By Doug Taylor, Walker & Dunlop
With the nation’s multi-housing market on the upswing, interim financing can be the bridge over troubled traditional-lending waters for experienced borrowers aiming to capitalize on opportunities to acquire or reposition multifamily properties.
Despite data from REIS Inc. showing a year-to-year drop of 21 percent in the multifamily vacancy rate—from 6.6. percent to 5.2 percent between 2010 and 2011—loans for unstabilized multifamily properties remain hard to get from traditional lending sources and government-sponsored enterprises (GSEs), which are focused on stabilized properties.
The Catch-22 is that under-performing properties-—at which the occupancy level is below the minimum required by GSEs—have an urgent need for financing to execute improvements or engage better management that will make them competitive and, ultimately, increase occupancy.
Why interim financing?
The solution is interim financing, or a bridge loan, from a reputable commercial real estate financing company. A bridge loan can give the borrower time to work out the “kinks” of a venture that does not meet the qualification criteria for a permanent loan. For example, interim financing gives new buyers of under-performing properties who are trying to breathe life into them the capital they need to make renovations and other improvements.
Borrowers generally have 12 to 24 months to pay back the bridge loan, which gives them the additional time they need to improve occupancy and/or cash flow of the property in order to secure permanent financing. Another advantage of bridge financing is that it can be non-recourse, which means that, except in certain circumstances, the lender cannot come after assets other than the property in the event of a default.
The key when looking for a bridge loan is to find a true expert in this specialized-financing arena. The best bet is a lender with an established track record with Fannie Mae, Freddie Mac and HUD programs, as well as the ability to make bridge loans by leveraging its own balance sheet.
Is interim financing right for you?
The first consideration in qualifying for interim financing is the quality of the borrower. Borrower experience is a primary qualification consideration; bridge loans are not for amateur real estate investors. Well-capitalized, reputable borrowers who have prior experience and an existing presence as developers of commercial real estate in the target market are the best candidates for approval.
Eligible properties will be located in strong, stable markets that have a solid employment base. Attractive properties can be found not only in the big cities that are at the top of everyone’s list, but also in wealthy suburbs of major metropolitan areas and in other secondary markets. The key is the demographics of each market and how they relate to the property and its story.
Even though a “bridge” property does not currently qualify for permanent financing, it should have a clear exit strategy through a refinancing with Fannie Mae, Freddie Mac or HUD upon stabilization. In addition, the property should meet these basic qualification criteria:
• It should be larger than 100 units;
• Since newer properties are preferred over aged ones, it should have been built within the past 25 years; and
• It should be well located in a strong market.
What should a borrower expect when it comes to loan rates and terms? In our Interim Loan Program, for example, target loan amounts are in the $5 million to $15 million range, with larger loans considered on a case-by-case basis. Loan term is up to two years, and the interest rate is a floating rate over the 30-day LIBOR index. Maximum loan-to-value (LTV) is the lesser of an 80 percent “as-is” value or 75 percent loan-to-appraised value upon stabilization. Maximum loan-to-cost is 90 percent, including costs associated with renovation.
Interim financing success story
Recently, Walker & Dunlop’s Interim Loan Program provided $7,000,000 in bridge financing for Renaissance St. Andrews Apartments, a Class A garden-style residential apartment community located in Louisville, Ky. This 216-unit multifamily property was built in 2001 and is situated on over 19 acres. With three different floor plans in one- and two-bedroom models, the property features amenities including a clubhouse, outdoor swimming pool, fitness center, laundry facility and business center. Renaissance St. Andrews Apartments was 85 percent leased at closing and 80 percent at application.
This non-recourse loan was provided for an acquisition and structured with a one-year term. The loan was closed within 40 days of receiving the application from the borrower. Not only does this transaction highlight our continued focus on developing proprietary, complementary product offerings to borrowers with multiple financing options, but it also demonstrates a company’s ability to use its own capital to provide borrowers with the financing options that best meet their needs.
Bridge to multi-housing opportunity
When it comes to property acquisition or repositioning in the current improving multifamily market, interim financing can be the key to executing a strategic property plan when traditional lending sources are not available. By using interim financing, borrowers with unstabilized properties may find their bridge to opportunity as they seek to capitalize on changing multi-housing market conditions.
Doug Taylor, senior vice president at Walker & Dunlop, is responsible for originating new loan production in southern California and the Western United States. Walker & Dunlop was founded in 1937.