Use the following information to answer the questions below:
Jessie is a lending officer at the local community bank that lends to both residential and commercial borrowers. She is well-versed in both lending areas. For residential mortgages, she is most concerned with Loan-to-Value (LTV) and Debt-to-Income (DTI) ratios. For commercial loans, she looks at LTV, Loan-to-Cost (LTC), Debt Service Coverage Ratio (DSCR), and Debt Yield. The community bank’s underwriting standards are as follows:
Residential
LTV – 80% maximum, 75% for refinance
DTI – 40% maximum; 33% maximum for self-employed.
Commercial
LTV – 55% maximum
LTC –65% maximum
DSCR –1.25x minimum
Debt Yield – 8% minimum
Brian Schwartz is a local real estate developer. He is working with Jessie to finance both a house he is purchasing and a well-located unanchored retail center he is developing. The current residential mortgage rates are 7.125% for 30-years and 6.875% for 15-years.
Brian’s house is located in an established first-ring neighborhood with increasing property values. The house is appraised at $850,000. The unanchored retail center will be located in the same neighborhood. The five tenants, including Starbucks Coffee, have all signed Letter-of-Intents (LOIs). The budgeted cost to build the retail center is $20000,000 and is being built to an 8% cap rate according to Brian’s underwriting.
Jessie first underwrites Brian’s house. Brian is going to put a $225,000 down payment on the house. What is the LTV for this mortgage? Does this meet the community bank’s LTV underwriting standard?
Brian selects the 30-year mortgage option. The taxes on the property are $15,000 per year and property insurance is $2,100 a year. Brian owes $3,500 a month in other debt (i.e.- a car loan, monthly credit card payments, and student loan repayment). Brian is a self-employed real estate developer and owner. Brian nets an average income of $250,000 per year. What is the DTI ratio Jessie calculates for Brian? Does this meet the community bank’s DTI underwriting standards?
Jessie next underwrites the retail development. Since all the retail spaces are preleased, she is willing to go up to 65% LTC on the loan. How much is the community bank willing to lend for the development? Once the property is complete, the property will trade at a 6% cap rate, what will the LTV ratio be upon completion?
If the property performs to its underwriting and has NOI of $160,000 a year, what is the monthly DSCR ratio for the commercial loan at a 7.5% interest rate? Does this meet the community bank’s underwriting standard? For your mortgage payment computation, assume Brian will receive an INTEREST-ONLY loan.
The community bank also uses a debt yield computation to avoid lending on overpriced assets. What is the debt yield on the retail development? Does this meet the community bank’s underwriting standard?