Apartment Financing on Rehab Deals

Published January 6, 2012 

What criteria is needed to qualify for apartment financing on rehab deals?

First of all, if you are looking for an apartment loan on a multifamily property that needs substantial rehab, you need to have experience with multifamily construction/rehab and experience with repositioning apartment buildings. Repositioning means getting the property in good condition and getting it leased up to where market occupancy is at so you will be able to qualify for permanent multifamily financing. In almost all cases, you will have to acquire the property with a bridge loan, which is a temporary commercial loan designed to get the construction completed and the property occupied. On almost all the rehab apartment loans I have worked on, the construction has taken longer than expected to complete – resulting in much higher repositioning expenses, and the construction expenses have gone over budget. Some of these projects have failed, mainly because the borrower has not had the experience to keep the project on a time frame and has not had the experience to keep the construction expenses at budget. So it is going to be difficult for you to obtain a commercial mortgage to rehab an apartment building if you do not have experience. Keep in mind that you can always bring in a partner that has this experience.

Second, if you want to be sure that you will qualify for that rehab apartment loan, you are going to have to obtain the property at an exceptionally low price per unit. If your market research shows that the units will be worth $30,000 each upon completion of construction, and they are being offered for $14,000 per unit, and you think it will cost $8,000 in rehab for each unit, try to obtain the property for closer to $8,000 per unit. This will give you the needed cushion to cover the higher than anticipated construction expenses and the longer than anticipated time frame in leasing the property up. Remember that you are taking a substantial risk and are putting the apartment lender at risk, as well. The best way to offset this risk is to get the property for a great price.

Third, to qualify for a commercial loan on a rehab property you are going to have to put together a modified business plan on the project, highlighting experience, market rents, market occupancy. Furthermore, your commercial loan underwriter will want to see a projected rent roll and at least two years of project income and expenses, also know as a proforma.

By Terry Painter, President