The Danger with Concessions
Digested from Multifamily Insiders
If it is time to refinance your loan, giveaways may impact the borrowing vale of a community.
If you want to refinance your community, you need to understand how concessions could affect your borrowing power.
“If you find yourself wanting or needing to refi and you begin the underwriting process you will find that lenders are interested in how much income an asset is producing and how much income an asset can optimally produce,” Joe Killinger writes for Multifamily Insiders. “Concessions add an additional layer to the equation. When underwriting the net operating income of an asset, concessions are typically subtracted from the gross rental income in order to determine the net rental income, which also factors in things like vacancy and unpaid rent that is deemed ‘uncollectible.’”
Not are concessions are equal. For new and recently rehabbed communities, developers and managers often offer lease-up concessions. Marketers will also provide discounts when rents at a community or above the market.
Those concessions are not the issue.
“Lenders will have some concern when you are looking at buying or refinancing a property with rents that are in line with market competition but have on-going concessions to keep the property occupied,” Killinger writes. “They will wonder why there are ongoing concessions, and what hidden issues might be there.