CMBS loans are among the most popular types of financing for multifamily and commercial real estate, with approximately $77 billion in CMBS financing issued in 2018 alone. As many already know, CMBS loans are designed for securitization, meaning that one borrower’s loan will generally be grouped with many others to generate a commercial mortgage-backed security, which is then sold to investors on the secondary market.Read More
One potential downside to CMBS is that these loans are not serviced by the lender that originated them, and are typically placed under the supervision of separate loan servicing company referred to as master servicer. But what if things go south and a borrower defaults on their loan? That’s when another company, called a special servicer, comes in.Read More
A non-recourse loan on a commercial or multifamily property is a loan that does not require the personal guarantee of the borrower(s). To put it simply this increases investors/lender risk and reduces risk/liability to borrower(s).Read More
So don't get too excited if your loan amount based on your LTC or your LTV looks above and beyond what you expected, because you are going to get the lesser of the two, and quite often the lesser of three or four ratios. Lenders are experts in risk mitigation, and that means they know how to manage leverage and loan amounts.Read More
If you’re new to the world of commercial real estate, the phrase yield maintenance prepayment penalty has likely never been part of your vocabulary before. If you are trying to acquire a loan for a multifamily property, however, you must be aware of your prepayment options so you can make correct financial decisions for the long run.Read More
Whether you are a new borrower or are looking to refinance an existing loan, it's important that you partner with a lender like Multifamily.Loans to get you the best leverage and financing terms available.Read More
Essentially, in deferring capital gains tax obligations, investors are able to use the government’s due tax dollars for real estate investment and earn the return on that capital without having to pay anything to the government besides the actual tax obligation owed whenever, in the future, the investor chooses not to exercise his right to a 1031 exchange.
The Fannie Mae Multifamily Green Initiative was created to provide loans for properties investing in energy efficient, cost-cutting improvements and lifestyles. The Green Initiative program allows for an increase of 5% in loan proceeds as well as a 10 basis points (bps) reduction off the all-in interest rate.Read More
Rental Assistance Demonstration, or RAD, is a Department of Housing and Urban Development (HUD) program, which seeks to help investors preserve affordable housing across the U.S. To do this, the RAD program allows investors using four HUD legacy programs the ability to convert their housing into long-term Section 8 contracts. This helps investors by giving them more flexibility in terms of acquiring the financing to repair their properties, including making it easier to apply for the LIHTC (Low-Income Housing Tax Credit Program).Read More
When a conduit lender issues a CMBS loan, they will pool it in with a variety of other loans in order to create a commercial mortgage backed security (CMBS). These CMBS are similar to bonds, in the sense that they are traded on the open market. From an investing standpoint, CMBS are often compared to RMBS (residential mortgage backed securities), which are securities based on residential mortgage loans.Read More
While CMBS loans all but disappeared after the 2008 market crash, in the last 4-5 years, the CMBS market has been stronger than ever, with nearly $88 billion of loans issued in 2017, and October 2018 numbers showing a loan volume of nearly $65 billion from the beginning of that year. CMBS came roaring back for a variety of reasons, including the fact that they often provide the highest leverage loan a borrower can get for properties in secondary and tertiary markets. However, CMBS loans aren’t ideal for everyone— as they can provide a particularly poor loan servicing experience rife with significant prepayment penalties.Read More
CMBS lenders and life companies often compete in the same space for large real estate deals. Both have significant advantages and certain disadvantages. For instance, life company loans typically offer lower rates and significantly better loan servicing, while CMBS loans are much easier to get approved for and offer benefits including interest-only periods (and even full, interest-only loans).Read More
SASB CMBS transactions involve the securitization of a single loan, which is typically collateralized by one, very large property. Single Asset Single Borrower transactions are typically based on loans of at least $200 million, and often range up to $800 million to $1 billion+. While most are collateralized by one property, SASB loans can also be collateralized by a group of cross-collateralized/cross-defaulted properties all owned by the same borrower (much like a Fannie Mae Bulk Delivery Loan or Fannie Mae Credit Facility financing, though with much less flexibility).Read More
A CMBS spread, also referred to as a CMBS credit spread, is the difference between the interest rate of a CMBS loan and the underlying index on which the interest rate is based on. Since the vast majority of CMBS loans are based on the swap rate, spreads can usually be determined by taking the interest rate of a loan and subtracting the swap rate.Read More
Currently, most CMBS loans vary between 4.30- 5.00%, with exceptions for particularly desirable or particularly risky properties. CMBS loan rates are generally based on the U.S. Treasury Index, plus a margin, also known as a spread, which compensates a lender for their risk and provides for their profitsRead More
Cash On Cash Returns In Commercial Real Estate Investments
The definition of cash on cash returns can be simplified as follows; cash on cash return is a rate of return commonly used in multifamily and commercial real estate finance. It is calculated by looking at the amount of cash you invested compared to the amount of income you received over a specific time period, generally one year.
Simply, cash on cash return is calculated by dividing annual income by total investment. Cash on cash return is also called the equity dividend rate in certain cases. This is one of the most common return systems that can be found in the real estate industry. Referring to the example mentioned above, you can see it is a ratio, which is converted in to a percentage.
Knowing the formula, you should realize that the cash flow figure equals the net operating income of the property. Usual operating expenses should be deducted from the gross rental income. Then the answer should be divided by the equity investment to get the cash on cash return.
Income tax effects, resale implications, future cash flows, and loan principal deductions are not taken into consideration when we measure the cash on cash return.
The cash-on-cash aspect can be utilized to figure out the effects of leverage. In general, leverage is created by using a commercial mortgage loan to finance a portion of the property’s purchase value. For instance, assume an investor is able to secure a $600,000 mortgage loan on a $1,000,000 acquisition. Although debt repayment expenses like interest and other costs are going to occur, in this case a remarkably lesser investment is required and hence the additional expenses can be considered as worthwhile ones. Instead of buying a $1,000,000 property with $1,000,000 cash, you are buying it with $600,000 debt and only $400,000 cash and therefore your cash-on-cash returns will measure results on an overall investment that is the same size, but your cash outlay being significantly less.
This indicates if you can finance a greater portion of the property’s purchase value you can increase the cash on cash return. However, loans always involve a certain amount of risk. If the projected net operating income decreased substantially, the owner may be liable to make principal and interest payments or even, at some point, pay back the entire loan prematurely.
An investment in commercial real estate, of course, is a subject to be studied thoroughly prior to making any decision. Income taxes, possible risks, the amount of money to be borrowed, and the various financing alternatives available are the key components to consider before making a decision.