Jansen Multifamily Team Blog

If you are a Puget Sound apartment investor, the volatility of the capital markets has directly impacted your investment goals.  Whether buying, selling or refinancing, stricter underwriting guidelines than those offered during the Anomaly Period correlate to lower leverage, decreased cash flow and diminished returns.  That being said, apartments are the most attractive, from a lender’s perspective, of all commercial real estate asset classes.

To shed some light on the financing options available currently available for apartment owners, the Jansen Multifamily Team (JMT) recently interviewed Dan Piantanida, Vice President at GP Realty Finance, Inc. (GP) of Bellevue, WA.  GP is the Pacific Northwest Correspondent for one of the largest Fannie Mae DUS and FHA lenders in the country.  The results of that interview will be posted in two parts.  This post is part one of two.

JMT: What types of lenders are still actively lending in the multifamily market?

GP: Luckily for apartment owners, the GSEs (government sponsored entities) are still actively lending at attractive interest rates.  The GSEs include Fannie Mae, Freddie Mac and FHA.  I think this is one of the reasons why cap rates for multifamily properties have remained lower and increased more slowly than the cap rates for other income property types such as office, retail and industrial.

There are also a few banks and S&L that are in the apartment lending market, but that number has been dwindling.  In addition, a few life companies have just recently re-entered the market and they will lend on conservative deals.

JMT: What are typical loan terms/rates?

GP: Although it fluctuates constantly, a 10-year fixed rate loan through Fannie Mae or Freddie Mac is generally priced between 5.5% and 5.85%.  Rates on 5-year fixed rate loans are currently between approximately 4.85% and low 5.25%.  The rate depends on the requested leverage and the resulting debt coverage.  However, the reality is that despite what a loan officer may quote you, the rate is unknown because increasingly Fannie Mae and Freddie Mac loans are being sold and the rate isn’t determined until investors buy the paper.  Luckily for property owners, the demand for Fannie Mae MBS and Freddie Mac CME paper is growing which has compressed spreads.

The disadvantage of Fannie’s and Freddie’s loan programs are that their lowest rate products typically have an expensive yield maintenance prepayment penalty for the life of the loan; therefore, refinancing during the term can be quite costly.  That being said, one of the core advantages of Fannie Mae’s and Freddie Mac’s loan program is that the loans are assumable, and the borrower has the ability to go back to the lender and obtain a supplemental fixed or floating rate loan (provided the net operating income and the value have risen enough to support additional leverage).  The loans are also non-recourse with the exception of standard carve-out provisions for fraud, environmental contamination, and selling or encumbering without approval.

FHA is also active with its 223f program, which is a 35 year fixed rate loan with an all-in rate of less than 5.50%.  FHA can also underwrite deals differently than Fannie Mae or Freddie Mac, which many times can result in additional  proceeds to the borrower.  That being said, the fees and reserves are much higher than for Fannie Mae or Freddie Mac and can often outweigh the benefits of the rate and/or additional proceeds.  It is a great execution for larger deals over $20 Million.

Banks generally offer loan products that have shorter fixed rate terms.  Rates are generally in the low- to mid-6% range for a 5-year fixed rate.  Today, most bank loans are full recourse to the borrower.  However, a loan from a bank is much more likely to offer the borrower prepayment flexibility and in some cases no prepayment penalties at all.

JMT: How are today’s multifamily loans sized?  What should borrowers take into consideration when trying to estimate a down payment?

GP: That is a great question, and unfortunately there’s not a simple answer.  It depends most heavily on how high or low the cap rate is relative to the interest rate.

