Loan To Value (LTV) Ratio Overview & Formula

Loan to value ratio is a standard metric that lenders use to assess default risk and qualify commercial real estate loans. While it’s far from the only data point lenders consider, it’s one of the most basic and often checked early on during the loan application process.

What is a Loan to Value Ratio?

Loan to value (LTV) ratio is a straightforward way to measure a commercial real estate loan’s size against the value of the financed property. The ratio is simple, yet considered one of the accurate ways to assess the risk that individual loans present.

Loan to Value Ratio = Loan Balance / Property Value For example: a $400,000 loan on a $500,000 commercial property would have an LTV of 80% ($400,000 / $500,000 = 0.80).

What Does LTV Tell You?

Lenders use loan to value ratios as a measure of the risk that different loans present. Higher LTVs are considered riskier than lower LTVs for a couple of reasons.

First, borrowers have less equity in their commercial property when the associated loan has a high LTV. Should a property become unprofitable, borrowers who have less equity may be more apt to walk away and default on their loan.

Second, properties are more likely to become underwater when their associated loan has a high LTV. Should the local real estate market crash, properties with high LTV ratios will more quickly become underwater. This not only increases the risk of default, but also may force lenders to take a loss if they foreclose and auction off a property.

In order to ensure that loans fall within their risk parameters, lenders have maximum LTVs that they’ll allow. If borrowers know a loan program’s maximum allowed ratio, the LTV formula can be inverted to determine the maximum property value allowed or down-payment required.

What is a Combined Loan to Value Ratio?

When borrowers secure financing through multiple loan programs, lenders often consider the combined loan to value ratio (CLTV) in addition to the loan to value ratio. CLTV measures all of the outstanding balances on a commercial property’s loans against the property’s value. Whereas LTV considers only one loan against the property, CLTV considers all loans that are secured with the property. Combined Loan to Value Ratio = Σ All Loan Balances / Property Value

The combined ratio provides a more comprehensive measure when multiple loans and/or lines of credit are being used. It’s unnecessary when using only one loan.

How LTV Applies to Commercial Real Estate

Lenders appreciate how loan to value measures what portion of an investment property is financed. No other calculation considers loan balance and property value in such direct relation to each other.

Loan to Value vs. Debt Yield

Debt yield measures net operating income against loan balance, and thus shows the annual return on the amount borrowed. The metric doesn’t directly capture any property value change that results from building improvements or general market trends. Because loan to value includes a property’s value within its calculation, LTV will capture any changes in property value that result from improvements or market trends.

Loan to Value vs. Debt Service Coverage

Debt service coverage ratio (DSCR) focuses on interest rates and amortization schedules. This metric is almost entirely insulated from changes in property value.

Loan to value doesn’t assess the financials of a loan itself in the same way that DSCR does, but instead examines the loan’s amount as it relates to the property.

Loan to Value vs. Cap Rate

Cap rate measures a property’s net operating income against the property’s value. While this is needed to assess how profitable a property is, it doesn’t say anything about the property’s financing.

Loan to value uses the same property value data point, but examines the property’s financing rather than its income.

What is an Acceptable Loan to Value Ratio?

Most commercial real estate loan programs allow a maximum loan to value ratio of 75-80%, but some programs differ from this range. Special federal loan programs (e.g. HUD/FHA 223(f)) allow ratios of 83.3-90%. Some private loans will only permit 65-70%.

Additionally, a few specialized programs (e.g. Freddie Mac Green Advantage) may amend the maximum LTV slightly. Any such amendments are usually specifically so that investors can install environmentally friendly or similar improvements.

While qualified investors can take advantage of a program’s maximum allowed LTV, sometimes it’s advantageous to reduce the LTV in order to get a lower interest rate. Certain programs minorly reduce the interest rate when a borrower has more equity in their property. Even if such reductions are minor, the cumulative savings can be substantial considering the time and duration of commercial real estate loans.

How to Calculate LTV

The borrowed amount and property value are needed to calculate the loan to value ratio. A property’s appraised value is most often used, which is one reason why lenders typically require a recent appraisal during underwriting.

The formula to calculate LTV is: Loan to Value Ratio = Loan Balance / Property Value As another example, consider a $1.2 million property that’s being financed with a $1 million loan. The LTV would be 83.3%, and a specialize loan program that allows 80+% LTVs would likely be needed (1,000,000 / 1,200,000 = 83.3%). The formula can be inverted to determine the maximum permitted loan balance or property value: Property Value = Loan Balance / LTV ratio Consider a borrower who knows they can qualify for a $350,000 loan through a program that allows a maximum LTV ratio of 75%. The borrower would be able to purchase a property worth up to about $467,000 ($350,000 / 0.75% = $466,667).

