Office Buyer Lands 90% LTV as Owner - User. Or Do They?
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There was a very interesting article on Globest.com yesterday that caught my eye. It was titled exactly the same as above, but without the questioning. A mortgage broker helped an owner/user acquire a small, 11,000 square foot vacant office building for $4.2M by obtaining financing on the buyer’s behalf for almost the entire purchase price. Unfortunately, the writer of the article either didn’t ask how this was achieved, or the broker dodged such lines of questioning purposely. Sometimes, appearing intelligent, or in this case as a miracle-worker, is in what you don’t say. So let’s make some assumptions as to why, and or how, this deal possibly could have gotten done in today’s capital markets.
Let’s start with the obvious. As many online and print publications do, Globest.com used a very catchy title to draw the reader’s interest. It worked. But how could such a deal be possible when there are fewer active lenders, lower LTV ratios and leverage, higher debt service coverage ratios, and heavier guarantee requirements for borrowers in this day and age? Clearly there is a catch. A catch that the financier doesn’t want you to know. He just wants you to look up the name of his firm and give him a call to see if he can pull a rabbit out of his hat a second time. If he’s lucky, he’ll convince you to part with a retainer before divulging his sources or secrets.
Likely, he doesn’t have any secrets. He’d have you believe that the reason he was able to get his client 90% LTV because “although the property’s replacement value and as-is value were well below the purchase price, we were able to convince the lender that a 90% LTV loan was suitable because the buyer would be paying a similar amount on its mortgage as it paid in rent to its previous landlord.” After reading this, I want to sell this supposed lender a bridge….or maybe just have them finance it.
First of all, no lender I have come across has even gotten anywhere near 90% LTV for an existing building, especially when the value is well above replacement cost (almost $400 per square foot!). The only ones who have come close are SBA lenders because they have mandates to encourage lending to small businesses. While possible, I highly doubt that is the case here, as 90% of 4.2M is still a hefty 3.78M which is still a pretty aggressive dollar amount for an SBA lender. Plus the business has to meet certain requirements to be eligible, which we do not know if this business does or not.
Furthermore, the only way a bank would entertain a super highly leveraged loan like this purported one is if both the company was doing extremely well (not likely in this economy) and the principals were willing to personally guarantee the loan with their hefty net worth and balance sheet. Even if this is the case, lenders still typically do not want to leverage a deal that high because it increases the likelihood of a default. Regardless of the borrower’s net worth and lack of contingent liabilities, no lender in their right mind ever wants to foreclose on an asset or go after the borrower personally. Banks are in the business of lending money, not being repo men.
This is why I think that the borrowing entity had to offer up some other form of collateral to satisfy the bank. If this were the case, the broker could simply ignore the value of the other collateral to claim that solely based on real estate value, in this case the purchase price, that the loan amount was equivalent to 90% LTV. Are there any other ways you can think of to finance a deal like this at 90% LTV?
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Tags: assumptions, broker, capital markets, contingent liabilities, debt service coverage ratio, Financing, GlobeSt.com, lender, LTV, mortgage, net worth, owner/user, personal guarantees, personally guarantee, purchase price, replacement cost, vacant office building