Capacity. Conditions and Capital are also often included. The C’s of Credit are general. Each lender may have their own policies, standards and guidelines for each, which can fluctuate based on the current economic environment and other factors.
Cash Flow – Is there enough cash flow to cover the payments? If the loan is for a building, does the building generate enough cash flow (rent less expenses) on a monthly basis to make the required debt payment. If the loan is to a business, does the business generate sufficient cash flow to repay the requested loan and other loans the business may already have. Lenders often require additional cash flow above the required loan payments. For every $1.00 of debt payment owed, a lender may require $1.20 to $1.50 or more of cash flow to cover the payment. This is called the Debt Service Coverage Ratio (Cash Flow / Required Payment(s)). If the loan requires a personal guarantee, the lender will also review the individual’s personal cash flow and debts. This is called a Global Debt Service Coverage Ratio.
Collateral – is there sufficient collateral to support the loan? Lenders generally do not want to finance 100% of something. If the loan is for a building, equipment, vehicles, etc., the lender will often only lend up to a certain percentage of the value of the collateral. This is called Loan to Value (LTV).
Credit History – does the borrower have a strong history of repaying loans on time? Does the borrower utilize revolving credit wisely?
Character – does the borrower have industry experience, a good reputation in the market? Has the guarantor built up cash reserves or a retirement fund and spent their money wisely?
Capacity – Will there be excess cash available to operate the business or household after the loan is placed? Is cash available to support the loan if there is an economic downturn?
Conditions – What are the current or potential future economic conditions that may impact the borrower? Several lenders will run stress tests that evaluate market changes to determine future potential cash flow generation and borrowing capacity.
Capital – is the financial structure of the business and guarantor strong? Are there assets that could be sold or refinanced if additional cash was needed?
All “C’s” are reviewed as a whole; no single “C” is taken in isolation. Lenders may often allow several strong “C”s to offset one potentially weak “C”. Lenders may also utilize other factors in their underwriting process.
It is important for business owners to have a trusted group of advisors, including CPAs and attorneys, that can assist the business owner in being prepared to meet the “C’s of Credit”. AAI Financial Group can also assist you by reviewing your situation and your potential to borrow.
RECENTLY FUNDED TRANSACTIONS
Here are examples of opportunities we assisted our clients with last quarter:
- $4,812,600 Warehouse SBA 7(a) – Yakima, WA – 92.55% LTV
- $1,260,000 Multifamily Purchase – Greater Detroit, MI – 80% LTV
- $292,500 Office Refinance – Bend, OR – 75% LTV