How to Use LTV for Commercial Real Estate

Loan-to-value ratios must be met in order to qualify for commercial real estate loans. After checking a loan program’s maximum LTV, the formula can be used to determine:

• Whether a loan application will be denied based on this criterion
• What the maximum property value that an investor can purchase is
• What down-payment will be required for the purchase of a property

The maximum allowed LTV should be checked early on in the loan application process, so the borrower can check other loan programs if necessary and can determine what their purchasing parameters are.

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Source: Loan To Value (LTV) Ratio Overview & Formula

https://www.creconsult.net/market-trends/loan-to-value-ltv-ratio-overview-formula/

Multifamily Rent Growth Continues to Outpace Inflation

 

JLL adds that inflation is also showing signs of slowing.

Real estate has long enjoyed the reputation as an inflation hedge. According to data and analysis from JLL, even with the spikes in CPI the US has been experiencing, that statement remains true, at least for multifamily. And as pressure builds on the ability to increase rents and allow continued profitable expansion, there’s evidence that the inflation rate has begun to slow.

“The national average rent growth for Class A multi-housing properties has surpassed inflationary growth by 198 basis points from 2010 to the first quarter of 2022,” according to JLL. “In fact, in the first quarter of 2022, national multi-housing rents increased 15 percent year-over-year, as rising inflation translated to significantly higher rents.”

Multifamily housing does have an ability to mark rents to market, increasing them both on an annual basis at renewal time and when there is turnover in units. According to Yardi Matrix, multifamily asking rents hit an all-time high in April of $1,659, with rents up 8.8% in all but one of the top 30 metropolitan areas.

That pricing strength has also enabled growing property values and cap rate compression. Walker & Dunlop’s latest multifamily outlook stated that nearly $290 billion in transactions were logged in 2021, more than double the total from 2020. “Part of the rebound in the multifamily market reflected a return by many renters who had vacated their urban apartments during the height of the pandemic, but vacancy levels were also flattened by the lack of new multifamily completions,” the report noted.

However, JLL’s framing does suggest that there might be limitations. Class A housing may be able to command continued rent growth from consumers with higher incomes. Whether that might be true for Class B or C housing, where consumers are likely to have more constrained financial resources, is far from clear.

Even for Class A, though, there are eventually limits. “The convergence of several trends over the pandemic, namely home buyer affordability issues, rapidly rising wages, population migration trends and a supply and demand imbalance have resulted in a level of rent growth that is unsustainable,” the JLL release quoted Geraldine Guichardo, JLL head of Americas living research and global head of research, hotels, as saying.

And negative leverage has emerged in multifamily, with shrinking returns for buyers despite rent hikes.

JLL is predicting that both inflation and rental growth will start moderating this year and through 2024, with rates eventually dropping below 5%.

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Source: Multifamily Rent Growth Continues to Outpace Inflation

https://www.creconsult.net/market-trends/multifamily-rent-growth-continues-to-outpace-inflation/

Cost Segregation Deadlines for Tax Year 2021 Extensions

 

Did you file an extension for 2021?

If you filed an extension for 2021, you still have time to get a cost segregation study done before the September and October tax filing deadlines to mitigate some or all of what you owe.

September 15 Tax Deadline

Our Cost-Segregation partner's Internal Deadline is July 22, 2022 - All relevant data to complete the project must be received by this date in order to ensure timely delivery of the study for the 9/15 tax deadline. Relevant data needed include the site survey, building cost basis/depreciation schedule, blueprints (if available), appraisal (if available), and construction/improvement cost detail (if applicable). 

October 17 Tax Deadline

The Deadline is August 22, 2022 - All relevant data to complete the project must be received by this date in order to ensure timely delivery of the study for the 10/17 tax deadline. Relevant data needed include the site survey, building cost basis/depreciation schedule, blueprints (if available), appraisal (if available), and construction/improvement cost detail (if applicable). 

• If you have a building that you have already filed on in 2021 or owned prior to 2021, you can file Form 3115 Change of Accounting Method. our Partner can prepare that for you. This will allow you to apply cost segregation and get "catch up" savings in 2021.

