Filling the Gap in Small Balance Multifamily Financing

John Beacham, CEO, Toorak Capital Partners. Image courtesy of Toorak Capital Partners

COVID migration patterns have exposed many shortcomings in the U.S. housing market, most notably the lack of sufficient housing supply in suburban locations.

Beyond the sustained demand for single-family homes, there has been a significant and lasting spike in demand for higher-density affordable housing, both inside and outside of city centers. Despite this increased demand, developers and property investors looking to build, reposition or stabilize occupancy within smaller scale multifamily properties with loan needs under $10 million are experiencing a scarcity of capital.

Demand for suburban multifamily housing is not a temporary blip. While the COVID-19 pandemic may be easing, companies and workers are realizing that remote work is sustainable over the long term. This means that movement from city centers to suburban areas is expected to increase, placing a priority on the production of new multifamily inventory.

Many of those leaving city centers (and not returning) are not in a position or do not prefer to purchase a single-family home. They prefer the convenience, and oftentimes amenities, of multifamily rentals. While the agencies are better at funding a longer-term stabilized loan, they are not set up to handle the interim draw requests of bridge loans. Local banks which historically have provided some of this funding, cannot do so at the scale needed to meet the demands of small cap multifamily projects.

Traditional commercial real estate lenders and government agencies are structured to finance loans on larger stabilized multifamily properties—typically $10 million and higher. Thus, there are very few lenders that provide funding for short-term rehab, bridge or ground-up construction loans on small balance multifamily properties. The limited availability of financing is due in part to the lengthy and complex loan approval processes for multifamily loans, as these deals usually involve additional layers of approval, including loan committees that involve a consortium of partners that must reach a consensus.

The Need for Speed

These lenders and capital providers typically do not have the in-place infrastructure needed to process larger units of smaller loan balances, especially those under $10 million. Today’s market moves faster and needs to address the urgent demand for inventory that did not exist pre-pandemic.

When identifying a capital provider to partner with on this type of bridge loan, lenders should be looking for a company that is, first and foremost, highly experienced in these specific types of transactions and has a dedicated team in place to handle them. An established infrastructure from the capital provider also ensures lower fees and rapid loan acquisition cycles. The ideal capital provider for small balance multifamily properties should also have a dedicated draw process that ensures that funding is rapid, consistent, and efficient.

Capital providers who can meet the needs of their borrower base are able to buy loans much faster and more efficiently than large commercial real estate deals, despite the high volume, and can develop long-lasting relationships with borrowers by offering various financing programs, recycling capital at a faster pace, and growing their lending platforms over time.

Projects financed this way can enable updates to outdated housing stock, conversions of industrial and retail properties into residential units, conversions of single-family properties into multifamily properties, and ground-up construction of multi-family buildings across the U.S.

All of these property segments can increase housing availability and affordability and help to meet the spike in demand for higher-density affordable housing in the suburbs as well as cities. Finally, a more sustainable flow of capital brings significant benefits and social impact for both residents and neighborhoods.

Toorak recently funded a value-add apartment complex acquisition in Atlanta. We provided a $3.2 million loan on the garden-style 86-unit complex. At the time of acquisition, the complex was 74 percent occupied, with 10 units down due to fire damage. The value-add renovations and lease up was completed within a 24-month term, and the borrower was able to exit the loan with long term financing.

John Beacham is CEO of Toorak Capital Partners.