Every situation is sui generis, but there are a number of...
by Kbyrnes (2024-03-23 15:57:26)
Edited on 2024-03-23 21:04:20

In reply to: Trump type large real estate deal liquidity requirements.  posted by IAND75


...generic factors that usually apply. When dealing with commercial real estate (CRE) the lenders generally insulate themselves with lower loan-to-value (LTV) ratios than you'd see for a home loan--a 60% LTV is not uncommon at all.

In general, CRE loans are underwritten based on factors such as the quality of the asset, its location, its age, and other factors that are typically distilled into the level of contract and/or market net rent (NOI--net operating income) the property can sustain, and whether the NOI can satisfy the annual debt service (ADS) requirements. The ratio of NOI to ADS is called the debt service coverage ratio (DSCR) and every underwriting of an income-producing property will focus on this. Lenders typically want a DSCR of at least 1.25, meaning you have a 25% cushion of NOI compared to ADS. If you don't have a favorable DSCR, liquidity is kind of a moot question; though if you're talking about a newly opened property that is still in initial leaseup, the DSCR at stabilization will be key; and then the borrowing entity will need to be able to keep the project afloat with other sources of funds until NOI is high enough to pay debt service.

Cash liquidity can be important, but it depends on the totality of the circumstances. If the loan is nonrecourse, the borrower liquidity will not be as important as it is when the borrower has to make a personal guaranty of the loan.

As to your penultimate question, I'd think that you'd need $100 million if each deal required its own $10 million.

I don't know how lenders monitor such requirements; if the mortgage payments are made on time, that would seem to be sufficient. I suppose the lender might annually request proof of adequate capital reserve funds (money to pay for things like HVAC replacements and so forth).

Last thought as to your last question--it reminds me of the saying that if you owe $100,000 and can't pay the lender, you're in trouble; but if you owe $100,000,000 and can't pay the lender, the lender is in trouble. Trump has used this concept to his advantage for many years.

EDIT: The generic factors I mentioned are always important, but when you have a super-high worth portfolio, the relationship takes on a lot of significance, because the lender would love to have as much of the borrower's property in house as possible. And on the flip side, when you have sizeable negatives associated with a borrower who has what is a notionally high-value portfolio, it can certainly complicate things. The 30,000-foot version: overall risk versus reward; and when it comes to Trump, we're back to the "sui generis" description.