If you renovated your property in 2021 that was in service in 2020 or prior, you are eligible for additional tax savings with Partial Asset Disposition (PAD). This MUST be taken in 2021 or you lose the opportunity to write off the remaining depreciable basis of what you ripped out/removed. In other words, there is "Cash in the Trash"!

45L tax credits and 179d tax deductions are still available in 2021. If you made energy-efficient improvements to your property, please reach out and we will let you know if you qualify.

Do you have W-2 employees and your business was impacted by COVID due to a government shut down, supply chain, or revenue drop of 20% or more? Ask more about ERTC or ERC (Employee Retention Credits). Up to 26K per W2 is available.

Do you have questions about the 100% Bonus and how that will change in the coming years? Please don't hesitate to ask.

Please Contact Us for further information regarding your Cost Segregation needs. 

 

 

 

https://www.creconsult.net/market-trends/cost-segregation-deadlines-for-tax-year-2021-extensions/

eXp Commercial Explained with Randolph Taylor

 

Every Thursday at 8 a.m. PT eXp Commercial eXplained highlights exceptional Agents, Brokers, and Partners of eXp Commercial. The event is hosted by Commercial President James Huang and Director of Operations Stephanie Gilezan.

On June 2nd, 2022 Randolph Taylor, Senior Associate and Multifamily Investment Sales Broker with the Chicago-Naperville eXp Commercial office was featured to speak about his Commercial Real Estate practice servicing Multifamily Buyers and Sellers throughout the Chicagoland area and Suburbs. As well, Randolph spoke about his recent experience joining eXp Commercial and how this has benefited his practice and service to his clients. 

Below is a recording of this discussion:

How Can We Help You?

Are you looking to Buy, Sell, or Finance/Refinance Multifamily Property?

contact us

https://www.creconsult.net/market-trends/exp-commercial-explained-with-randolph-taylor/

May Apartment Rents Posted Largest Increase for 2022

 

Still, the longstanding upward trend might have plateaued.

Apartment rents are growing more slowly than they did in 2021, but at a pace faster than the years immediately preceding the pandemic, according to the latest national rent report by Apartment List.

Year-over-year rent growth currently stands at a “staggering” 15.3 percent, according to the report, but is down from the 17.8 percent peak it showed at the start of the year.

In May, rents rose 1.2 percent—the largest monthly increase of the year—and through May they are up 3.9 percent. That lags last summer’s scorching pace, but it’s ahead of the pre-pandemic norm. Five months into 2021, rents rose 6.1 percent.

The national vacancy rate stands at 5 percent, up from the low of 4.1 percent last fall.

Rents increased last month in 96 of the nation’s 100 largest cities, though 70 of these cities have seen slower rent growth in 2022 so far than they did last year. Some of the hottest Sun Belt markets are signaling that their growth has plateaued.

“Based on what we’ve seen so far this year, rent growth in 2022 seems likely to continue exceeding the pre-pandemic trend, even as it moderates substantially from 2021 levels,” Apartment List said in a release.

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Source: May Apartment Rents Posted Largest Increase for 2022

https://www.creconsult.net/market-trends/may-apartment-rents-posted-largest-increase-for-2022/

Multifamily Still Holds Top Perch Despite Supply Household Formation Concerns

 

Despite inflation and rising rates, multifamily maintains many of the same strong fundamentals as it did at the end of 2021.

Apartment rents have surpassed pre-pandemic levels in many cities across the US, pushing investment sales numbers in the segment to historic highs. And they are expected to remain strong despite increasing concerns about household formation numbers and the lure of single-family rental home investments.

According to Walker & Dunlop’s new multifamily outlook, nearly $290 billion in transactions were logged in 2021, more than double the total from 2020. That activity centered most in the first quarter of this year in Atlanta, Houston, Dallas-Fort Worth, and Phoenix, as interest “firmly” shifted away from coastal markets to the Sun Belt, following pandemic-era trends. Cap rates for the sector are also at record lows, with per-unit pricing rising 11 percent over the past four quarters to $239,000.

“Part of the rebound in the multifamily market reflected a return by many renters who had vacated their urban apartments during the height of the pandemic, but vacancy levels were also flattened by the lack of new multifamily completions,” Walker & Dunlop notes in the report, adding that data also suggests that new completions are likely to be higher in 2022 than last year. “This sets the stage for more multifamily completions over the next three years than any comparable period dating back to 1988, with an above-average concentration in the suburbs,” analysts note.

