“The Self-Storage Niche is a Deal Generator,”
“Mixed-Use Deals Can Pay Dividends,”
“Carve Out Your Niche,”
Jason M. Aubrey,
For more articles on niche financing
View these articles and more at
“Today’s Special? Restaurant and Bar Opportunities”
project success. Typically, a lender will run projected
cash flows using market rents, in addition to a sensitivity analysis discounting the market rents in case the
borrower’s projections or their execution falls short or
does not come to fruition.
In a recent and successful $21 million senior-lender
financing transaction involving two properties in
downtown Boston, for example, the approval was driven
largely by the location of the properties. They were
both in a robust Boston market with strong supporting comparables.
In addition, the borrower had a 40 percent equity
investment in the properties. Part of that investment
was in the form of a third unencumbered property,
which the borrower had recently acquired for cash.
Similarly, when underwriting construction loans, the
focus is generally first on the loan-to-cost (LTC) ratio
and then the loan-to-value (LTV) ratio at completion
and stabilization. Banks, for the most part, are lending
at 55 percent to 65 percent of costs with full recourse.
Nonbank lenders generally provide financing in the
range of 70 percent to 85 percent LTC, with completion guarantees.
Decisions for many borrowers in the current lending
environment come down to their willingness to sign
recourse provisions and/or how to measure the value
of a nonbank lender’s higher LTV versus the initial
lower cost of traditional bank financing. Choosing a
bank loan, however, also normally entails a lower LTV
that may require expensive mezzanine debt, preferred
As a commercial mortgage broker, lining up financing for cash-flowing properties is generally straightforward. Properties that are not cash flowing (such as a vacant property) and construction loans, however, can be
a bit more complex because the initial analysis from a
lender’s perspective is a bit more involved.
That’s why mortgage brokers interested in pursuing such deals should first learn the lay of the land on
the financing side. First, let’s examine the approaches
used in financing a cash-flowing property compared
with a property that is not cash flowing.
Determining financing options for conventional
cash-flowing properties normally begins with analyzing
the net operating income (NOI) and applying a market-capitalization rate. It is a quick, back-of the-envelope,
first-step analysis to ascertain the approximate loan-to-value level and debt-service coverage ratio of the
loan request. From there, the lender gets more granular
by analyzing the expenses and rent roll to validate
the numbers against comparable properties and, of
course, an analysis of the property characteristics and
market conditions is undertaken as well.
When underwriting properties that are not cash
flowing, lenders generally begin with the story behind
the deal, as well as financing sources and uses. There
are several questions brokers can expect lenders to
ask: Why is the property vacant, or why is the borrower acquiring a vacant property? Is the existing property
vacancy market driven, the result of a property deficiency, or is it situational? What is the plan to create value
(upgrade the building, adaptive reuse, demolition and
rebuild, etc.)? How much skin (equity) is the borrower
contributing to the project?
If the borrower is acquiring a vacant property and
has 25 percent to 40 percent equity being invested in
the transaction, then that is generally more meaningful
and compelling to a lender than a borrower who has
owned the property for many years and has already
refinanced most of the cash out of the property’s value through one or more previous financings. Once the
story is validated, the lender must then analyze the
market conditions and comparables to understand if
the project is viable, and to determine the potential
income and expenses and, ultimately, the property’s NOI.
The execution risks for the owner are much greater for
vacant properties than with stabilized properties, so
underwriting these assets will generally require a
discount-to-market analysis as a fallback scenario for the
lender to feel more comfortable about the potential for
Continued on Page 98 >>
Jonathan Daniel is a principal at Knighthead Funding in
Greenwich, Connecticut. Prior to joining Knighthead in 2013,
Daniel was the principal and founder of Silo Financial Corp.,
a private equity-based real estate finance company.
Throughout his career, he has sourced, originated and
serviced more than $1 billion in commercial-mortgage products, and he has developed innovative deal structures for a
diverse range of commercial-property owners. Reach Daniel
at (203) 327-3327 or email@example.com.
Being Prepared Gives
You More Financing Reach
Learn the ropes of construction and vacant-property deals before jumping into the ring
By Jonathan Daniel