An irritating refinancing issue

Have just begun the process of refinancing 201 N Ave 55, a 12 unit property we renovated and recently stabilized.

Thought I’d share with you an irritating issue I’m running into, so that you aren’t surprised when it happens to you.

Let me begin by giving you some sample numbers. These aren’t actuals for the building, because I don’t want to give my competitors my real numbers, but they will serve well enough to illustrate the point.

The numbers:

  • Acquired for $2MM
  • Renovated for $500k
  • So, all-in for $2.5MM
  • New rent roll of $250,000
  • Stabilized valuation (in my opinion) of 12.5x GRM = $3,125,000

My starting point for a refinancing is to ask the bank for 65% of the new valuation, or $2,031,250.

Their counter is that, since the property has only been stable for a few months, they’ll only do 65% of my cost, or $1,625,000. Or, I can wait for a year, and then they’ll go off appraised value.

Can you see how irritating this is? At $1,625,000, they’re only at 52% LTV against my value… which is way too little leverage to lock in for 7 years (during which there will presumably be rent growth).

I can understand the bank not wanting to cash me all the way out (eg loan me $2.5MM). But 65% of cost is ridiculous.

Fortunately, I have good relationships with 2-3 banks who I think will see past this nonesense and look more at the value of the building and less at my costs.