This expert post is written by Anthony Liu, Managing Director at Hines, one of the largest privately held real estate investors and managers in the world.
Whether a board member has years of experience or is new to managing the financial interests of a building on behalf of residents, taking on a new loan or refinancing a building’s existing loan is probably one of the most important decisions a board must make.
If done haphazardly, obtaining financing with a subpar loan can have decades of negative repercussions, depressing the building’s apartment values and increasing the monthly carry—not to mention angering the neighbors. Here are four tips to help navigate a successful building loan.
1. Have someone on the board with a strong background in finance.
With hundreds of thousands or millions of dollars on the line, having someone who understands the ins and outs of the process and loan terms makes a huge difference. Because no two loans are the same, slight differences in the terms can have significant financial consequences.
For example: while an interest-only (IO) period may present an attractive interest rate, it may not always be the best option. For the first few years of that loan, the building is only paying off interest. This means the actual amount borrowed is not paid down until the end of the loan, especially if the amortization schedule for the non-IO period is short. This can great increase the monthly carry in the later years of the loan, which can lead to big increases in maintenance fees to cover the loan, and in 10-15 years when residents complain about this, it’s often too late to correct course because the prepayment penalty may be prohibitive to pay the loan down with a new loan.
Having someone with enough financial background to understand the principal and interest payment schedule for the duration of a loan and how that impacts the building’s financials over the course of the entire loan compared to other loan structures is key to figuring out what's best for your building. And even if trade-offs are made, these can then be communicated to the building so there are no surprises down the road.
2. Hire a broker or use an online marketplace to get competitive pricing.
It shouldn't be expected that most board members finance loans for a living and know where to find the best rates, so it’s important to maximize the number of potential lending leads. The biggest mistake a board can make is to refinance with the existing lender without comparing its terms against those of other lenders. The cost of convenience can hurt the building financially.
That said, hiring a broker can also be expensive if the loan size is small, and some brokerage firms will charge an arm and a leg because the transaction does not lead to repeat business. That makes it all the more important to select a trustworthy broker. An online marketplace, such as LoanBase (think of it as the LendingTree for commercial loans), is a solution worth looking into for some boards where the resources may not be there to hire a broker.
3. Tap into personal networks.
Reaching out to one’s personal or professional networks can generate additional lender leads. You may have more friends or colleagues who serve on a board thank you think, and your property manager can be a good resource as well. Most board members recognize how difficult the process can be and are generally willing to lend a helping hand and share which banks they used on a recent financing.
Another approach is to ask one’s personal banker to make introductions to its commercial lending arm. Personal bankers are happy to make these introductions because it’s more business for their firm and makes you a stickier client.
4. Improve your building’s financials.
It's a simple fact that banks will lend at more attractive terms to a building with stronger financials. Consider hiring an advisor or delegating someone on the board who can help think through creative ways to increase the value of the building by increasing the property’s revenues or decreasing the building’s expenses and capital outlays. For example, leasing up a vacant retail unit or replacing an underperforming parking operator are some ways to generate additional income to the building. Another idea is to condominiumize and sell the retail or parking to generate significant cash flow upfront, but again there are trade-offs for consideration.
Building loans are often on a 15-30 year cycle, so it's no surprise most board members have limited experience with securing a loan or refinancing. But by doing your homework and taking the time to do due diligence up-front, you can help minimize the risk of securing a bad loan that will haunt the residents for decades to come.
Super is not a financial or investment advisor. It's important that buildings do their own research and analysis before making any financial decisions, such as further investigation with a broker or commercial real estate loan platforms like LoanBase or StackSource.
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