Details Lenders Like to See - Property Level Info
Property Level Info Here’s the additional detail pertaining to the post on presenting your request to lenders.
Today we're going to discuss the property level info necessary to screen a multifamily loan request. First, we will address the rent roll. More than half of the rent rolls I see leave so many important details out. Some of this detail is necessary to determine if you are eligible for a lower rate (known as affordability discounts as offered by Fannie & Freddie). Next, we'll address the Income & Expense or the P&L statement (Profit & Loss). I've seen so many mistakes here - even by experienced owner-operators - that make a big difference when it comes to the loan amount that the cash flow supports. Plus, there are potential discounts to rate due to higher debt coverage ratios. Then, we'll wrap things up with a few points surrounding capital improvements. All of this to shorten the process, improve efficiency, get you a higher loan amount and possibly a lower rate.
Rent Roll
Having a great rent roll does several things:
It creates a smoother process for you
Makes feedback more accurate and more timely
Makes the process more efficient for you
Is necessary to determine eligibility for discounts to interest rates available from Fannie Mae & Freddie Mac.
One of the primary missions of the agencies (Fannie & Freddie) is to finance quality, sustainable, and affordable rental housing. As such, you’ll find that lower interest rates are generally available for multifamily properties with strong “affordability” components. While the term “affordable” includes Low-Income Housing Tax Credit (LIHTC) communities and properties encumbered by regulatory agreements, with respect to pricing (interest rates), “affordability” is not exclusive to such properties. An affordable, market-rate project is one in which a certain percentage of multifamily units is considered affordable relative to the Area Median Income (AMI). Properties that have a high percentage of affordable units are eligible for big discounts to interest rates. Both Fannie Mae and Freddie Mac have different models to determine affordability. A licensed Fannie Mae DUS Lender and Freddie Mac Optigo Lender such as Hunt Real Estate Capital, can determine eligibility with a physical property address and a detailed rent roll. (To see if your property is eligible for affordability discounts, contact me directly. Just send a physical address and a rent roll to tony.talamas@lument.com).
So let's get to it. A great rent should state:
Unit number
Unit type - Studio, 1, 2, or 3 bedrooms for each unit
Size of units - how many square feet is each unit or floor plan?
Status: Vacant, Occupied, Admin (Office, Model, etc)
Asking / market rent - how much are you asking for each unit?
Actual lease rent - how much do you actually lease the unit for? Be sure to specify and separate any one-time concessions
Which units, if any, receive a Section 8 rent subsidy? Separate this amount and state tenant's responsibility.
Lease start date: When did each lease start?
Lease end date: When does each lease end?
Very few leases show this, but it would really be nice to see how long each unit has been leased to the same tenant. This might be answered by the lease start date.
If a lease is month-to-month (MTM), disclose whether or not it started that way or rolled to MTM from a 12-month lease
The rent roll should state all available units, including occupied, vacant, admin (office, maintenance, storage, model) down units, etc. I've seen too many rent rolls that only disclosed occupied units while neglecting to show vacant or down units and that will significantly slow down the screening process
Which units, if any, are leased to employees? How much is the discount/concession, if any?
The summary should recap
Number of available units
Number of occupied units
Number of vacant units
Number of admin units
Number of down units if any
Total rent collected - actual, not market
Market rent of vacant units
The rent roll should be current, no more than 30 days old
Disclose any tenant concentrations such as students, military or single-employer
If any units are master-leased, disclose that
P&L Statement (Profit & Loss / Income & Expense)
Do you want a lower rate? Do you want a higher loan amount? Do you want a quick, efficient and smooth process? If you answered “yes” to any of these three questions, then pay attention to this next section.
I've seen my fair share of horrible, messy, convoluted P&L statements that raise far more questions than they provide answers. These often result in less than desirable feedback, unnecessarily lower loan proceeds and a much longer, choppy process. It could even unnecessarily disqualify you from a lower interest rate due to discounts related to higher Debt Service Coverage Ratios. So if you want to maximize your loan proceeds, reduce your rate or if you just want a smooth, quick, painless process, then follow the advice below and take the extra time - it's really not much - to keep good, clean, detailed records. If you don’t have the time, hire a bookkeeper with direct experience and knowledge of multifamily accounting.
