Automotive Property Loans ? Credit Crisis

June 12th, 2010

If you own an automotive property or are thinking of buying one, such as an oil change facility, collision shop or general auto repair, youve got to have youre ducks in a row as they say, to get the loan closed in this market.

Believe me Im sick of hearing about it and sick of warning my clients. But as the credit crisis persists, you need to start thinking clean. In other words your loan requests have to be strong or you wont be getting any term sheets from banks. Theyll simply pass on your deal. One of the more common issues is bad credit or mediocre credit. 6 months ago you could get away with a 620 and still have some good options. Now you really need a 680. Issues like late pays or an excessive amount of debt, even with good scores, will now kill most options.

Another common issue is so many automotive property owners dont show enough income to qualify. The idea on a bigger scale is to avoid as much taxes as possible, but when you go to get a loan, youve got a problem. Whatever money you saved by not paying tax youll pay back to a lender in the form of a higher interest rate or by not getting a loan at all. Pay now or pay later. Tal to your CPA about this he may be able to help you create more noncash items like deprivation so that you can have the best of both sides low taxes and a good rate.

Bottom line, if you want a decent loan, youve got to show a decent amount of income in this market. More exactly, youll need to hit a Debt Coverage Ratio of a 1.3, which has gone up from a 1.2 (some banks used to go down to a 1.1). What this ratio means, is that youll need to show $1.30 of net income, for every $1 of proposed mortgage payments. So after you pay all of your expenses and pay the mortgage youll still have $.30 left over

Automotive property loans are still doable! But youre going to have to be more serious about pulling them off. And (Im not just trying to up sell you) you should be more concerned about if the funding bank is really going to close vs. picking one bank over the other to save 10 basis points on your rate. Prepare in the beginning and have your loan package look as clean as possible BEFORE you submit it to a bank. You dont want to have to explain away a single item if you can avoid it.

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Current Underwriting Details of an Automotive Property Refinance

June 11th, 2010

Owners conducting an Automotive Property Refinance are often surprised to discover how many new attractive loan programs that have become available within the last 3 years. 30 year amortization periods, stated income and cash out refinance up to 75% LTV are now on the market.

However, automotive refinances are still heavily scrutinized by lenders that are concerned with the environmental status of the property. In addition, the special use nature, as well as the high level of seller financing (land contracts) further complicate and make lenders cautious.

Underwriting criteria is broken down into a few main categories Loan to value, debt service coverage ratios, property analysis, tenant evaluation and credit worthiness of the borrower.

LTV CLTV

Loan to value restrictions on automotive refinances are typically capped at 70% on rate and term and 65% on cash out refinances. However, there are a few lenders that will now allow up to 75% on a cash out basis. Lenders also will permit high leverage with seller held financing (sits in second lien position). The combined loan to value can be as high as 90%. For example, if the current first lien position existing convention loan is at 40% loan to value and the seller held is at 30% loan to value the owner could pull an additional 20% equity out on a cash out refinance (40% + 30% + 20% =90% CLTV).

DSCR

Debt Service Coverage Ratio restrictions are typically conservative at 1:1.3 for this building type. Meaning that for every $1.30 of net income (income after taxes, insurance, repairs, etc) the property/business produces, the mortgage payment will not be allowed to exceed $1.00. Said in another way, after all expenses and the mortgage have been paid, the owner needs to net $.30 to qualify.

Due to the cash nature of this business, stated income loans, (where borrower does not have to provide tax returns) can be a solid option for owners that do not show enough net income to qualify for traditional loans. With this type of loan the DSCR discussed above is not relevant.

Tenant Evaluation

In the case of investment automotive refinances, tenant evaluation is very important. Lenders may request tenant financials as well as borrower financials and scrutinize the time left on the current lease; among other relevant information. In addition, many lending source will only consider owner occupant transactions.

Property Analysis

Great caution will typically be used as market value and market rent is evaluated and compared to the subject property. Environmental status of the property will be examined and buildings constructed before 1997 will be further analyzed. Appearance, location, accessibility, and local market conditions, as well as other factors are considered.

Credit Worthiness

The personal credit worthiness of the borrower will be scrutinized. 680 credit score is normally the minimum for the best finance options. Exceptions can be made (on a limited basis) as some conventional lenders will consider scores as low as 640. The overall strength of the property, tenants, net worth, DSCR, and LTV can offset concerns of low credit scores.

Every potential automotive property refinance is unique and are considered on a case by case basis. However, the above can give you a good idea of what the capital sources look for when considering funding this type of commercial loan.

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