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Capital Mortgage Partners presents Multifamily
Mortgage Workshop

• Todays Agenda
• How to Add Value as a Mortgage Broker
• Marketing Building Your Pipeline
• Origination Overview
• Building a Complete Rent Roll Reviewing
  Property Operating Statements
• Calculating DSCR and LTV Maximizing the Loan
  Amount
• Presenting the Loan Data to Capital Mortgage
  Partners
• Mitigating Policy Exceptions
• How Underwriters Review Loan Submissions
• Pitfalls to Avoid
• Case Study Multifamily Property
• Conclusion, Questions Answers
• Show Us Your Deals On-The-Spot Loan Review

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• Welcome
• Please turn off or set to Vibrate Cell Phones
  Blackberries
• Rest Rooms
• Schedule
• 9AM-12Noon Break at 1030
• QA will follow after Case Study
• New Loan Review On-The-Spot Conditional
  Approvals
• Be Interactive This is for you, Ask Questions
• My background RVP SE States with Capital
  Mortgage Partners
• SunTrust Bank CRE Group, JP Morgan and other
  Conduits
• Technology, General Appraiser, RE Broker
• Show of hands how many have closed Comm or MF
  loans in past 12 months?

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About Capital Mortgage Partners MULTIFAMILY

• Capital Mortgage Partners
• Apartment Loans (5 units), 100M-5MM
• Rebate pricing to approved brokers and
  correspondents
• All loans originated are generally held in
  portfolio
• Loan structure is a 30/30 with fixed rate periods
• 80 LTV starting at 1.00 DSCR
• Programs include
• Standard
• Interest Only
• No Doc / No Ratio
• Market Rents
• IMCC Multifamily Express
• Jan 2006 Adding Commercial Property Types

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What is a Commercial Mortgage Loan?

• Typically income-producing real estate
• Property types include
• Multifamily (5 units)
• Retail / Office / Industrial
• Mixed Use
• Mobile Home Park
• Healthcare
• Self Storage
• Hotel/Motel
• Commercial Banks may include
• Construction Loans
• Residential Subdivisions Condo Conversions

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Differences between Residential Commercial
Underwriting

• Commercial
• Debt Service Coverage Ratio (DSCR)
• Loan To Value (LTV)
• Loan To Cost (LTC)
• Underwrite the Cash Flow of the Real Estate

• Residential
• Debt To Income Ratios
• Front Ratio
• Back Ratio
• FICO
• Underwrite the Borrower

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Appraisal Concepts

• Three Approaches to Value
• Income Capitalization Approach
• Primary method for income-producing properties
• Based on NOI
• Sales Comparison Approach
• Comparable Sales
• Cost Approach
• Cost of Construction less Depreciation plus Land
  Value

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Calculating Value

• Capitalized Value
• the value indication resulting from the income
  capitalization process the present net worth of
  anticipated benefits in the form of income
• Formula Value NOI / Cap Rate
• Example
• Net Operating Income 100,000
• Capitalization Rate 10.0
• Formula 100,000 / 0.10 1,000,000
• Cursory value calculation
• Step 1 NOI / Cap Rate Property Value
• Step 2 Value x Max. LTV Max. Loan Amount

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Origination Process

• Build a Complete Rent Roll
• Collect 1-2 yrs. and YTD Operating Statements
• Normalize the Income Stream
• Add Underwriting Reserves Apply Constraints
• Maximize the Loan Amount
• Submit Loan Request

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Building a Complete Rent Roll

• Calculate Gross Potential Income
• The total income attributable to the real estate
  collateral at full occupancy before operating
  expenses and vacancy are deducted typically
  calculated as
• GPI In-Place Revenue Vacant Units _at_ Market
  Rent
• Count rental increases that will occur prior to
  loan closing.
• Include Market Rents, Original Occupancy Dates,
  Lease Expiration Dates, Last Rent Increase Date,
  Note if unit is furnished, rent subsidies
  (Section 8 tenants) and any rental concessions.

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Contract Rent vs. Market Rent

• Contract Rent
• Actual rent as specified in a rental or lease
  agreement, as opposed to actual market or
  economic rent.
• Market Rent
• economic rent the amount for which the
  competitive rental market indicates the property
  should rent.
• generally, contract lease rates are "marked to
  market" if contract rent is greater than market
  (reduced for underwriting purposes) or less than
  market rent (increased for appraisal purposes).

