This multifamily loan case study provides an overview of a Cash-Out Refinance DSCR Loan on a 5 Unit Multifamily Property in New York City valued at $2.65M.

The borrower’s main goal was to pull cash out of their property and improve cash flow by securing a low rate DSCR loan for this investment property which they had held for several years. Ridge Street Capital delivered the tailored financing solution of a $1.55M loan at 7.375% with a 30-year amortization, helping the investor achieve their goals in NYC's unique real estate financing market.

Deal Specific Considerations

This deal presented several complexities that had to be accounted for when structuring this loan:

NYC Mortgage Tax and CEMA Strategy

Mortgages in New York City have a significant mortgage recording tax of 1.8%-2.2% depending on the size of the loan. To minimize costs, we implemented a Consolidation, Extension, and Modification Agreement (CEMA), which allowed the borrower to assign their existing mortgage to our firm and avoid paying the 2% mortgage tax on over $1.2M dollars saving the client over $25,000. The borrower only paid mortgage tax on the cash-out proceeds instead of the full loan amount.

Multiple Partners in Ownership Entity

The property was owned by an entity with two 50/50 partners. We used the higher credit score between the two partners for loan pricing, ensuring the lowest possible rate.

Rate Sensitivity Due to Previous Mortgage Experience

The borrower had recently experienced a significant rate increase when extending their existing mortgage. To meet their priority of obtaining the lowest rate, we provided a competitive rate of 7.375% with a 30-year amortization, optimizing cash flow and reducing their monthly payment.

Details of The Loan

Our financing solution was tailored to solve each of the borrower’s challenges and had the following Terms:

• Loan Amount: $1.55M
• Property Valuation: $2.65M
• Loan-to-Value (LTV): 58.5%
• Interest Rate: 7.375%
• Amortization: 30 Years
• DSCR: 1.16
• Property Status: Fully leased, stabilized rental property

Understanding Multifamily Investing

With multifamily financing, there are unique distinctions in the underwriting requirements based on the number of units the property has. The main distinctions are that any properties over 5 Units are considered "commercial" and require a commercial income based appraisal, additional investor track record, and a DSCR above 1.15.

Financing Categories for Multifamily Properties

The long-term financing market for multifamily properties is typically segmented into:

• 1-4 Units: Often financed using standard Residential DSCR Loans similar to residential mortgages.
• 5-10 Units: Fall under Commercial Multifamily DSCR Loans, and are only available to experienced investors.
• 10+ Units: Exclusively require commercial financing underwriting with more complex case-by-case financial evaluation required.

Commercial Appraisal Valuations

Income-Based Valuation vs. Sales Comparison Approach

Multifamily properties are valued using different methods depending on the number of units:

• 1-4 Units: Use the Sales Comparison Approach, where property value is based on comparable sales of similar properties in the area.
• 5+ Units: Primarily valued using the Income-Based Approach, which calculates value of a property based on the property’s Net Operating Income (NOI) and Capitalization Rate (Cap Rate). 5 Unit+ Properties are almost exclusively purchased by investors who buy properties based on a target cap rate. As a result, there are often few sales comparables for these properties. Income based valuations are calculated as: NOI/Target Cap Rate.

DSCR Based On NOI vs. Rent

For both 1-4 Unit DSCR Loans and 5+ Unit Commercial DSCR loans, the debt service coverage ratio (DSCR) is used to qualify a loan based on the income the property brings and does not consider the income of the borrowing entity’s guarantor.

With Residential DSCR loans, DSCR is calculated as: DSCR = Rent / (Principal & Interest Payment + Taxes + Insurance + HOA)

With Commercial DSCR loans, DSCR is calculated as: DSCR = NOI / (Principal & Interested Payment + Taxes + Insurance + HOA)

For commercial properties, any property management, non-tenant paid utilities, general maintenance costs are deducted from the rent in the DSCR equation.

Outcome

This transaction was featured on the coveted Traded.co commercial real estate site.

If you’re interested in multifamily real estate investing or have a project you’re looking to finance, Ridge Street Capital specializing in multifamily financing for real estate investors.

Request A Term Sheet | Get Pre-Approved | Book A Call