A great P&L statement will break out income in detail and list non-recurring capital improvement (capex) items "below the line" so that a lender can quickly evaluate your loan request based on accurate information derived from recurring, operating expenses and true & accurate collection figures.
First tip: a great P&L will show each month, side-by-side, so that underwriters can determine trends in both income and expenses.
Income
When it comes to collections, many statements - especially on smaller properties that are operated by independent owners - just show the rent collected; but that doesn’t really tell the whole picture as to how the property operates. And lenders love to see the whole picture. A really great P&L statement will breakout the following in detail.
Rental Income
Market Rent: What is the market rate for your units? This is the total amount of rent you can expect to collect based on market or asking rents. This is not what you are actually collecting but instead it’s the total amount you could expect to collect if you were renting out 100% of your units at full, asking rent
Loss-to-Lease: this is the difference between the asking rent and what you actually leased the unit for. For those of you who don’t break this out, think of it this way….market rents may be moving up but you have some in-place rents (perhaps a stable, valued tenant you prefer to keep at a lower rent as opposed to turning the unit over) that are lower than market. This difference reflects your loss-to-lease and tells a story of where your actual rents are relative to the market
Gross Potential Rent (GPR): This is the market rent minus loss-to-lease. It is how much you can expect to collect if you were 100% occupied and all tenants paid rent on time. It includes the actual rent on occupied units and the asking rent on vacant units.
Physical Vacancy: this is simply the amount of rent lost in a given month due to not having units rented. What is the market rent of the vacant units?
Concessions: state any one-time / temporary rent discounts / incentives that you offered a tenant for signing a lease
Bad Debt: this is simply the amount of rent that is noncollectable due to skips or non-payment leasing to evictions
Net Rental Income (NRI): subtracting bad debt, concessions and vacancy from GPR gives us the total, actual rent collected in any given month.
Other Income
List the following:
Laundry income
Parking income
Short-term premiums
Utility Reimbursement or RUBS
Corporate income, if any
Commercial income, if any (be sure to provide specific, starting with square feet occupied and lease terms)
Cable income
Misc. income
Effective Gross Income (EGI): Adding NRI to all other income gives us EGI
Expenses
Real Estate Taxes: state your real estate tax expense
Insurance: State your actual insurance cost for property, liability and flood, if required
Utilities
This includes gas, electricity, water & sewer, trash removal
Disclose to the lender who is responsible for utilities. Is this an all-bills-paid property? Who pays for water, electricity, etc?
Repairs & maintenance
Don’t place one-time, non-recurring capital improvement items in here
State only recurring items. Things like pest control, cleaning & turnover, grounds maintenance, general repairs & maintenance, maintenance of recreation amenities
Management fee
Payroll: disclose the total payroll figure, including payroll taxes and benefits, if any, for all employees. You may choose to provide your lender with a payroll schedule that lists each employee on your payroll and the hourly rate or annual salary paid to each employee, whether full-time or part-time.
General & Administrative expenses
Marketing and advertising
Professional fees
Security
Office/model/down units
Office expenses
Other administrative expenses
Net Operating Income (NOI): subtracting total expenses from EGI gives us NOI, which is used to determine the net cash flow available to service debt
Capital Improvements
Maintaining a safe, clean, desirable property that functions efficiently is important to extend the useful, economic life of your property and to improve your property's ability to compete for tenants, stay fully occupied and command the highest possible rents. As such, understanding the capital improvements made both in recent history and those planned play an important role in evaluating your loan request.
So, when it comes to capital improvements, simple identify
Planned Improvements
Describe, in detail, the work to be completed
Identify the time period in which it will be completed
State the estimated cost
Completed Improvements
Describe, in detail, the work that has been completed in the past
Identify when the work was completed (month and year or just year)
State the cost (this also goes a long way in establishing your cost basis and increasing the likelihood of being eligible for a larger cash out refinance)
And remember, these items stay "below-the-line." Don't wrap these figures into your operating expenses. Keep them as separate, non-recurring line items below the NOI line.
Last thoughts on keep detailed rent rolls, P&L statements and capital expenses
Get a software program and hire a bookkeeper familiar with how to do this or just have a qualified property manager do this
Be sure to not include personal expenses or expenses related to other assets not tied to the subject asset; keep the records for each property separate.
Written by Tony Talamas: Connect with me on LinkedIn
Schedule a time to speak with me here - Tony's Calendar
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