https://www.creconsult.net/market-trends/exp-commercial-national-meeting/
Friday, July 8, 2022
Thursday, July 7, 2022
What is Debt Yield and How Does it Apply in Commercial Real Estate
Debt yield hasn’t traditionally been a primary commercial real estate loan underwriting metric, but more lenders are incorporating it into their criteria. In the current real estate market, measuring debt yield ratios provides lenders with a stable assessment regardless of unusual or changing conditions.
What is Debt Yield?
Debt yield is a standardized way to measure net operating income (NOI) against total loan value. The ratio is simple to calculate, but it’s an accurate measure of risk that can be used to evaluate individual loans or compare different loans.How to Calculate Debt Yield
The math required for a debt yield calculation is simple and easy. The debt yield formula is: Debt Yield = Net Operating Income / Loan Amount For example, consider the purchase of a property with $300,000 NOI and a loan of $3 million. In this example, the debt yield is 10 percent ($300,000 / $3,000,000 = 10%).What Does Debt Yield Tell You?
Lenders use debt yield ratios to determine what their return would be if a buyer immediately defaulted on a commercial real estate loan. Loans with low debt yields are considered riskier, as the lender would receive a smaller return in the event of foreclosure. Higher debt yields are less risky because the lender would receive a larger return and could recoup their losses faster.
Once lenders know what annual return they’d receive, they can calculate how long it’d take to recoup the loss on a foreclosed property. This is done by dividing 100 percent by the debt yield ratio (annual return). The result is the number of years that it’d take to recoup all losses. Recoup Time = 100 / Debt Yield Assuming the above debt yield of 12 percent, the lender could recoup their investment in around 8.3 years (100% / 12% = 8.33 years). Borrowers can alternatively use the ratio to calculate the maximum loan amount a property can qualify for. If the allowed debt yield and net operating income are known, then the loan amount is the NOI divided by the debt yield. Maximum Loan Amount = Net Operating Income / Debt YieldIf a lender requires a minimum debt yield of 10 percent, the maximum amount that the above example could qualify for would be $1.2 million ($120,000 / 0.10 = $1,200.000).
(Of course, any maximum loan amount would also be subject to loan to value (LTV) and debt service coverage ratio (DSCR) requirements. If a lender considers all three of these ratios, whichever has the lowest permitted loan amount is the one that sets the maximum amount borrowed.)How Debt Yield Applies to Commercial Real Estate
Lenders appreciate that debt yield ratio is insulated from variables that can skew loan to values, debt service coverages, and even cap rates. As extremely low-interest rates and spiking property values make accurate loan risk assessment more difficult, debt yield provides a consistent risk measurement when underwriting commercial real estate loans.Debt Yield vs. Loan to Value
Loan-to-value ratios depend heavily on the value of a commercial property, and this ratio is susceptible to large swings in property values. Borrowers can potentially get much larger loans when property values increase drastically, and lenders can be underwriting an underwater loan if property values then drop drastically.
In contrast, debt yield ratios aren’t impacted by changes in property value. The loan itself is the underlying denominator, and not how much the property is worth. So long as net operating income doesn’t change, debt yield won’t change after a loan is underwritten.Debt Yield vs. Debt Service Coverage
Debt service coverage is based on the annual debt payment, which is affected by interest rate and amortization schedule. Thus, DSCR can be skewed by extreme interest rates (currently extremely low) and/or long amortizations. The DSCR for variable-rate loans will also change as interest rates increase.Debt yield is based on the loan amount, and thus won’t change with interest rates or amortization schedules. It is thus a more consistent measure in many situations, even though both measurements use net operating income.
Debt Yield vs. Cap Rate
Although cap rate also looks at net operating income, this is based on the value of a property. Cap rate is thus susceptible to some of the same issues as loan to value is, and which debt yield is insulated against.What is an Acceptable Debt Yield?
The Comptroller’s Commercial Real Estate Lending booklet recommends a minimum debt yield of 10 percent, and most lenders that consider this metric follow that recommendation.
In certain situations, lenders may allow a 9 percent debt yield for desirable properties in major markets (e.g. New York City, Los Angeles). Ratios of 8 percent for truly exceptional properties are quite rare, although not altogether unheard of.
Notably, debt yield is based on current net operating income. Projected rent increases or NOI growth isn’t considered when calculating the ratio, so adjusting projections generally won’t have an impact on whether debt yield meets a lender’s minimum requirement.
Wednesday, July 6, 2022
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 ValueThe 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
Tuesday, July 5, 2022
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%.
Source: 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.
Monday, July 4, 2022
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?
Sunday, July 3, 2022
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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