Life Companies’ Expanding Role in Multifamily Finance

LICs are increasing their allocations to the apartment industry and broadening their offerings, according to Mark Perkowski of Draper & Kramer Inc.

Mark Perkowski

With continued low interest rates, it has been a solid year for multifamily acquisition, development, refinancing and renovation, mostly funded by Fannie Mae and Freddie Mac. First-quarter 2021 multifamily mortgage debt grew by almost $30 billion, to $1.7 trillion, from fourth-quarter 2020, according to the Mortgage Bankers Association, and government-sponsored enterprises accounted for 80 percent of that increase.

But while Fannie Mae and Freddie Mac continue to dominate the market for multifamily financing, borrowers should not overlook life insurance companies as a source for capital, especially if they are seeking moderate leverage. Life insurance companies typically don’t compete on last-dollar leverage, but they are less programmatic than the agencies. Borrowers can secure competitive loan terms regardless of loan size, geographic location or even occupancy level.  

Life insurance companies continue to expand their multifamily lending allocations. Following is an overview of their most attractive and beneficial offerings for multifamily borrowers: permanent loans, floating rate/bridge loans and construction-to-perm loans.

Permanent Loans

Life insurance companies can be the best source for permanent loans on stabilized or nearly stabilized properties. Although life insurance companies usually top out at 65 percent loan-to-value, they provide extremely competitive interest rates for the properties that fit their lending parameters. Spreads often top out at 175 bps over the corresponding treasury and can go much lower as the LTV decreases.

Because there are many different life companies, each with different lending parameters, competitive rates and terms are available for a wide range of assets. For example, a life company may provide a much lower rate on workforce housing in a secondary market or a longer period of interest-only payments on newer Class A properties in major metros. A partner who can steer you to the life insurance companies known to be looking for your kind of property is essential.

Life companies can be a great source of capital on newly built or rehabbed properties still in lease-up.  Whereas Fannie and Freddie require that a property achieve stabilized occupancy before they will fund a permanent loan, life insurance companies can close based on the pro forma. If a building starts leasing in February and is 80 percent leased by July, a life insurance company can underwrite trended rents and issue the loan now. Many will fund the full loan amount once the debt service coverage ratio reaches  1.0, using a credit enhancement such as partial recourse or a master lease that burns off once the property is stabilized. This program is extremely valuable in a volatile interest rate environment and can save hundreds of thousands in interest expense over the life of the loan.  

Floating Rate/Bridge Loans

Another option to consider from life insurance companies is short-term floating rate bridge loans. Many life companies offer floating-rate programs that are competitive on deals of 65 percent LTV or less, and very competitive at or below 60 percent LTV. Spreads will range from the low- to mid-200s at the top of the leverage stack to below 200 over LIBOR for 60 percent LTV or less. With LIBOR currently at 0.10 percent, borrowers can end up with a coupon at or below 2.0 percent.

These loans usually have a term of three to five years and are typically open to prepayment after 12 months. They are especially good for borrowers who are completing light renovations or want flexibility to sell the property.

Construction-to-Perm Loans

Life insurance companies are the only source of capital for a construction loan that automatically converts to a permanent loan, which takes interest-rate guesswork out of the deal. For this type of financing, life insurance companies usually fund up to 65 percent of cost and prefer a term of seven-plus years after the loan converts to a permanent mortgage. They will occasionally allow the sponsor to cash out some of the imputed equity, but typically only if the perm loan is 10 years or longer. This loan structure is an especially good option for developers with a long-term hold strategy.

These loans are relatively rare. Most borrowers do not use them because they require more equity. But for low-leverage borrowers, this program reduces financing expenses and eliminates interest-rate risk between construction and permanent financing. The rate remains the same for the entire life of the loan.

Fannie and Freddie will continue to provide most multifamily financing, but it is well worth borrowers’ time to investigate their options with life insurance companies. Although life companies are unlikely to provide the highest leverage, they can offer better, more flexible terms and help multifamily borrowers achieve their business objectives. A partner to source this kind of financing will be invaluable as the multifamily sector emerges from the pandemic relatively unscathed.

Mark Perkowski is vice president, Commercial Finance Group, Draper and Kramer, Inc.

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