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Income Expenses

• Collect YTD for Express Program (2 yrs YTD for
  Standard Programs)
• Operating Statements (Schedule Es on Refis)
• Analyze income expenses attributable only to
  Property
• Appropriately Annualize YTD Expenses
• RE Taxes are generally paid every six months
• Insurance is generally paid annually
• Include Vacancy and Off-Site management
• Include Replacement Reserves for Capital Expenses
  (non-recurring expenses)
• Support any changes to standard underwriting
  guidelines

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Cash Flow Concepts

• Net Operating Income (NOI)
• Total Income minus Operating Expenses, but
• Do not include Capital Expenditures or Annual
  Debt Service
• Net Cash Flow (NCF)
• NOI minus Capital Expenditures/Replacement
  Reserves
• Do not include Annual Debt Service

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Key Concepts of Underwriting

• Debt Service Coverage Ratio (DSCR or DCR)
• the ratio of Net Operating Income to the Annual
  Mortgage Payments.
• A DSCR of less than 1.0 means that there is
  insufficient cash flow generated by the property
  to cover required debt service.
• Formula DSCR NOI / Annual Debt Service
• Example
• Net Operating Income 100,000
• Annual Debt Service (Mortgage Pmts) 80,000
• Formula 100,000 / 80,000 1.25 (referred to
  as 1.25x)

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Key Concepts of Underwriting

• Loan To Value (LTV)
• the ratio between the Loan Amount to the Current
  Value.
• Formula LTV Requested Loan / Value
• Example
• Requested Loan 800,000
• Collateral Value 1,000,000
• Formula 800,000 / 1,000,000 80
• Cursory value calculation
• Step 1 NOI / Cap Rate Property Value
• Step 2 Value x Max. LTV Max. Loan Amount

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Getting to NOI

• Calculating the Gross Potential Income
• Contract Rent vs. Market Rent
• Adjust for Vacancy
• Adjust for Concessions
• Adjust for non-allowable income (Late charges,
  credit report fees, refundable deposits
• Adjust for laundry, carports, utility
  reimbursements-historically market supportable
• Normalizing the Income Stream
• Remove Non-Recurring Expenses
• Underwriting Reserves
• Underwriting Constraints
• Maximizing the Loan Amount
• Lender Underwriting Requirements

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Reviewing Operating Statements

• Operating Statement vs. Tax Return
• Line Item Allocations
• Commingling Business RE Expenses
• Do not include Depreciation, Amortization,
  Mortgage Interest or Debt Service
• Reconcile Operating Statement to Tax Return
• RM or Cap Ex?
• Security Deposits, Late Fees, Eviction Costs
• Issues with Sellers not supplying Tax Returns
• Relying on Real Estate Listings or Offering
  Brochure

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Sample Operating Statement
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Sample Operating Statement
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Historicals are Entered Now What?

• Normalization
• A methodology facilitates a comparison of a
  propertys ongoing performance with performance
  at the time of underwriting
• Note all unusual, non-recurring, expenses in NOI
  Analysis so that they will represent the
  property's normal operation

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Underwriting Adjustments/Reserves

• Vacancy Collection Loss
• The percentage of all units or space that is
  unoccupied, or from which there is currently no
  rental income (generally use greater of 5 or
  submarket vacancy) If current actual is greater,
  use footnote to explain.
• Management
• Off-site used on all loans. Generally greater of
  5 or historical (on refi). For underwriting
  purposes it is used on all requests including
  self-managed.
• On-site required in some states at 16 units,
  typically runs 15-25 per unit-use lenders
  guidelines
• Replacement Reserves (Capital Expenditures)
• Funds for anticipated major, non-recurring
  expenditures required to maintain a building to
  pay for the eventual replacement of major items
  (e.g. roof, plumbing, HVAC, parking lot, carpets,
  etc.)
• Calculated on a per-unit basis depending on age
  and condition of property (200-300)

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Sample Multifamily Underwriting Matrix
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Underwriting Constraints

• Maximum Loan to Value (LTV)
• Constrains the proposed loan to the maximum
  allowable LTV (typically 75 to 80)
• Typically based on transaction type purchase,
  cash out refinance, rate and term refinance, etc.
• Minimum Debt Service Coverage Ratio (DSCR or DCR)
• Constrains the proposed loan to the minimum ratio
  of effective annual NOI to annual principal and
  interest payments (typically 1.15x to 1.30x)
• Represents the number of times the annual debt
  service must be exceeded to achieve the target
  DSCR
• LTV and DCR are Inversely proportional
• (As LTV increases, the DCR decreases and vice
  versa)

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Maximizing the Loan Amount

• Check Market and Submarket Vacancy
• Check Management Fee will there be a change
  (new management contract?)
• Review Details of RM items to reallocate
  non-recurring expenses, as supportable
• Normalize the expenses (provide support)
• Adjust Replacement Reserves (Cap Ex) if
  supportable
• Mitigating Factors call your Capital Mortgage
  Partners rep

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Capital Mortgage Partners Multifamily
Underwriting Methodology

• CREDIT
• Credit / Interest Rate Risk
• CAPACITY
• Liquidity Risk
• COLLATERAL
• Transaction Risk
• COMPLIANCE
• Compliance Risk
• Policy Exceptions
• Mitigate

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Pitfalls to Avoid in the Initial Analysis

• Not accurately adjusting for increased RE Taxes
  on a Purchase Transaction or Cash Out Refi
  transaction
• Downward Rental Trends (Rents and Occupancy)
• Large Variances of Expenses year to year (may be
  capital expenditures-get explanation)
• Non-Recurring Items included in RM
• Seasoning Issues (Refi under 12-24 months)
• Market and Submarket Vacancy
• Section 8 Units / HAP Contracts (Call Capital
  Mortgage Partners rep)

