One of the best decisions we made during the formation of Velocis Fund was to limit our debt exposure to 60 percent of our asset acquisition costs. That decision, combined with the ability to buy properties on compelling current yields on existing NOI, has made borrowing a lot more fun than we ever expected.
Of our three acquisitions closed to date, we used bank financing on two purchases, and life insurance company debt on one of the assets. Of the three properties we currently have under contract, it looks like we will go with bank financing on all three acquisitions. The reason: Commercial banks have been more agile, flexible, accommodating, and have offered better rates and terms than other competitive lending sources.
The interest rates to date have been very aggressive in the 3.8 percent range (on average) for a five-year loan term. Bottom line: Healthy banks are eager to lend on properties where they see little risk and good upside, and the borrower is willing to commit substantial equity to the acquisition.
Further to the discussion, much has been made about the future of interest rates; we believe that interest rates will remain historically low for at least the next one to two years. By negotiating the ability to convert floating rate debt to fixed rates through a swap mechanism, you can enjoy the low rates of today without leaving yourself vulnerable to the higher rates that are sure to appear in the coming years.
By effectively managing your debt strategy on each asset, you can maximize the returns on your investments. The best way to accomplish this goal is to establish a close relationship with preferred lenders that understand and agree with your acquisition and investment strategy, and can make the borrowing side of a transaction go smoothly and seamlessly.
We have been fortunate to establish a successful track record and look forward to growing our portfolio with these lending relationships. After all, it is all about relationships.
Jim Yoder is principal of Velocis Partners. Contact him at [email protected].
