Financing Mixed-Use, Not So Loose!

It seemed like a ‘no-brainer’ at first! A fully occupied mixed-use building conveniently located in Fairfax, CA - steady tenants, easy parking, back yards for each of the 3 apartments, a newly re-done coffee shop and a hair salon that’s been there forever. Furthermore, the buyer was highly qualified. She was very creditworthy and had good liquidity. So what could be wrong with this picture? In the first place, the bank that owned the mortgage would allow a borrower to assume it only if they put down a minimum of 30%. Moreover, the current rents weren’t supporting a debt ratio that was acceptable to the bank based upon the assumable loan amount and the remaining down payment. 

Lending Resources Group (LRG) was asked by the borrower’s experienced agent to structure the loan so that it worked for the borrower and was still acceptable to the seller. We still had to find a lender that was willing to permit the seller to carry back a portion of the required down payment, because the borrower did not want to put down more than 20%. Most lenders wanted a 30% down payment from the buyer.  After several inquiries, LRG decided that Bank of Marin suited its client’s needs and requirements. It went like this:  the borrower would put down 20% of the purchase price which was established at $680,000. That amounted to $136,000.  The seller would carry back 10% or $68,000 which this bank permitted. Bank of Marin would supply the remainder of $476,000 which gives us a total of $680,000. OK, so far so good.  Now all we needed was a supportive appraisal. The appraisal was ordered by the bank after the buyer approved  the inspection report.

The bank received the appraisal report about 2 weeks after ordering it. The report was very comprehensive and the value of the building was established at $690,000.  Sounds good, right? The value was $10,000 higher than the purchase price.  You would think we were good to go with the loan? NOT SO FAST! The appraiser chose to reduce the rents of the 3 residential units by a total of $550.00 claiming they were not supported by the rental market in Fairfax. Lending Resources called the appraiser to speak with him about this. He said he would raise the rents if we could provide additional comps supporting the rents they were paying. The seller’s agent and LRG had a conference call with him also and he repeated the same thing, “find me other comps to support the current rents and I’ll raise them back up.” The only trouble was 2-fold, he had found all the comps available in Fairfax for his appraisal and he wouldn’t accept comps even 4 blocks away in the next town of San Anselmo - he only wanted comps in Fairfax. This was despite the fact that the seller’s agent had worked with this property over the past 7 years, knew the tenants very well and knew they preferred living there instead of other locations in Fairfax that might be larger or have higher ceilings. The lowering of rents had never been done with any prior appraisals on this property.

One of the key elements that the appraiser used for reducing the rents was the lower ceilings in 2 of the 3 units. The seller’s agent said in all the years she had seen appraisals done on this property, no one ever made that an issue. Murphy’s Law seemed to be at work here - once again something was interferring with getting this loan approved.  You ask WHY? The reason is simple.  If the rents are lowered by the appraiser, the debt ratio is not going to work according to the bank’s requirement of at least 1.2:1.0. They’re either going to refuse to do the loan or lower the loan amount.  In this case, they chose to lower the loan amount by $40,000, so instead of lending $476,000, they were only willing to lend $436,000. 

Who was going to make up this shortfall?  I can tell you it wasn’t going to be the seller, because he felt he had lowered his asking price enough.  Nor, did the buyer want to put in any additional funds. The deal looked like it was falling apart. What were the seller and buyer willing to do? After much haggling with the appraiser and a strong effort by both LRG and the bank’s business development officer with the underwriting manager, Bank of Marin agreed to increase the loan amount to $456,000.  That only left a shortfall of $20,000. The seller agreed to add another $10,000 to his carry back to make that $78,000 and he also agreed to allow the buyer to sign a separate promissory note for $10,000.

This was a team effort no doubt by everyone involved.  The seller’s agent did an excellent job of dealing with the difficult appraisal and a somewhat disgruntled seller.   The buyer’s agent did an excellent job of negotiating on behalf of his buyer and helping her stay cool since this was the first real estate investment transaction for her besides her house.  Bank of Marin was cooperative in the long run despite a difficult appraisal. Lending Resources kept the wheels turning by informing all parties what was needed to make this transaction work.  Everyone knew what had to take place and everyone pulled together to make this deal successful.  It’s a very difficult lending environment even when all the ingredients for a successful transaction are present. Kudos to all involved!