The next podcast update is here with a continuation of our commercial loan reserves discussion!
Reserve requirements are affected by the changes during COVID, and it’s important to know what to expect. Listen in as Isaac and I discuss a recent case situation that I worked with.
Featuring:
René Nelson, Eugene commercial real estate broker
Isaac Grant, Eugene commercial loan officer
Investing with Commercial Real Estate Loans – Part 5
René Nelson: Joining me today again is Isaac Grant from Oregon Community Credit Union. Hey, Isaac.
Isaac Grant: Hi, René.
René Nelson: Okay. Ready for this? Reserves Number Two, this is our second show. So I know when somebody comes to you and they want to buy a 10 unit apartment complex, they need 25% to 35% down, plus they need reserves. We just got to starting to talk about reserves. Now let’s talk really the nuts and bolts of it. How does that work? Walk me through that.
Isaac Grant: Yeah. So as we were starting to discuss yesterday, René, it really is a case by case basis and it’s going to be lender to lender, so I might shoot a question back here to you in a minute for what you’ve seen from various lenders recently working with your clients. Typically, when we’re looking at cash reserves, we’re looking at liquid reserves. So what do we have in the bank that can easily pay off debt if you do come into some troubles?
With COVID at the moment, obviously, that’s one of the reasons a lot of lenders are looking more to liquidity and they’re looking to have some cash reserves on hand as in the case that maybe you have some vacancy, maybe have some people that have to defer payments. It’s a real reality for not just us here in Oregon but around the world at the moment, is people’s ability to repay and then obviously your ability to repay debt to that lender.
So we’re looking at cash reserves. We will look at retirement accounts and stock accounts as well. Sometimes we may reduce the amount of those retirements just for stress testing. So markets fluctuate, it’s not true cash at the moment, so you may see underwriters say, “Okay, we’ll take 50%, 60% of what’s in your retirement accounts and we’ll class that as cash liquidity just in case there’s some volatility to the stock market.”
René Nelson: So I can answer that question also. I closed a transaction in April and it was on a pretty large multi-family portfolio situation, and the lender required 12 months worth of PITI reserves. Even though the buyer had an interest only loan, the lender needed assurance that the taxes, the insurance plus the full payment, was going to be collected, so my buyers had to set that aside as a reserve in closing.
Isaac Grant: Interesting. Yeah, there’s a lot of that happening right now in the market.
René Nelson: Yeah. And, again, just call Isaac. He’s a wealth of information. Isaac, give them your phone number.
Isaac Grant: It’s (541) 681-6418.
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