Q. Does ValueXpress accept transactions from brokers? Do brokers need to sign an agreement with ValueXpress to submit transactions?
A. Yes, we accept transactions from broker’s, advisors and any other intermediaries. You do not need to sign an agreement with ValueXpress to submit loans.
Q. ValueXpress provides both recourse and non-recourse commercial loans. What are the benefits of recourse versus non-recourse loans?
A. Interest rates on non-recourse loans are lower than recourse loans, in the range of 0.50%-0.75%. In addition, non-recourse loans do not require any personal guarantees by the principal owners as to repayment of the loan (except for carveout provisions). However, in order to achieve the attractive rates on non-recourse loans, the prepayment protection is strong, either Treasury Defeasance or Yield Maintenance. Underwriting criteria for non-recourse loans is strict, since only the cash flow from the property is assumed to repay the loan. Transaction costs on non-recourse loans are higher than recourse loans.
Recourse loans have less prepayment protection than non-recourse loans. Often, the prepayment is a declining percentage of the loan balance (i.e. 5% of the loan balance in year 1, 4% of the loan balance in year 2, 3% of the loan balance in year 3, 2% of the loan balance in year 4, then open to prepayment without penalty). In addition, underwriting criteria for recourse loans are more liberal than non-recourse loans as the principal’s guarantee provides a secondary source of repayment for the loan. Often, slightly more loan proceeds can be achieved on a recourse loan versus a non-recourse loan because fewer reserves are underwritten.
Q. How do I know whether a property qualifies for a non-recourse or a recourse loan?
A. In general, unless the borrower needs pre-payment flexibility as a high priority, it is best to qualify potential loans for a non-recourse program first. The key to qualifying for a non-recourse loan is asset quality and tenant diversification. Properties should be classified as “B” quality. Asset quality is a subjective test that generally follows the following: “A” – like new, less than 10 years old, high quality materials of construction, “B” – less than 30 years old or significant recent renovation, good materials of construction in overall good condition, “C” – more than 30 years old, good materials of construction in fair condition with evidence of deferred maintenance. “A”, “B” and in limited instances “C” quality properties qualify for non-recourse loans. Properties need to be tenant-diversified (i.e. the move-out of any one tenant will not cause the net income from the property to fall below debt payments). Multifamily properties are automatically diversified and always qualify for a non-recourse loan if it meets minimum asset quality standards. On the other hand, an office building with 4 equally sized tenants is not tenant diversified and if one tenant vacated, vacancy would rise to 25% and it is likely that the net income would not exceed debt service payments during the vacancy period and the property would not qualify for a non-recourse loan without substantial reserves. Single tenant properties qualify for non-recourse loans only if the tenant is credit-rated and has a long-term (generally 10-15 years or more) lease.
Recourse loans are more flexible. “A”, “B” and “C” quality properties will qualify for a recourse loan. Tenant-concentrated properties (one-to-five tenants) will qualify for a recourse loan. Owner-occupied and non-credit single-tenant properties will qualify for a recourse loan.
Q. Does ValueXpress provide construction or rehabilitation loans? What about loans secured by special purpose properties?
A. Generally ValueXpress does not provide construction loans, rehabilitation loans or loans secured by special purpose assets (such as churches, bowling alleys, ice rinks, amusement parks, etc.). However, ValueXpress will assists its clients in securing construction loans with through its commercial banking relationships
Q. Does ValueXpress provide business loans that are not secured by real estate?
A. ValueXpress only provides loans secured by real estate
Q. Does ValueXpress provide stated income loans?
A. ValueXpress does not provide stated income loans. ValueXpress only provides loans on properties in which full documentation is available. However, please note that underwriting is primarily based on income from the property being financed, so the lack of income earned by principals in the transaction may not be relevant as to whether the loan is approved.
Q. How does the underwriting method differ between investment properties versus owner-occupied properties?
A. Investment properties are underwritten based on the property rent roll and property-level income and expense statements. Income tax returns for the ownership entity are rarely used. On the other hand, owner occupied properties are underwritten based on the income tax returns for the business that operates within the real estate, not property level income and expense statements.
Q. What is Treasury Defeasance?
A. Treasury Defeasance is a form of Yield Maintenance. Yield Maintenance is a prepayment formula that protects the lender from losing the interest it was earning on the mortgage in the event of an early prepayment. Although borrowers are not keen on prepayment formulas, the presence of the formula allows non-recourse loans at very attractive interest rates; without penalties, lenders would have to factor pre-payments into their rates and rates would be higher. It is best to show the effects of Treasury Defeasance with a simple example. If a borrower closes a 10-year loan at 5%, and the borrower wishes to prepay the loan in year 5 when interest rates are 4%, it is assumed that the lender will reinvest the mortgage balance at 4%; hence it will lose 1% per year for the remaining 5 years of the mortgage life. To protect its return, the lender will receive the present value of the 1% lost by prepayment 5 years early. It should be noted that due to the present value calculation, prepayment penalties are higher in the early years of the mortgage, and lower in the later years, as the period of time that you are discounting lessens. Conversely, if the borrower prepays after 5 years when interest rates are 6%, the lender can reinvest the proceeds at a higher rate then it was earning on the mortgage. Hence, the lender will actually pay the borrower to prepay in certain instances. To determine the potential effects of prepayment, you must consider the current level rate at which the mortgage is anticipated to close. If rates are low relative to history, chances are they will go up over time and hence create a relatively low or no prepayment penalty. If rates are high relative to historical averages, rates may trend downward, resulting in higher potential prepayment penalties.
Also, it is important to consider that the mortgage is always transferable.