Here’s the Money

One year after the financial crisis, there are multiple options for financing multifamily housing

The mood at the Mortgage Bankers Association (MBA) conference in February had turned hopeful: Sources of financing seemed to be at least making initial steps toward returning to the market. Of course, among all commercial real estate types, the multifamily sector had the greatest capital availability, and relatively least to worry about. Nevertheless, as Jamie Woodwell, vice president of commercial real estate research at MBA, noted, although mortgage originations picked up in the fourth quarter, they remain at a low level in absolute terms. Indeed, multifamily property financing was a full 40 percent lower in the third quarter of last year compared to the year before.

So where is the money today for multifamily housing? Besides Fannie and Freddie, which have thankfully supported multifamily housing thus far, there is money to be found in a myriad of other sources: banks, life companies, investment funds, and yes, CMBS sources. And of course, there is also HUD-insured financing for construction, acquisition and refinancing.

The latest numbers from the Federal Reserve show that Fannie Mae and Freddie Mac held the lion’s share, $359.6 billion, of multifamily mortgage assets—a full 40 percent—in the third quarter, according to Reis Inc. They were followed by commercial banks, which held 24 percent, or $216.8 billion, in multifamily residential mortgage assets. Twelve percent, or $110 billion, of the assets are still held in CMBS, CDO and other ABS issues. Savings institutions held 7 percent, or $64 billion, of the assets, and life companies held 6 percent, or $50.4 billion.

Some of these financing sources have returned in a significant way to the market. For example, while life companies pulled back seriously last year in the wake of the economic crisis, they are said to be back in the market looking for apartment deals. And the competition among lenders for good loans is even sometimes described as “competitive.”

Notably, CMBS financing, which was out and dead for a large part of the past two years, is showing glimmers of revival. In fact, at least a handful of investment banks, including JP Morgan, Goldman Sachs, Citigroup and other companies, are said to be lending to CMBS-type standards with the eventual goal of securitization.

“Life insurance and CMBS lenders are courting very aggressively in the 5 percent range [in interest rates] for good deals,” contends David Hendrickson, managing director at Jones Lang LaSalle. “They are very competitive.”

According to Lawrence Stephenson, executive vice president of NorthMarq Capital, Fannie Mae and Freddie Mac are providing up to 75 percent Loan-to-Value (LTV) ratio on refinancing, and up to 80 percent LTV on acquisitions today. The interest rate spread is about 200 basis points above the comparable Treasury security, which brings the interest rate to the high 5 percent range depending on the underwriting. The Debt Service Coverage (DSC) ratio is 1.25, or at least 1.30 in smaller markets.

The greatest issue today in multifamily financing is in obtaining desired leverage, says Stephenson. If a borrower does not need high leverage, Fannie Mae and Freddie Mac will provide the most competitive financing. “If you can come up with the equity, you can get to Fannie Mae and Freddie Mac,” says Stephenson. The two agencies will lend for Class A, B and C properties, and they will go down to tertiary markets, although they may charge a little higher interest and lend less for these markets, says Stephenson. And Fannie Mae has a small loans program that will provide financing for loans of as little as $1.5 million or less.

Life insurance companies, on the other hand, target only the top, institutional-grade, newer properties, generally in major metropolitan areas, not secondary markets. Their minimum loan sizes tend to be larger, but Hendrickson says they will lend as little as $4 million to $5 million. Life insurance companies provide lower leverage than the two agencies, however, and will go up to a maximum loan size of only 65 percent LTV, says Stephenson. And even at the lower LTV levels, their interest rates are in the 6 to 7.5 percent range.

Stephenson notes that life companies are currently not so competitive in the multifamily financing marketplace. “Most life companies are returning to the market, and they want multifamily back in their portfolios,” says Stephenson. “They have to have a competitive advantage that will lead the borrower to go to a life company rather than Fannie and Freddie.” And on both rates and dollar amounts, unfortunately, life companies are not so competitive currently.

Hendrickson argues, however, that life companies can charge “best-pricing” interest rates as low as in the 5.25 to high-5 percent range on the lowest LTV loans. “The gap between the interest rates charged by the life companies and the agencies is closing,” he says.

As far as CMBS-type financing, Hendrickson agrees that the financing that is currently underwritten to CMBS parameters (albeit much more conservatively) is readily available. The sources that are leading the way in aggregating such loans for possible securitization down the road will charge interest rates of 6 to 6.75 percent on 10-year loans, and as low as 5.5 to 6.25 percent on five-year loans, says Hendrickson. These loans will go up to 70 percent of LTV. “If for any reason Fannie and Freddie cannot finance the deal, CMBS is not far behind,” he says. CMBS minimum debt yield is 10 percent, and this may override the DSC of 1.25 percent. The minimum loan size is about $10 million to $15 million, he notes.

CMBS financing will extend to “quality” Class B properties in secondary markets as long as they are “decent” locations, says Hendrickson. “Life companies are looking for ‘perfect’ properties. CMBS will accept ‘less than perfect,’ but still ‘very good’ properties,” says Hendrickson.

