Everything You Need To Know About Apartment Building Financing in California

Apartment building financing in California is a unique loan product.  It’s not quite residential, but it’s also not quite commercial.

What types of properties are considered apartment buildings?

Apartment buildings are generally considered five or more units.  Anything less than five units is generally considered residential.

What are the most important metrics when looking for an apartment building loan in California?

The most critical property metrics include:

• Net operating income: The annual earnings, minus expenditures that a property produces from its operations.
• Debt service coverage: A ratio involving cash flow relative to debt payment obligations.
• Loan-to-value ratio: An appraisal of the loan sum relative to the value of the property.

When the transaction does not fit the bank model, short term private money options are viable alternatives.  For example, if the debt service coverage ratio is too low due to lowered rents or vacant units, a short term bridge loan can help reposition the property, giving the owner time to increase rents and take out the short term loan with a more advantageous longer term loan.

Apartment building loan terms & types:

Apartment building loans in California can be structured to be long term or short term bridge type loans. Interest rates can be fixed, variable or hybrid. Short term financing can typically be done with little or no prepayment penalty.  Longer term options typically will carry some sort of prepayment penalty.  Many bank loans have a 5 year walk down type of prepayment penalty, something like 5%, 4%, 3%, 2%, 1%.

Loan amount:

Loan amounts on apartment building financing can vary greatly.  Many institutional lenders require a minimum loan amount of $500,000. Loan-to-value ratio top out at seventy or seventy-five percent of value, although in some situations that LTV ratio can be slightly lower. A lower loan-to-value can translate into a lower rate in some situations.

Documentation:

Documentation can vary, but typically the following items are going to be required:

• Photos of the property
• Breakdown of sqft, bed, bath count for each unit
• Previous year P&L as well as current YTD P&L or operating statement
• Rent Roll
• Rental or lease agreements
• Loan amount requested
• For purchases, purchase contract, title/escrow info and prelim
• For refinances, existing mortgage statement, loan amount request and use of funds for any cash out

If you are looking for apartment building financing in California, give us a call today at 877 462 3422.  We have many different options for a wide range of situations.