Many aggressive loan officers will tell their clients that they can lend up to 80% loan to value through the GSE’s for acquisitions.  In Seattle-Tacoma-Everett MSA’s the maximum loan to value is technically still 80%, and 75% in smaller markets.  The reality is that the primary constraint for most of Fannie Mae and Freddie Mac loans in the Pacific Northwest has been the minimum debt coverage ratio of 1.25.   When borrowers were buying apartments at 4.5% to 5.5% cap rates, and borrowing at 6%, their loan amount could be less than 60% of the purchase price since the property’s income couldn’t support a higher amortized payment.  Today, we are starting to see a shift where interest rates are still below 6% and cap rates are rising.  In some markets where cap rates have risen above 7%, it is definitely possible to have a loan of 75-80% of purchase price based on current rates.

If you are a buyer, be sure that you will have enough liquidity on hand after closing equal to at least 6-12 months of debt service if you are acquiring a property.

If you choose to borrow through a bank, the loan to value maximum is generally 75%, and many banks have set their maximums at 60% to 65%.

One key note:  If a borrower is interested in pursuing a Fannie Mae or Freddie Mac loan, it is critical that the borrower is familiar with the GSEs underwriting guidelines.  Our firm has a niche in this business since we were founded as a Fannie Mae correspondent in 1992.  We have two senior analysts who each have over a decade of experience underwriting apartment deals, and we can respond to our clients with preliminary loan sizing within 24 hours after receiving financials.

JMT: Is there any apartment construction funding available for clients today?

GP: Despite contrary belief, there is.  The most active source of construction financing is HUD.  The FHA 221 d4 is a non-recourse, construction/permanent loans that is fixed for 40 years.

With HUD, there are some drawbacks.  The process is generally long (often times 6 months or longer), the fees and reserves are high, and a borrower isn’t able to rate lock on a project until HUD issues its final commitment which is at the tail end of the process.  There is much more legal and architecture work involved than with a standard construction loan.  Also contractors must comply with Davis-Bacon wages which can increase the cost of constructing the project.  Lastly, when calculating your interest rate be sure to make sure to add the Mortgage Insurance Premium which is typically another 45-50 basis points.

That being said, the rates are extremely attractive right now.  The all-in rate as of Monday of this week (11/2/09) including the MIP was 6.12%.  For a 40-year fixed rate loan, I can’t think of too many borrowers who would complain.

The leverage factor is also important.  HUD can lend up to 90% loan to cost on a 221d4 loan, and the minimum debt coverage ratio (based on a 40-year amortization) is only 1.11.

The other major benefit which can not be underscored enough is that there is no takeout risk.  You already have a fixed rate loan locked in place.  As I mentioned above, there are several hundreds million dollars worth of construction loans coming due in 2010, where the borrowers are going to be put in a tight situation because permanent loan underwriting has grown much more conservative than when the original construction loan was originated 2-3 years ago.

Lastly, the loan is completely non-recourse.  There aren’t even carve outs.

There are still a few banks are doing construction financing, but the list has been getting smaller.   Banks lending on construction projects today will require that the borrower has a significant amount of cash in the deal, and the bank will be looking for a developer with great experience and an extremely strong balance sheet, liquidity and recurring cash flow.

GP Realty Finance, Inc. is a commercial mortgage banking firm that specializes in all forms of multifamily financing including senior housing, section 42 tax credit projects and mobile home parks.  GP Realty Finance, Inc. is also the Pacific Northwest Correspondent for one of the largest Fannie Mae DUS and FHA lenders in the country, and has been a leading producer of Fannie Mae financings in the Puget Sound since the firm began in 1992. GP Realty Finance has generated over $2.2 Billion in financings, with over $1 Billion closed in the past 5 years.  In addition to Fannie Mae and FHA, GP Realty has relationships with Freddie Mac, Life Insurance Companies, National Banks and Thrifts as well as a network of regional banks.

GP Realty Finance, Inc. also arranges financing for office, retail, industrial, self storage, hotels and marinas.  In addition to debt, GP Realty Finance has also helped arrange mezzanine financing and equity and its principals often joint venture with many of its clients.

To inquire more about GP Realty Finance or to be added to the company’s mailing list to receive regular updates on our recent closings and changes in the commercial real estate finance industry, please give us a call at 425-637-8849 or email dan@gprealty.com.