Rising interest rates and uncertainty around capitalization rates and rents can make it challenging for multifamily and senior housing owners to create a business plan with confidence.
Fortunately, lenders are increasingly willing to provide flexible multi-asset financing, often at attractive pricing, that can give owners financing certainty and enable them to make asset management decisions without adversely impacting the terms of the in-place debt. Given the current combination of rising interest rates, market uncertainty and favorable borrowing conditions, it’s a perfect time for owners to get creative and think beyond the traditional single-asset mortgage.
Not Just for REITs
Multi-asset financing solutions are available to owners of market-rate and affordable housing, student housing, military housing, manufactured housing and senior housing. (Multi-asset financing solutions are also available on commercial properties. This article’s scope is limited to non-commercial property types.) These solutions allow owners to lock in favorable financing terms now and make asset management decisions down the road without having to worry about how those decisions could impact the in-place debt, such as potentially incurring prohibitively expensive prepayment fees.
Having certainty around financing terms can be particularly beneficial when considering multi-property acquisitions. In fact, some lenders allow owners to put financing in place before specific properties have been identified. This enables owners to focus on acquiring new assets and maintain the flexibility to change their strategy in the future.
Owners can use the surprisingly customizable features of multi-asset financing solutions to meet their unique business plan needs. Leverage is available across the spectrum, from low-to-high. In addition, many lenders provide the ability to increase the loan amount in the future. Some lenders will do so without a repeated due diligence process. Additional financing provisions can include fixed- and or floating-rate debt tranches of varying terms, enabling owners to stagger their debt maturities and reduce interest rate exposure. Most lenders offer flexible release and substitution provisions that can minimize or eliminate potential prepayment fees. These provisions also enable owners to make acquisition and disposition decisions while keeping their overall portfolio financing terms intact.
Multi-asset financing solutions have evolved considerably over the past 20 years. The initial target borrowing audience included REITs owning large, geographically-diverse portfolios of multifamily communities. As REITs have progressively tapped the unsecured debt market for financing, lenders have widened their target borrowing audience to include national and regional players, funds, and family-owned businesses. Lenders have also been coming up with increasingly flexible solutions that can overlay other product offerings and associated pricing discounts to reduce overall financing costs. In addition, some lenders are offering increasingly flexible terms on senior housing and manufactured housing property portfolios.
These financing solutions are not for everyone, however. To fully reap the flexibility benefits and justify the upfront cost, owners need a property portfolio critical mass, typically around $50 million minimum. Good borrowing candidates include, but are not limited to, individual and fund owners that are actively managing their portfolio through acquisitions and dispositions, have a shorter- and or longer-term holding horizon, and or need to maintain a certain level of portfolio leverage. Other good candidates include family-owned businesses that are working on estate planning and owners who own or plan to acquire, multi-property portfolios. More recently, funds that are working on their offering documents and want their financing in place upfront have been drawn to this type of financing. In each of these instances, borrowers can put an overall financing structure in place, start out small, and add and dispose of properties as opportunities present themselves.
Look for Experience
Lenders willing to provide this sort of multi-asset financing primarily include the Agencies, life insurance companies, and banks. The characteristics of the financing will differ by lender, so it’s important that owners pick the right lending partner. Lenders with access to multiple capital sources may be particularly well-positioned to deliver an optimal debt package. An owner should partner with a lender that takes an active interest in understanding its business plan and can draw upon extensive multi-asset financing experience to craft the optimal debt solution. Borrowers should also make sure the lender is experienced on the back-end. Multi-asset financing solutions involve living, breathing property portfolios with a lot of touch points. Experienced lenders typically assign a dedicated internal team to each portfolio solution for the duration of the financing term. This consistency promotes relationship building and expertise among parties involved in the financing, which in turn can make the substitution, release, and supplemental loan process efficient and painless. The converse can be true when working with an inexperienced lender.
Multi-asset financing solution benefits are timeless. However, their virtues are particularly beneficial in rising interest rate environments and periods of real estate value uncertainty. By locking in flexible financing terms today that don’t tie down specific properties, owners can focus on what matters most: their long-term business strategy.
Laura Eckhardt is a principal with PGIM Real Estate Finance with more than 20 years of experience structuring and managing multi-asset financing solutions, including collaborating on Fannie Mae’s first Credit Facility in 1995.