But as supply ticks up, so do concerns over household formation numbers, which could weigh on absorption. Home sales are also predicted to slow due to rising mortgage rates; according to Fannie Mae’s housing market forecast in April, total home sales are expected to slump by 7.4 percent in 2022 and by another 9.7 percent in 2023.

Walker & Dunlop also pointed to data from Zelman & Associates noting that annual population growth is forecast to increase by just 0.39 percent growth per year for the 2020-30 decade as opposed to a prior decade average of 0.71 percent per year.

Still, Walker & Dunlop goes on to note that even with institutional investors absorbing an increasing share of single-family home purchases, multifamily fundamentals have outperformed Zelman’s recent forecasts, leading them to increase 2022 economic revenue growth to 7.8 percent from 5.8 percent.  “Despite inflation, rising rates, and war in Europe, the multifamily industry maintains many of the same strong fundamentals as it did at the end of 2021 and remains the top-performing commercial real estate asset class.”

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Source: Multifamily Still Holds Top Perch Despite Supply Household Formation Concerns

https://www.creconsult.net/market-trends/multifamily-still-holds-top-perch-despite-supply-household-formation-concerns/

THE IMPACTS OF HIGHER INTEREST RATES ON THE RENTAL HOUSING INDUSTRY

 

According to Freddie Mac, in April 2022, the 30-year fixed mortgage rate averaged 5.11%, reaching its highest level in a decade. The past two years of economic news show a domino effect of the pandemic, shutdown, stimulus, recovery, supply chain disruption, inflation, and now higher interest rates prescribed to cool the fever.

When interest rates are discussed in broad terms, mortgage rates are the main lens, but the hikes are also spilling onto all segments of the housing industry, including multifamily.

Having an Effect or Not?

For John Tomlinson, Chief Financial Officer, Bell Partners, based in Greensboro, N.C., it’s a good news/bad news situation. “On the positive side, rising mortgage rates increase the cost of financing a home purchase,” he says. “The result is increased demand for renter housing. With high occupancy rates, the increased demand results in higher effective rent growth. On the negative side, the higher cost of debt forces buyers to sharpen their pencils and be more selective. Given the significant impact of debt related to total capitalization, some deals previously viewed as attractive become marginal opportunities.”

Rent growth is cited as the strongest buffer to higher capital costs. “We’re seeing very high rent growth,” says Chris Bruen, Research Director for the National Multifamily Housing Council, based in Washington, D.C, “The rent growth has more than offset the increase in the cost of capital. As of the fourth quarter of last year, cap rates are decreasing despite rising interest rates. Going forward, if rent growth continues to compensate for those higher interest rates, it’s somewhat of a wash for builders.”

Not all loans are created equal. Long-term, fixed rates remain mostly stable. “Adjustable-rate loans is where we’ve really seen a run-up over the last month in anticipation of the Federal Reserve’s news,” says Jamie Woodwell, VP of Commercial Real Estate Research at the Mortgage Bankers Association, based in Washington, D.C. “Those increased rates transfer directly to a builder’s bottom line.”

Shawn Townsend, Managing Partner of Chicago-based Blue Vista Capital Management, doesn’t believe anything is going to stop the multifamily development juggernaut. “From a development perspective, the pace of new development is continuing in spite of interest rate movement,” he says. “There’s an incredible capital momentum behind housing products. Not just multifamily, but the build-to-rent space, townhome, and the single-family hybrid. There’s still a supply-demand imbalance due to housing inventory in general, and the migratory patterns domestically have shifted demand in specific markets.”

The Yield Curve Inversion (Again)

In 2019, before anybody ever heard of COVID, the yield on the two-year and 10-year Treasury bonds inverted, meaning the rates on a two-year note was higher than a 10-year note. Economists point to inversions as a harbinger of a coming recession. The news typically generates a lot of headlines. It happened again on March 31 of this year, and the warning bells were rung. Are we headed to a triple whammy of higher rates, inflation, and a recession at the same time?

“Near-term inflation and recession go hand-in-hand,” says Townsend. “There are more distractions in the current cycle taking the investment momentum out of the equation, especially in the real estate space, which has been built up over the years. A lot of the narrative has been around the evolution of the post- pandemic fundamentals.”

Tomlinson notes the surprise of the 2019 inversion, but he’s not shocked about the current one. “I think the inversion in 2019 was more unusual because there were no other signals at that time suggesting an increased risk of recession. Unemployment was low, incomes were rising and inflation was muted. Today, expectations of higher interest rates to fight inflation as well as increased geopolitical risk have led many to conclude that the risk of recession has increased. Hence, last month’s yield curve inversion was not surprising.”

