Need a Building Loan? Here’s What Banks Look For

Local Law 97 mandates that all New York City buildings above 25,000 sq. ft. comply with energy efficiency standards by 2024 or face fines which incrementally increase. Perhaps you’ve already budgeted for an analysis of what it will take to lower your buildings’ carbon emissions. You’re still probably going to need a loan for the actual work. There are many banks out there that are willing to help. Based on our conversations with banks in our network, here’s what they look for when deciding whether or not to provide a building loan:

Cash Flow Available to Service Debt

What Percentage of Annual Revenue is in Arrears?

The percentage of annual revenue in arrears (payment owed by owners) is important to banks. If a bank sees that there is a large percentage of ownership in arrears, they will be reluctant to provide a building loan. In this case, it would behoove the building to work with owners to come up with a payment plan that lowers the amount in arrears.

Current Contribution to Reserves

What percentage of the current revenue is going into reserves? Banks want to see that ownership has a handle on excess revenue and that it’s saving for potential issues. Additionally, if the building has excess revenue, that proves to the bank it’s worthy of a loan because the surplus can contribute towards paying down the loan.

HOA / Maintenance Percentage Increase

What does the building board normally decide when it comes to HOA increases? How does it implement them? How often? This gives the bank an idea of what to expect throughout the course of the loan and shows how well ownership handles their costs.

Loan Payment to Annual Revenue Ratio

How much of the annual revenue goes to paying off the current or future loan? The higher this ratio gets, the less appealing the loan becomes for the bank. For cooperatives, this isn’t weighed as heavily. For condominiums, this is one of the most important metrics.

Units Rented vs. Owners in the Building

It is the bank’s assumption that buildings that have a higher percentage of ownership have a lower rate of risk. Banks believe that when owners live in the building, they’re more likely to have an effective maintenance plan. If you have a high rental ratio in your building, have your accountant provide detailed notes on the maintenance plan and upkeep in the notes of the financials. 

Is there a significant concentration of ownership? Most banks want boards to have full ownership of the building. If a building has a sponsor or a building owner that owns more than 15% of total units, that will make it harder to secure a loan with the bank.

Current Work + Future Budgets

Reserve Studies

Reserve studies are important since they give the board clarity on what work will need to be done over the next 10-20 years. Additionally, this assures the bank that the building won’t continuously come back to the well for additional resources. In order to understand how much time is left on the building equipment, you can hire an energy or mechanical consultant to perform an analysis. There are several different building components to consider: boilers, facade, roofs, DHW, and HVAC.

Payback period on current work

While this ratio will not take into account inflation, it helps the bank understand what the building will save by implementing this work. Furthermore, those savings can be utilized to help pay off the building loan.

Annual savings on work being done

The assumption from the bank is that these extra savings will help the building pay off the loan.

Future work + budgets

The bank wants to validate that future work won’t become an issue before the building loan is paid off. If future work does become an issue, the bank wants assurances that it will not deter loan payments. The bank will typically ask the architect (or consultant who performs the reserve study) what work is coming down the pipeline in the years leading up to the completion of the loan.

Current Interest Rate Climate 

Interest rates are expected to hike in the short term. Based on the market, it’s looking like interest rates will stabilize early next year and lower late next year. One might argue that it’s wise to wait until then to secure a loan. However, there are a lot of other variables that make it beneficial to secure a loan now if you have the ability to do so.

On an upcoming blog post, we’ll help you figure out how to pick the right loan.

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