Where can I get pmi on a commercial property?

Desire to negotiate 0% down payment on a sale leaseback with a large national company rated BB+
In Buying Property - Asked by Jere C. - Jun 11, 2009
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Paul S.
Broker/Agent
Glendora, CA

PMI, which stands for Private Mortgage Insurance, is for the benefit of a lender that is loaning funds greater than 80% LTV. It covers loss to the lender for the amount over 80%. It is not for the benefit of the borrower. What would be the purpose of you getting it?

Jun 11, 2009
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Jere C.
Researcher
Surprise, AZ

To persuade the lender that he may safely lend me the entire 100%; and to assure me that, should the large national company rated BB+ (the seller) never the less does go belly up and default on his lease payments, I will not be left holding the bag, owing vast sums to the lender for my purchase of empty property devoid of income. Yes, the lender is the pmi beneficiary, but doesn't it, if invoked, cancel or partially cancel my debt? Do I misunderstand how it works? Also, neither the lender nor seller is likely to deal with me on a 0% down payment basis unless assured that the property will in all circumstances, stay bought and paid for; and outside of such assurance, I wouldn't want to try to be the buyer either. The crux is that the property must either be paid for from promised lease income, or fail safe.

Jun 11, 2009
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Paul S.
Broker/Agent
Glendora, CA

What your are asking can't be done. If the tenant fails someone will lose. That would be you. However you are proposing having nothing invested and hence nothing to lose. That is why a lender won't do it. It is your risk if the tenant fails not someone elses which is why lenders want you to have something invested. A PMI company is not there to insure you against loss and make your investment without risk. You can't get PMI insurance for that. The lender can for the amount they lend over 80% LTV but, because of the risk no PMI company would touch such a deal. Residential has far less risk yet 100% financing is the primary reason the country is in the toilet. There is always risk of loss with any investment. The greater the risk the higher the return. You must take on some risk to receive a return. What you are suggesting simply doesn't exist. You can't get "fail safe" as you call it. You also can't get financing from a lender with $0 down. You might from the seller?

Jun 11, 2009
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Jere C.
Researcher
Surprise, AZ

I assume the reason this seller wants a sale leaseback with me is to acquire 100% cash now (from me via a lender) in return for giving a time debt; that the seller is not interested in giving property in return for my time debt. Isn't there such a thing as commercial mortgage insurance, or seller performance surety bond (for the lease payments), which I would be glad to capitalize with the lender, as long as some underwriter says my time charge for assuming the risk is such and such? Where would I look for such an underwriter? Also: Life insurance companies, somewhat like banks, are themselves 'insured,' if one fails others step in to take over the accounts. How about pmi companies, 'commercial mortgage' insurance companies, performance bond surety underwriters? Any recourse in event of their failure? I'm looking to offer the lender (and me) protection not just against the seller's or my failure, but against any guarantor's also. Where should I look? Isn't there some place besides Lloyd's of London?

Jun 11, 2009
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Paul S.
Broker/Agent
Glendora, CA

Sale lease/back does give the seller the cash. That's why there has to be some unless the seller carries and then there is only the cash on the difference between the carryback and the price. Cash has to come from somewhere. No lender is going to loan 100% on a commercial piece of property especially now. You will be lucky to find a lender that will loan with 35% down. In addition the property is going to have to cash flow to the tune of 1.25 to 1.35. That is know as a debt coverage ratio (DCR). What that translates to, is for every dollar of debt payment, you will need $1.25 or $1.35 in income. Your downpayment or the price would have to adjust to meet that requirement. DCR usually causes the the down to be greater than 35% (depending on the cap) and the lender picks the greater of the two, DCR or 35% down. You are simply looking for something that doesn't exist. That said, if you have the money sitting in a bank you could collateralize a loan with the money. It sounds like you have no money? If that is true who would loan you money? What would there guarantee of repayment be? And what "insurance" would be interested? Insurance is usually given out if the risk of loss is low not high. You would be sky high in the eyes of a lender of mortgage insurer. If the seller is unwilling to do the deal with no money down no one else will either.

Jun 12, 2009
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Jere C.
Researcher
Surprise, AZ

