CREJ

Page 14 — Multifamily Properties Quarterly — May 2021 www.crej.com Finance www.hcm2.com Three Light Kansas City, Missouri The Cordish Companies M ultifamily continues to be the darling of commercial real estate with both debt and equity chasing a limit- ed 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 multifam- ily.While in recent weeks Treasurys have started to tick up, all-in coupons remain extremely attractive. The fol- lowing two scenarios are representa- tive of the types of quotes we have received for structured multifamily transactions. n Value-add transactions. We see a lot of multifamily acquisition-rehab transactions, with a moderate reno- vation strategy (10% of total capital) to increase rents while the property continues to cash flow. Structured finance lenders, including life insur- ance companies, are very active in the space. For a two- to five-year hold strategy, the loan typically would 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% to 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 3.3-3.5% range.With full-term interest only, this allows the sponsor to maximize cash flow while com- pleting the renovation strategy. For borrowers with lower-leverage man- dates, this yields even more attractive coupons.We see acquisition-rehab loans in the 60-65% loan-to-cost range pricing from 2.75%- 3.25%. This recent transaction illus- trates this point: The sponsor acquired a 350- unit, 1980s vintage multifamily asset with plans to reno- vate 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 fund- ing of 62% of the purchase price, with future funding of 65% of all renova- tion costs. The all-in coupon on this interest-only, floating-rate loan was 2.75%. n Lease-up transactions. We also have seen demand for short-term bridge financing on newly construct- ed multifamily loans where the spon- sor 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/con- verting to an amortizing structure; 2. Sponsor wants to replace recourse construction debt or expen- sive preferred equity while the prop- erty leases up and stabilizes; or 3. Sponsor wants 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 plus/minus two-year bridge loan can be utilized in order to maxi- mize proceeds and extend the interest- only period. For a noncash-flowing asset, there are lenders willing to fund up to 80% LTC on a nonrecourse basis. Insurance companies will max out at 70-75% LTC, while debt funds can stretch up to 80-85% LTC. We see pricing ranging from 3.5% to 5%, dependent upon deal specifics. Lenders typically underwrite and size loans to an exit loan to value or a stabilized debt yield that fits their respective parameters. Lenders often will 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 pro- ceeds 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 still are 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 seven- to 10-year floating-rate loan at full leverage (typically around 75%), Freddie Mac is pricing in the 2.5% to 2.8% range. Although the agency pro- gram will only look at historical cash flows (contrasting to other structured finance lenders that 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 five-year fixed-rate pro- gram, which maxes out at 65% LTV but features full-term interest only. This program prices similarly to the floating-rate program, with rates cur- rently in the mid- to high-2% range. 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 sectors has lenders 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 com- panies and debt funds in the struc- tured finance realm, are getting more aggressive and creative in their prod- uct offerings in order to win business. Whatever the scenario or specific loan request is, chances are we have a home for it. s bbutler@essexfg.com ariggs@essexfg.com Structured finance for apts. is more active than ever Blaire Butler Assistant vice president, Essex Financial Group Alex Riggs Vice president, Essex Financial Group