Once your financing has been approved and you have received your loan commitment, there is a broad laundry list of items that warrant your attention. We’ve highlighted a few of those that sometimes can cause closing indigestion if not handled properly:
- Payoff notification to current lender: Most commercial real estate loans mandate payoff notification of between 30 and 60 days. Sometimes in the thick of the closing process, this requirement is overlooked. With so many multifamily loans today being securitized after closing, it is imperative to adhere to this requirement; otherwise the closing of your new loan could be delayed, which could create its own set of costs and negative repercussions. Another noteworthy aspect of your payoff is the closing interest expense calculation on your current note. Whereas banks typically charge interest to the date of payoff, agency loans (HUD, Fannie Mae, and Freddie Mac) require payment of interest to the end of the month in which their loan is retired. Consequently, refinances of agency loans usually occur during the last few days of a calendar month.
- Escrow calculations: Real estate taxes, insurance, replacement reserve deposits, immediate repairs, and interest to month-end – all of these items on a closing statement can represent a sizeable amount of cash required by a borrower at closing. It’s important that these items be anticipated and accurately calculated. In fact, when you initially commence the multifamily financing process, your draft sources and uses of funds statement should contain estimated placeholders for each of these items.
- Real estate taxes – the lender must have adequate funds on hand to pay the next tax bill when due, typically with a one-month cushion. Escrowed taxes can be as high as 6 to 12 months of the annual tax expense. Be careful to look for an increased taxable property value either as a result of a sale or a cyclical re-assessment of property value.
- Insurance – the lender will usually want insurance paid at closing for up to one full year.
- Replacement reserves and immediate repairs – these will depend on the results of the property physical inspection report. When financing with HUD, they can be quite large.
- Interest to month-end — Since multifamily loans are mostly paid in arrears, the lender will escrow at closing a per diem amount from the date of closing to the end of the month, calculated using the loan interest rate. The first monthly note payment is usually due in the first calendar day in the second month following the closing date.
- Opening Working Capital: When you are purchasing a property, it is recommended that you budget enough funds at closing to help you transition property operations until the rents are collected for the first month or two after closing. Otherwise, you might find a shortfall in working capital for payroll and payables.
- HUD MIP reimbursement: When you retire a HUD multifamily loan, make certain to formally request a reimbursement of the mortgage insurance escrow being held by your current lender. HUD MIP is paid in advance. So when the HUD loan is paid off, the lender will be holding up to 12 months of annual mortgage insurance payments.