Borrowers can also go to banks to obtain financing if they are willing to submit to recourse. Many large commercial banks have money to lend, and “a lot are definitely lending,” says Hendrickson. “Banks are quoting, and they are competitive.” The loans will tend to have shorter terms of three to five years. All interest rates will be floating, but the borrower can purchase a “hedge” to fix the interest rate. Interest rates will be in the 5.25 percent to 6 percent range (including the hedge), says Hendrickson. Another advantage is that smaller local community banks will lend in tertiary markets.

This is also the time to obtain mezzanine financing, preferred equity or second mortgages for apartment owners who are trying to bridge the gap between the new valuation of the property and the equity they can come up with. “There is plenty of capital available for mezzanine debt,” says Thomas Dennard, CEO of Grandbridge Real Estate Capital. Dennard notes that sources of such structured financing today include investment funds and investment bank operations, as well as traditional life companies who have established groups in their lending platform to generate higher yields. Many new names among the providers include former CMBS players who have evolved to use their skills in providing mezz cap as CMBS opportunities declined.

Mezzanine debt or preferred equity is expensive, though. The capital provider wants yields of 10-12 percent today, says Dennard, and there may sometimes be an origination fee. The term will be short-term, three to five years, and the LTV will be up to 80 to 90 percent. The capital provider will get the preferred return on any sale, and there is a guarantee that allows them to take full ownership of the property if necessary, indicates Dennard.

Nevertheless, according to Hendrickson, typically structured financing providers will want most of their yields paid on a current, as opposed to accrual, or look back, basis.

Often overlooked is acquisition, refi and construction financing that is insured by the Federal Housing Administration (FHA) and administered by the Department of Housing and Urban Development (HUD). Such FHA-insured financing is available through many of the multifamily mortgage bankers. “[HUD financing] is not synonymous with subsidized housing,” says Philip Melton,  senior vice president, Grandbridge Real Estate Capital.

As far as construction financing, in addition to banks, borrowers can turn to FHA-insured 221(d)(4), which provides all-in-one fixed-rate, 30- or 40-year construction and permanent financing. Melton says current interest rates for these loans are 5.75 percent to 6 percent, plus 45 basis points for mortgage premium insurance. Leverage is up to 90 percent of replacement cost, at 1.11 DSC.

FHA-insured financing is a viable option if the borrower needs the maximum proceeds. And for construction financing, HUD is probably the only alternative, says Hendrickson. However, the drawback of using this financing is that the application process takes time, at the extreme as much as nine months.

FHA-insured financing may be readily available for a range of multifamily asset classes, but it is said that HUD is reluctant to insure financing in markets that already have a fair number of other FHA-financed multifamily competing. Another of FHA financing requirements is the payment of Davis Bacon wages for new construction.

Despite the range of debt financing choices for multifamily housing today, borrowers may still have trouble obtaining financing if they cannot come up with the equity that is needed. But for the “well-margined transactions with 20 to 30 percent new cash, it is very easy to get the debt placed,” says Dennard. And in such cases, borrowers probably have the full range of options from which to choose.

Lenders Looking  Up for 2010


Jones Lang LaSalle Survey Lends Support to Greater Industry Optimism

MHN mingled with the conference attendees at the Mortgage Bankers Association’s (MBA) Commercial Real Estate Finance/Multifamily Housing (CREF) Convention & Expo held in February in Las Vegas.

There appeared to be fewer conference attendees compared to boom times of past years, but the mood was resilient. Perhaps by February, the mortgage bankers had at least some cause for greater optimism.

Who would have thought last year that CMBS lending would be showing signs of revival by early this year? And insurance companies, which had all but stepped out last year, had allocations for commercial real estate once again. However, the verdict went both ways on bank lending—some say they are still as tight-fisted as ever, while others said many are definitely lending.

Indeed, Jones Lang LaSalle released the results of its survey that showed greater optimism overall among capital sources. According to the survey, the number of lenders expecting loan production of between $2 billion to $4 billion has doubled to 43 percent, compared to the 21 percent of lenders who said the same last year.

“The tide appears to have turned for commercial real estate lending as an increasing number of lenders predict loan production will increase this year,” states Jones Lang LaSalle, which also announced its new online platform for the auction of distressed loans.

Jones Lang LaSalle’s survey, conducted on the MBA CREF show floor—administered directly to 60 nationwide lenders—included a mix of insurance companies, commercial mortgage-backed securities dealers, private equity lenders, commercial banks and government agencies.

Additional good news for the multifamily sector: A majority of lenders responding (27 percent) said they would single out multifamily for their loan dollars, according to Jones Lang LaSalle.  The numbers don’t appear to change much for next year, as 25 percent of respondents said they plan to reserve a majority of their lending dollars for the multifamily sector in 2011.

Another good sign for commercial real estate borrowers is that a full 30 percent of capital sources in the survey said they have already begun or plan to begin lending on speculative projects in 2010. (Twenty-three percent stated the risk won’t be worth the reward until year-end 2012.)

Overall, news in a positive direction for borrowers.

“Most life companies are returning to the market, and they want multifamily back in their portfolios.” Larry Stephenson NorthMarq Capital

“There is plenty of capital available for mezzanine debt.” Tom Dennard Grandbridge Real  Estate Capital

“CMBS will accept ‘less than perfect’  [properties] but still ‘very good’ properties.” Dave Hendrickson Jones Lang LaSalle

To comment on this feature, email Keat Foong at