As I understand your term DCR (debt coverage ratio), it is NOI (net operating income) divided by scheduled principle and interest payments (computed on either an annual or monthly basis with the same result), and Cap (capitalization rate) is annual NOI as a percentage of Price (property cost).
Therefore a Cap rate of 8.25% would allow a 1.35 DCR and 0% down payment: when purchasing on a 30year mortgage @ 4.54% APR (annual percentage rate); or when purchasing on a 40 year mortgage @ 5.40% APR. Although I thought the 30 year APR would be that low, I'd have guessed the 40 year APR would have been a full percentage point or two higher.
Nevertheless, as this property does have an 8.25 Cap, 20 year initial leaseback, four 5-year lease renewals (for a total of 40 envisaged lease years), and periodic 5% rental increases, either each lease renewal or each 5 years (I'm not yet sure which), doesn't this deal seem worth exploring?
For instance, 1.25 DCR would allow a 30 year term at 5.21 APR, and a 40 year term at 5.99 APR; and a 1.20 DCR would allow a 30 year term at 5.58 APR, and a 40 year term at 6.32 APR.
And, if there are rent increases early in the game, when equity would still be low, I'd be delighted to dedicate them to increased mortgage payments.
I've some money, but its nothing compared to this league.
Well, I guess I must have been looking at some outdated information. I see the prospective seller's rating is not BB+, but rather BB-, and has been since October 2008, which is why the seller wants to raise cash on assets, and I want isolation from their problems, and would like to price some insurance to protect me and the lender. And I remain curious as to how safe insurers, underwriters, etc, themselves are in the face of calamity. That is, can they really protect me, and how much do they cost? Any advice on those points?

Jun 13, 2009
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Paul S.
Broker/Agent
Glendora, CA

Jere
Please e-mail me direct at paulsylvester@remax.net. with your questions. Give me the numbers on the investment and I will figure out the DCR, Cap, IRR etc. A property with an 8.25% cap, a 30 yr amort loan @ 5.99% does not generate a 1.25 DCR, it is 1.148. For every dollar of monthly debt there has to be, in this case, 1.25 in net operating income (remember that NOI does not include debt). Example: $100,000 purchase price. 8.25% cap= $8,250 NOI. Loan $100,000 @ 5.99% amort 30 years= $7,187. There is not $1.25 in income coming in for every dollar of the $7,187 going out on the loan. All that said you still won't be able to find a lender that will loan even if the DCR meets the 1.25 reqirement because commercial loans generally require 35% down or a 1.25 DCR whichever is greater. If you can't get a lender to lend you sure won't get anyone to insure such a loan. It would be like trying to get someone to insure an airline piloted by Kamakazie's. Anyway contact me direct.

Jun 15, 2009
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Jere C.
Researcher
Surprise, AZ

NOI per mo @ 8.25 cap for $100,000 loan = $687.50
int rt yrs paymt DCR
2.93 15 687.22 1.000
5.49 20 687.32 1.000
7.32 30 686.93 1.001
7.89 40 687.07 1.001
5.99 30 598.91 1.148
5.58 30 572.82 1.200
6.32 40 572.68 1.200
5.21 30 549.73 1.251
5.99 40 549.52 1.251
4.54 30 509.06 1.351
5.40 40 508.98 1.351
A. My calculated DCR for a 5.99 % rate was for a 40 (not 30) year loan, and above are various results using an online amortization calculator.
B. DCR increases as payments decrease, which decrease as amortization period increases.
However, the lenders best interest rates (rate of return) correlate with increasing term.
If the hazard is that the company may fail and earnings and payments cease, rather than degrade, then a higher DCR offers no increased protection, and the loan decision would best be made on the judged security of the planned payments.
And, if the planned payments are judged sufficiently secure then I would think:
the lender would seek comparatively high interest and comparatively quick payoff,
and the investor/borrower (I) would seek comparatively quick payoff, which would occur at the lowest negotiable interest rate (i.e. likely 5.29 % for 20 years to 7.32 % for 30 years).
I think the parent company has some current risk and needs to raise cash (hence the sale leaseback).
I think the operating subsidiary corporation can probably generate income to cover the CAP rate (and at a probably adequate DCR), whether the parent company fails or not. That is, even if the parent company should go to bankruptcy, I would expect the operating subsidiary corporation to survive in some guise, and continue to generate income sufficient to cover the CAP rate lease.
C. Which explains my continuing interest in the project.
D. But, since I can't seem to find an insurance solution to isolate both the lender and me from harm, I will explore the possibility of the seller's agent:
lining up a lender that will facilitate a loan,
supporting a purchase offer for the proffered sale/leaseback from a corporate shell of some sort,
to be established by (and to isolate) me.
E. It's been fun!

Jun 17, 2009
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Paul S.
Broker/Agent
Glendora, CA

Good luck to you but you are barking up the wrong tree. Let me know if you pull it off because in today's lending world you thinking is flawed. You are not going to be able to protect yourself against loss by shifting the risk to an insurance company. You will not be able to get a 40 year amortization on a commercial loan especially a triple-net and you won't be able to buy something with no money down from someone other than a seller who is willing to carry. For sure no one will be willing to insure you against a loss. Let me know what the seller's agent says when you propose what you have in mind to him. I'm confident you will get the same response I have been giving you and that is, no, what you are trying to do won't work. You have my email. If you make it work let me know because I would like to use it as an example in the siminars I do on investing in NNN properties.

Jun 18, 2009
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