Why Nontraditional Financing Makes Sense in a Crisis
- Sep 23, 2020
When it comes to securing multifamily construction loans across the nation, it is a lender’s market. Analogous to the ramifications of the Great Financial Crisis, financing companies have become extremely stringent about what projects they give the green light to finance, amid the uncertainty of the COVID-19 fallout. For the most part, they have to answer to investment committees that are large and cautious, and while a builder may have a sound business plan in a strong market, it doesn’t always come down to the project level. There could be a myriad reasons a project doesn’t get a construction loan.
As a result of the challenges of securing debt with traditional lenders, private lenders are seeing an escalation in financing requests from multifamily developers. Private financing companies for the most part are able to make decisions based on the actual project basis and can provide more flexibility and creativity that offers an attractive situation for both the builder and the debt provider. Since March, our originations team has seen an increase in construction loan requests from borrowers pursuing business plans that were easily financeable prior to COVID-19 but are now being called into question by traditional lenders and left unfunded.
With all that said, below are some key things multifamily developers should keep in mind when it comes to seeking financing for a project:
Know the source of capital
The lender’s capital source is always going to drive what loans actually get approved. A lender with discretionary capital that holds the loan in their portfolio after originating it will be able to provide certainty of execution.
Don’t expect a historically low interest rate
Most capital isn’t tied to the yields on the Treasury rate. Rates on multifamily loans are directly linked to the uncertainty and risk in the market, and, unfortunately, there is a lot right now. That not only includes the COVID-19 crisis but it is also an election year, and so on.
Preferred markets are changing
If you are developing in a central business district, it can be challenging for some lenders to make your loan pencil. What was a no-brainer construction loan nine months ago is now held up at a loan committee, as questions arise around this pronounced period of rental rate declines that we have seen in many CBDs. Lender underwriting standards relative to the pandemic are hard to predict as views on how urban infill areas will recover vary widely. A frank conversation with your lender about where they see rental rates trending in the next 18 to 24 months would be a good idea. The majority of lenders actually see many U.S. CBDs as too risky in today’s environment.
However, when it comes to multifamily, our team at Parkview Financial doesn’t share in all the doom and gloom that others may forecast. We have strong convictions about how asset classes will perform over the long term and we talk about these convictions with our borrowers freely.
Multifamily is a secular winner. Historically, it has remained a steady asset class nationally, and while there are headwinds, many people want to work close to where they live—in amenity-rich urban centers—even if that means they work from home a certain percentage of the time. Moreover, suburban multifamily living will also continue to attract a growing population. Secondary and tertiary markets had been in demand prior to this year’s crisis. For example, last year we did a loan for a large luxury apartment project in a suburb of Boise, Idaho. While that may have sounded high risk five years ago, there is a strong renter demand due to a dearth of product there.
Ultimately, if a project makes sense, a lender that effectively understands the underlying value of the asset will be there to finance it.
Andrew Benton is a managing director at Parkview Financial.