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Broker Origination Overview

• Meet with the Borrower
• Secure Broker Fee Agreement for origination fees
• Most states typically dont require Rebate/Yield
  Spread Premium disclosure check the statutes
  (Capital Mortgage Partners allows up to 2 pts
  Rebate on most programs)
• Collect documentation
• Operating Statements (2 yrs typically) or
  Schedule Es and attachments
• Current Rent Roll
• Property Digital Photos and description
• Borrower Credit Report, Borrower Resume
• Include a 1003 only to illustrate Net Worth,
  assets liabilities and SREO
• Complete the Historical Income Statement / NOI
  Analysis
• Apply appropriate Vacancy, On/Off-site
  Management, Cap Ex reserves
• Note any variances from standard guidelines
• Submit Loan Registration Package
• Receive Conditional Approval
• Collect Third Party Deposit
• Deliver complete Credit File to IMCC prior to
  appraisal due date

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How Does a Broker Add Value in a Transaction?

• The Key to Originating Commercial Mortgages
  Requires Knowledge of
• The Borrowers Wants Needs Deal Points
• Commercial mortgage process, underwriting
  analysis, and a proper loan package
• Understand the Borrowers Wants, Needs Exit
  Strategy
• Requested loan term (and amortization)
• Fixed or variable rate
• Type of prepayment penalty, lock-out or yield
  maintenance, holding period
• Recourse options
• Cross-default, cross-collateralization 
• Understand the Underwriting Process
• Ability to Analyze Cash Flows (Property Income
  Expenses)
• Apply Property-specific Reserves Constraints
• Calculate LTV DSCR
• Knowing what type of lender

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Sourcing Deal Flow Build your Commercial
Pipeline

• Direct Sources, Commercial Property Owners
• Source County/Municipal public record
• Develop relationships with Commercial Real Estate
  Brokers
• Pre-arrange financing for existing property
  listings
• Proactive meetings and representation at local
  Realtor functions
• Financial Advisors (CPAs, Estate Planners)
• Demonstrate your ability, leave a sample Loan
  Package
• Source Yellow Pages
• Potential difficult issues use caution
• Deals that have been shopped
• Co-brokered deals be aware of control issues
  who can present and negotiate?

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Registering a New Loan with Capital Mortgage
Partners

• Standard Program
• New Loan Registration Form
• Current Rent Roll
• 2 Yrs YTD Income Expense Statements
• NOI Analysis Spread Historicals and Forecast 12
  months operations
• Digital Photos

• Express Program
• New Loan Registration Form
• Current Rent Roll
• 1 Yr Income Expenses
• Digital Photos
• No Tax Returns, No paystubs, No VOE or DTI
  qualification

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Sample IMCC Express Loan

• Low documentation
• 1 yr Income Expenses
• Current Rent Roll
• Tri-Merged Credit Report with scores
• Signed 1003 with Stated Income
• No Tax Returns, Pay Stubs, VOE, No DTI
• Benefits
• Earn up to 4 Points on each transaction
• Down to 1.00x DSCR, up to 80 LTV (credit
  score-driven) Appraisal Rents used for income
• Fast Closings

Sample 500,000 Multifamily Loan Commission 2
pts Front 10,000 2 pts Rebate 10,000 TOTAL 2
0,000
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Reading Rate Sheet
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• Attach Operating Statement, Rent Roll, Credit
  Report Photos

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Concluding Comments

• Capitalize on Multifamily Loans
• State of the Multifamily Market, Interest Rates
  Condo Conversions
• Affordability Index of SFRs
• Its about the Property, not the Borrower
• Always calculate NOI DSCR
• Include Vacancy, Management and Cap Ex reserves
• Provide Comments to the Analyst/Underwriter
• Provide support of deviations
• Work smart
• Dont waste time on non-starters
• Multifamily Case Study

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Multifamily Case Study 1
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Case Study Multifamily Property

• The subject property is a 13-Unit multifamily
  property. The property was built in 1978 and
  renovated in 2002, with additional non-recurring
  renovations made in 2004-2005. The property is
  being purchased for 1,200,000 and the borrower
  is requesting an 80 loan.
• Assume the following
• 12 units are occupied, 1 is vacant (see Rent
  Roll).
• Leases are mostly 1-yr terms structured as gross
  leases.
• The market vacancy is 5.0.
• The seller self-manages the property and the
  borrower plans to self-manage.
• A conveyance does not trigger a Real Estate Tax
  Reassessment.
• The borrower submitted 2004 and YTD (for 9 mos.)
  property operating statements.
• Borrower mid-FICO is 720, 200,000 liquidity,
  400,000 net worth.
• No other significant changes are noted or
  anticipated.
• Underwriting requires a minimum of
• 5.0 Vacancy Collection Loss
• 5.0 Off-Site Management Fee
• 350/Unit Cleaning, RM, CAM and Supplies
• 250/Unit Replacement Reserves (Cap Ex)
• From the analysis, calculate the normalized
  income and expenses and the DSCR based on the NOI.

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Case Study Answer Key