The other issue that may be sliding under the radar is what happens when the kinks in the supply chain finally get ironed out. “It is difficult to separate out organic inflation from supply chain issues, which initially sparked inflation, the Fed reaction, and pressure on the yield curve,” says Tomlinson. “The Fed’s actions and messaging have moved the market on the short end meaningfully. Absent this action, the yield curve would probably be a more indicative leading indicator.”

Inversion is an indicator of what is expected to happen, but it’s not always right. Larry Jacobson, President, and CEO of Los Angeles-based The Jacobson Company says, “While an inverted yield curve has often preceded a recession, this is not a given. In fact, a recession did not occur when the yield curve was inverted in 2019. Investors have seen that it can often take some time for the effects of yield curve inversion to reach equities; therefore, it’s wise not to act impulsively. We may or may not be headed towards a recession, but criteria such as how the Federal Reserve manages its interest rate increases will really be the determinative factor in my view. We just don’t have enough information at this point to know whether they will get it right or not.”

The Affordability Question

Pre-COVID, housing affordability was a hot-button issue that is now making a return to the spotlight. Greg Curci, EVP at Morgan Properties based in King of Prussia, Pa., doesn’t see higher rates alone pushing more people into rentals. “Down payments are as much a factor as borrowing costs, particularly with regards to first-time homebuyers,” he says. “The rapid rise in home price values over the past year put homeownership temporarily out of reach for many and has helped fuel the unprecedented demand for apartments. It remains to be seen if the recent rise in mortgage rates will trigger a meaningful enough decline in home prices such that renters are able to convert to homeowners.”

Woodwell thinks there are bigger forces at work regarding homeownership and affordability besides interest rates. “There’s a lot of focus and discussion on rent vs. buy,” he says. “Both markets are driven by the supply of housing and the overall number of households out there. Interest rates flow through to the rental market. I look more to the demographics and supply and demand shortage as the key drivers for what’s pushing people into different types of housing right now.”

The Housing Shortage

Check out the price of lumber and the lead time for appliances. Assess the threats of inflation and recession. Add in the rate hikes and yet, the building goes on. “While the cost of construction has certainly increased over the past couple of years, there is simply not enough apartment supply to meet the demand,” says Curci. “As a result, multifamily development projects in under-supplied markets still pencil out quite well as developers and their capital partners are willing to inject considerable optimism in their future rent growth projections.”

Tomlinson is looking at new projects coming out of the ground which is always a safe place to start an analysis. “Multifamily construction starts will remain attractive until the spread between development and acquisition yields no longer justifies the added risk,” he says. “We’re seeing delays in development, but construction starts nationwide remaining at elevated levels. With higher financing costs, some developers may choose to adjust their projects with fewer amenities and other cost-saving measures.”

Biggest Concerns

With all that’s going on, are interest rates the biggest headache affecting developing or operating multifamily buildings? It depends on who you ask. Townsend says, “As we assess lending opportunities in the asset class, we’re increasingly concerned about aggressive operating assumptions. We’re seeing a very aggressive year-over-year rent growth opportunity in the first 12 to 24 months before they settle into a benchmark that they grow with CPI. Obviously, if you don’t reach those aggressive rents, it becomes a problem.”

Woodwell points to what’s happening in key markets and the basic rules of supply and demand. “For the construction of multifamily, it’s often not easy. It can be affected by local laws that affect the ease of building, local market conditions – just a host of things can affect it,” he says. “The builder and the lender are always looking at the market in which the property is being built and the market to which it will be delivered.”

Bruen sees the supply chain issues as the main cause and probably the most solvable solution. “It was the pandemic that originally caused the supply chain issues which caused inflation and higher rates so I think if new strains prolong supply chain issues, that could have an indirect effect on rates,” he says. “They’re not totally unrelated but we keep coming back to the supply chain being a catalyst for a lot of it. Right now, the increased cost of capital is being offset by high rent growth. So, I think there are still profits there to make construction worthwhile. The question is, will this rent growth continue to compensate for the higher costs of capital?”

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Source: THE IMPACTS OF HIGHER INTEREST RATES ON THE RENTAL HOUSING INDUSTRY

https://www.creconsult.net/market-trends/the-impacts-of-higher-interest-rates-on-the-rental-housing-industry/