How Are Non-Recourse Loan Interest Rates Determined?
By Terry Painter/Mortgage Banker, Author of the best selling book: “The Encyclopedia of Commercial Real Estate Advice” Wiley Publishers
Who Makes Non-Recourse Loans and Why Have Them
First of all, non-recourse lending is only offered on commercial real estate loans, not residential. The exception is a blanket loan on 5 or more residential 1 – 4 unit properties. Credit unions and almost all commercial banks do not make non-recourse loans. Why? Because recourse is the most powerful weapon in their arsenal to compel a borrower to never miss a loan payment. With recourse, they have the borrower personally sign a guarantee which makes it easy for the lender to get a summary judgement from the court that can take possession of the borrower’s bank accounts, security accounts and personal assets if they default on the loan.
Non-recourse loans are made by Fannie Mae, Freddie Mac and HUD for Multifamily properties. And for all other commercial real estate, Commercial Mortgage Backed Security (CMBS) loans, Insurance Life Company Loans, Private Debt Fund lenders, and Private Bridge Lenders are pleased to make non-recourse loans. If the borrower defaults on a non-recourse loan, since they did not sign a personal guarantee, the lender’s only recourse is to take the property back. The borrower’s personal assets are protected.
How are Non-Recourse Loan Rates Determined
By the time you apply for a non-recourse loan, the lender already knows what return they need to earn on their money. This is based on their cost of funds if they are borrowing the money plus all of their operating expenses. On top of this they need to earn a profit. The total return is based on a combination of interest rate and points. For example: If the interest rate is 6.00% and the points charged are 2.00%, annually the lender will be earning a yield of 8.00%. Private money lenders usually lend from a fund, or a group of individual investors. Some lend from a warehouse line of credit. In this case they need to earn a margin of profit over their cost of funds.
Fannie Mae, Freddie Mac, and HUD/FHA, are securitized lenders that solely offer non-recourse financing. They shop rates from Wall Street Bond shops daily to get the lowest spread over the corresponding treasury yield. The all in rate is based on an index plus a spread. Fannie, Freddie and HUD set the initial spreads and then the lenders add basis points (bps) on top of this. Let’s say the 10 year treasury is at 3.50% and Fannie Mae puts a spread of 2.00% on top of this. Then the lender puts in another .50%. This puts the rate at 6.00%. Unlike banks, these lenders do not earn a dime on charging interest over time. The income from the interest goes to the investors that purchase the mortgage backed security bonds that these loans represent. The lender’s income comes solely from what they can earn from the spread on top of what the bond traders are charging.
For multifamily properties, Life Companies, Fannie Mae, Freddie Mac, and FHA, usually have the lowest interest rates. For all other commercial investment properties like: office, retail, self-storage and industrial, Life Companies and CMBS usually have the lowest rates.
Non-Recourse Bridge Loan, and Private Fund Loan Interest Rates
Most Non-Recourse Bridge loans and private money loans use the 30 day SOFR or prime rate plus a margin. These loans are almost always interest only. Spreads range from 2.75% to 7.00%. For example: to calculate the interest rate for a Bridge loan where the 30 day libor rate is 2.50% and the spread is 4.00%, the rate would be 6.50%
Bridge loans and private money loans that tie into the 30 day libor rate will adjust monthly. Loans that tie into the 90 day libor rate will adjust every 3 months.
Non-Recourse Construction Loan Interest Rates
Without question the very best non-recourse construction loan is the HUD 221 (D)4 for Multifamily. This loan goes up to 85% of cost and is a seamless construction loan roll over to perm. Once the property stabilizes (rented out), the loan becomes a 40 year fixed, fully amortized loan at one of the lowest interest available in America. Interest rates are based on the 10 year treasury yield plus a margin. A mortgage insurance premium is added to the rate as well. For more on the HUD 221(D)4 Multifamily loan check out: HUD Construction Loans / Financing
Most other non-recourse construction lenders base their rates on the 30 - 90 day libor rate plus a margin of 3.00% to 6.50%. These rates will adjust every one to three months. For larger loans of $10,000,000 and above, life companies have the lowest non-recourse construction loan rates. These loans often only go to a maximum of 65% to 70% of cost. On the other end you have private money non-recourse construction loans that can go up to 75% or more, but have higher spreads and higher rates.
For almost everything from A - Z on Non-Recourse Loans read this article
By: Terry Painter/President Apartment Loan Store, and Business Loan Store