This article appeared in Colorado Real Estate Journal's Multifamily Properties Quarterly Issue in May 2021.    LINK

Multifamily continues to be the darling of commercial real estate, with both debt and equity chasing a limited number of transactions. While acquisition prices continue to set new records, the affordability of debt allows the deals to pencil.  Within the last two months, we have seen life companies and debt funds alike aggressively compete for structured finance opportunities in order to increase their exposure to multifamily. While in recent weeks treasuries have started to tick up, all-in coupons remain extremely attractive. The following two scenarios are representative of the types of quotes we have received for structured multifamily transactions.

Value-Add Transactions

We see a lot of multifamily acquisition-rehab transactions, with a moderate renovation strategy (10% of total capital) to increase rents while the property continues to cashflow.  Structured finance lenders, including life insurance companies, are very active in the space.  For a 2-5 year-hold strategy, the loan would typically feature a 3 + 1 + 1 loan term structure, allowing for maximum leverage and flexibility for a sale or permanent refinance. These lenders will provide 70 – 75% of the total capital stack (initial funding of 70-75% of purchase price, with 100% of renovation dollars future-funded), on a floating rate basis in the 3.30 – 3.50% range. With full term interest only, this allows the Sponsor to maximize cash flow while completing their renovation strategy. For Borrowers with lower-leverage mandates, this yields even more attractive coupons.  We see acquisition-rehab loans in the 60-65% LTC range pricing from 2.75% - 3.25%. This recent transaction illustrates:

The Sponsor acquired a 350 unit, 1980’s vintage multifamily asset with plans to renovate the units at a cost of 10% of the total capital stack.  The Life Insurance Company Lender provided a 62% LTC option, structured as an initial funding of 62% of the purchase price, with future funding of 65% of all renovation costs. The all-in coupon on this interest-only, floating rate loan was 2.75%.

Lease-Up Transactions

We have also seen demand for short-term bridge financing on newly-constructed multifamily loans, where the Sponsor desires more time before selling or refinancing into a permanent loan. Some examples of scenarios for this include:

  1. If a project has construction delays or a slower lease-up and the construction loan is maturing / converting to an amortizing structure
  2. Sponsor wanting to replace recourse construction debt or expensive preferred equity while the property leases up and stabilizes
  3. Sponsor wanting to hold the asset until all concessions burn off or the initial round of leases turn in order to increase property value and optimize exit economics

For each of these, a +/- 2-year bridge loan can be utilized in order to maximize proceeds and extend the interest only period. For a non-cash flowing asset, there are lenders willing to fund up to 80% LTC on a non-recourse basis. Insurance companies will max out in the 70-75% LTC, while debt funds can stretch up to 80-85% LTC. We see pricing ranging from 3.50% - 5.00%, dependent upon deal specifics.

Lenders typically underwrite and size loans to an exit LTV or a stabilized DY that fits their respective parameters. Lenders will often structure in an interest reserve to be drawn to pay interest, with the remaining balance released when the property hits certain metrics. Bridge loans usually feature 12 months of minimum interest, meaning after 12-months of interest payments, the loan can be paid off without penalty. This allows the Borrower flexibility in order to time the sale or permanent refinance with the market. Although the all-in rate may seem higher at first glance, once the higher proceeds and interest-only are taken into account, this strategy has proven accretive for many Borrowers.

Although we wanted to highlight that insurance companies and debt funds are becoming more active in the structured finance space, the agencies are still a relevant lending source in all facets of multifamily lending. A lot of Sponsors considering bridge loans also consider the Freddie Mac floating rate loan program. For a 7-10 year floating rate loan at full leverage (typically ~75%), Freddie Mac is pricing in 2.50% - 2.80% range. Although the agency program will only look at historical cash flows (contrasting to other structured finance lenders who will be forward looking and provide more proceeds), this execution can be the best option for rehab transactions with a light lift. The floating rate allows for maximum prepayment flexibility and typically features partial-term interest-only. The best execution is for properties deemed “mission-rich.” Freddie Mac also has a 5-year fixed rate program, which maxes out at 65% LTV, but features full-term interest only. This program prices similarly to the floating rate program, with rates currently in the mid to high 2.00%’s.

As we’ve said before and we’ll say it again, multifamily continues to be the favorite asset class for lenders. This trend has been exacerbated even more during the pandemic, where looming uncertainty in the office and retail sector has lenders are hesitant to increase exposure. Although all of our lending sources have different mandates and investment strategies, their message is consistent: we want more multifamily loans. As a result, lenders, specifically insurance companies and debt funds in the structured finance realm, are getting more aggressive and more creative in their product offerings in order to win business. Whatever the scenario or specific loan request is, chances are, we have a home for it.