Strategic Real Estate Investors Discover High-Yielding Opportunities with the Help of Bridge Financing
By John Caulfield, Arbor Commercial Mortgage LLC
There is a large variety of financing options today for multifamily investors, with institutions such as Fannie Mae, Freddie Mac and FHA providing what many believe are the best available options. But with the stabilization of the commercial real estate market other alternative financing options have additionally emerged, serving more specialized needs, including critical interim financing. For those needs, quite often the right product is a bridge loan.
Two factors have combined to produce the bridge financing demand we see today within commercial real estate and the multifamily arena in particular. First, with the economy still in a gradual recovery from the recession, there exist many cash-starved and distressed commercial properties across the country. But these distressed properties often present great opportunities for strategic investors, especially in the multifamily sector, where fundamentals and investment returns are the strongest in comparison to the other commercial real estate asset classes. With permanent financing lenders maintaining their high levels of underwriting standards these days, there are many strong investment scenarios nationwide that would suffer without short-term bridge financing supporting investors on their way to eventual permanent debt.
As a by-product of the last recession, we continue to see many properties as great candidates for bridge financing. These include assets that are capital-starved, over-leveraged or part of larger portfolios, where investors are forced to sell because they are financially impaired or have reached discounted payoff or short sale agreements with their lenders. The list of transactions requiring bridge financing is a long one these days and also includes traditional acquisitions, refinances, debt buy-backs with fresh equity, properties in lease-up, acquisitions with rehab components and acquisitions with nearly completed new construction.
With new construction financing still in somewhat short supply and, as a result, numerous projects left unfinished from a few years ago, bridge financing has been key in these circumstances as well, providing the new developers greater financial support and confidence to move forward and complete projects. This is key within the multifamily sector, as rental demand continues to rise in many major metropolitan areas, leading to renewed calls for new development.
In other circumstances, there are many investors whose assets do qualify for permanent debt, but choose to delay that option in favor of a one- to three-year bridge loan. The strategy here is that with an asset—in its owner’s judgment—still underperforming, available permanent loan leverage will be less than what it would be following a couple more years of seasoning and stabilization under a bridge loan.
The investment opportunities that are in lock step with the increasing availability of competitively priced bridge financing are clear when looking deeper into the multifamily sector today, and not only because of its strong fundamentals and returns. Multifamily assets have short-term leases and, therefore, respond more rapidly to market changes, meaning a bridge loan is often all an investor needs in the interim to quickly turn around an underperforming property. With investments possibilities like this in large supply, combined with strong multifamily returns, bridge financing demand has been especially strong at this point of the multifamily market cycle.
With any bridge loan, the borrower must always have an eye on the permanent loan exit strategy, and within the multifamily sector, long-term Fannie Mae, Freddie Mac and FHA financing is often the best execution. Ideally, though, in order to keep take-out fees at a minimum and optimize the efficiency of the overall bridge-to-permanent loan process, borrowers will look for lenders that can provide both bridge and permanent financing in a one-stop-shop format. A few unique multifamily lenders are now providing such a value-added service in today’s market, with a select group of those lenders offering flexible terms and speed of execution, including an ability to close in as few as three weeks.
Arbor was the bridge lender in a recent transaction that exemplifies this type of demand. The borrower on a 98-unit multifamily property in Dallas needed a recapitalization in order to bring its asset to full stabilization following a major property-wide renovation. But the borrower was seeking a one-stop-shop to provide both the interim and eventual permanent financing. Arbor provided the $3.7-million bridge loan that allowed the asset to be recapitalized and stabilized with rapidly rising rents. And Arbor is now in the process of providing the permanent Fannie Mae DUSpermanent take-out loan as well, satisfying the borrower’s original parameters.
Taking a look further into the bridge lending market, there also seems to be a developing separation between lenders that will only transact above $10 million deals and a special few that will also serve the below $10 million market. At above $10 million loan level, loan pricing seems to be consistent across the board with so many lenders serving the space. However, pricing variations seem to be much wider below the $10-million loan mark, with fewer lenders present. Certain savvy lenders have taken note of the strong bridge financing demand below $10 million and are increasingly targeting the space, which is often viewed as an underserved market.
While it seems that conditions are nearly perfect for investors to take advantage of current bridge lending options and their associated investment opportunities, it begs the question of when and why conditions could change. The simple answer, without being able to predict significant macro-economic changes, is that attractive and highly available commercial bridge financing should be here to stay for some time in response to a steady amount of over-aggressive loans rolling off lenders’ books, resulting in a continual supply of distressed or cash-starved properties. Or, in another way of looking at it, the unique and strong investment opportunities found today should continue to exist for the foreseeable future thanks to the critical support of bridge financing.
John Caulfield is COO of Uniondale, NY-based Arbor Commercial Mortgage LLC. He is responsible for managing the overall production of Arbor’s national sales force and overseeing the implementation of the company’s integrated sales and marketing efforts. Caulfield is also responsible for all capital market activities relating to all of Arbor’s lending products as well as the oversight of Arbor’s loan servicing portfolio and collaboration and engagement with Arbor’s valued business partner, Fannie Mae. In addition, Caulfield oversees the management of Arbor’s trading and investment banking partnerships and the operations functions of Arbor’s pipeline, from screening through closing. He directs the seamless execution of Arbor’s deals by ensuring that all disciplines involved in a transaction are in constant communication and are working with the most current data available.