Appraised price / cap rates of homes and lender bank loan phrases – Score: 6

6 thoughts on “Appraised price / cap rates of homes and lender bank loan phrases – Score: 6”

  1. We look at ltv based on different cap rate scenarios over multiple years. We look at quality of tenants and length of leases, that’s hard to quantify in just a cap rate, but no matter what someone is buying a property for, we are going to look at what our loan to value would be at a 8/9/10% cap rate. Hope that helps.

  2. Lender here. I’m more focused on Debt Yield than cap rates or DSCR. DY ignores the effect of low rates or cap rate compression that can get you in trouble when only looking at LTV or DSCR. No single metric is perfect, but comparing DY across mortgage investment opportunities helps me screen quickly. I look at 500 requests a year and close about 10, so a lot of quick triage needed.

  3. I think your first comment is generally correct. When referring to cap rates, however, note that you have the cap rate of the actual acquisition and the cap rate that the appraiser uses that is a function on market/industry standards. The actual cap rate could be high (off market, good deal) and the industry standard for the type of deal could be low.

    In terms of you question, there are a ton of factors that go into this. Simply speaking, the higher risk (which you are equating to high cap rate – again, not always the case), the lower the LTV and the higher the DSCR target. All this is relative so would depend on your specific deal (ie an McDs 10 year NNN lease is “riskier” than an McDs 20 year NNN lease, but the McDs 10 year NNN lease is way less riskier (depending on other factors, eg basis) than say a 3 year NNN lease to your local bakery).

  4. Banks lend on the lesser loan amount predicted by a maximum LTV and minimum DSCR.

    Let’s say a property appraises based on a super low cap rate (NOI/value). That’s where DSCR factors in and makes the cap rate irrelevant (NOI/debt payments).

    Banks take market risk into account by lending based on that risk. Certain property types considered riskier have more conservative loan terms (lower LTV, higher DSCR).

    Loan terms vary from bank to bank, and even from borrower to borrower, based on a variety of circumstances that vary in importance at each bank.

  5. Downturns increase cap rates and decrease debt market liquidity. Both of these make refinancing tougher. Refinancing is often the primary repayment source for loans with a bullet due at maturity. As a lender, I prefer to size based on debt coverage ratio/minimum debt yield because it indicates cash flow, which can support repayment even during down markets. Yes, downturns negatively affect cash flow, but it lags the expansion of cap rates and contraction of available capital. I can restructure a loan with cash flow better than a loan with value.

    Which would you rather have a bullet coming due on?

    1. An apartment with rents down 5% but enough cash flow to support ongoing interest and principal with an extension to the maturity.

    2. A piece of land where even though values have contracted, you’re still at 70% appraised LTV.

    It should be no surprise, but it’s a lot tougher for a regulated bank to restructure scenario 2 without having to consider it a Troubled Debt Restructure and increase their reserves for the loan.

    For reference, I am placing a medical office loan where one lender is sizing with an 11% minimum debt yield on in place cash flow. They got to 11% based on a 4.5% floor rate, 20 year hypothetical amortization, and a minimum 1.45 DSCR. This seems conservative but lenders are more conservative during pandemic with office and retail. Many lenders still size by apartments using 1.20x DSCR, the actual rate, and a 30 year amo.

    LTV doesn’t usually constrain loans in low cap rate markets. That said apartments see max LTV of 70-80%, whereas commercial is generally tops out around 60-70%.

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