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 two of two.

JMT: How has the credit crunch impacted multifamily underwriting?

GP: I’ll try to keep my answer as short as I can, but this question alone could use up the entire interview…  First of all, the CMBS market has completely dissolved, and they were a large, growing piece of the multifamily finance market until late 2007 with the most competitive rates available.  Statistics vary, but I would generally say they were at least 20% of the permanent loan market in 2005 and 2006.

Banks and S&L’s have also tapered down their apartment lending.   For one, we’re seeing many banks that are under pressure by regulators to reduce their overall exposure to commercial real estate.    As a result, most banks are more interested in having  their apartments loans paid off than in making new loans.  Secondly, apartment fundamentals have weakened in many markets which has scared many credit officers away from lending to multifamily owners.

Lastly, and most importantly, across all lender types, there is far more focus on borrower’s financials than ever before.  The borrowers who have strong liquidity, solid recurring cash flow, and minimal exposure to maturing debt are at a significant advantage today vs. two years ago.   Be prepared to provide a financial statement, a schedule of real estate owned, copies of bank and brokerage statements, as well as 2-3 years of tax returns including K1’s and supporting schedules.  Banks will generally want to analyze these documents prior to issuing an application.  Furthermore, with a bank, a deposit relationship is critical, and the larger the account relationship or the potential account relationship the better the deal.  Many banks won’t even look at a deal unless they receive the deposit account for the property.

JMT: How has the Federal Government’s takeover of Fannie Mae and Freddie Mac impacted apartment financing?

GP: At first, we were pretty worried about the impact on apartment financing, but so far, it has been beneficial for borrowers.  For one, it has allowed Fannie Mae and Freddie Mac to issue mortgage backed securities to fund their loan vs. funding loans using their own cash.  Before the takeover in late 2008, investors were wary of buying loans guaranteed by Fannie Mae and Freddie Mac due to concerns about the two mortgage companies viability.  Today, now that the US Government has taken over ownership, the loans are sold with a (believable) AAA guarantee.  The number of investors buying these loans (and indirectly funding the loans of borrowers) grew dramatically since they could buy 10 year Fannie Mae MBS bonds yielding around 6% versus 10 year Treasuries yielding 3.50%.   Fannie Mae still has the option of funding a loan through a “cash” execution versus MBS, but the rates are often 20-30 basis points lower using the MBS execution.  Oftentimes, you will have multiple investors on the phone with a trader the day you rate locking that will be bidding for the paper.  Therefore, when borrowers ask for a spread and a rate, I generally provide a range because we really won’t know until the day it rate locks.  Earlier this year, we had a commitment letter issued at 5.80% and the next day the borrower rate locked at 5.52%.  That’s an extreme case, but it gives you an example of the fluctuations we see and the difficulty of predicting a final rate.  It’s worth noting that 71% of the Fannie Mae loans funded so far in 2009 have been done via MBS compared to 17% in the first half of 2008 when the program was new.  Freddie Mac has its CME execution which has really picked up steam in the later half of 2009.  Freddie’s 10 year CME rates are often over 40 basis points less than its cash execution, those CME rates are often very competitive with Fannie Mae rates.

JMT: What are the challenges for clients with loans coming due next year (2010)?

GP: There are many challenges due to weakening apartment fundamentals and tighter underwriting criteria.  Luckily rates are low now, but if they do go up, many borrowers will be in big trouble.  I’m particularly worried about the short term construction and bridge loans that are coming due in 2010 that were originated in late 2007 or early 2008.  Despite the fact that we saw the condo market start to deteriorate in 2007, banks became extremely aggressive on apartment lending believing that owners would just revert back to renting and occupancies and rents would skyrocket.  I don’t think lenders knew how bad this recession was going to be, and I doubt they would have made the same loans had they known that the unemployment rate would be rising above 9%.  Loans were underwritten with a low debt coverage ratio based on a future net operating income.  That projected net operating income was often calculated based on the belief that market rental rates would continue to appreciate throughout 2008 and 2009. That clearly hasn’t happened and the actual net operating incomes that were seeing on some of these projects are quite a bit short of their original projections.

JMT: What is your advice to clients that can’t refinance out of their loans coming due in 2010?

GP: We have been preparing our borrowers to build up their cash positions, since they may have to do a pay down of the loan in order to get it refinanced and paid off.  Also, many clients have other apartment buildings which are operating quite well and those buildings have untapped equity.   Now would be a great time to refinance those properties or if you have a Fannie Mae or Freddie Mac loan, obtain a supplemental.  Also, make sure you have a good rapport with your existing lender.  Banks are often issuing extensions, and it definitely helps to have a loan officer who wants to defend your request before loan committee.

JMT: Do you see signs of the credit markets loosening in the multifamily sector?

GP: The only signs of credit market loosening have been the growing acceptance of Fannie Mae and Freddie Mac’s mortgage backed securities which has reduced overall spreads.  That being said, I think overall credit is still tightening.  It appears the banks are still retreating from commercial real estate as a whole as they are under pressure from a tighter regulatory environment.  There are many chief credit officers who have been worried by all the national press that commercial real estate is going to continue to drop in value as the effects of the recession are still being felt.  As a result, they’ve chosen to halt producing apartment loans in order to reduce their overall commercial real estate exposure.

Fannie and Freddie should be a staple next year for borrowers seeking permanent financing.  However, both GSE’s have concerns about declining values and deteriorating net operating incomes.  Some markets such as Phoenix and Las Vegas have been labeled “pre-review” where the loan to values are limited to 65% LTV and the debt coverage ratio has been increased to 1.35.  Given the size of the GSEs servicing platforms they can tell pretty quickly from customers operating statements which markets are showing significant signs of weakening.  If more metropolitans markets become “pre-review” that’s going to present a big challenge to the apartment industry.  Don’t be surprised if Fannie or Freddie uses a higher cap rate than what the appraiser used to underwrite the deal because Fannie and Freddie have expressed concerned over the future direction of cap rates.

One critical mistake many borrowers are making is that they assume that they can always refinance lower leveraged properties and increase the leverage in order to generate additional liquidity.  This strategy has become increasingly challenging.  Due to regulatory pressures, most backs refuse to refinance a loan and provide cash back to borrowers unless it is an extremely conservative new loan or the property was owned free and clear.  Fannie Mae and Freddie Mac have also limited the amount of cash back given to borrowers from a refinance.  The LTV is limited to 75% versus 80% for a purchase.

JMT: When is a good time to refinance?

GP: Now more than ever is a time you should be refinancing, especially if you have equity in your properties that you’d like to tap into.  First, if the apartment market continues to deteriorate, lenders will keep tightening their underwriting standards and thereby reducing your potential to increase the leverage on your property.  Today, borrowers need cash.  Many of our clients are refinancing to build up cash to expand their portfolios because they believe that there are going to be more and more great buys in 2010.  For clients with larger portfolios, we have been setting up large acquisition lines secured by free and clear real estate which will often allow borrowers to close a transaction quickly with cash by drawing down on their line.

Other borrowers will simply need cash to meet the demands of their creditors as I mentioned earlier.  Some clients have a stable portfolio, but they don’t know how long that will continue so they want liquidity that they can have immediate access to.  Lastly, I won’t comment on where rates are going, but I’d say most of my clients believe rates are going to increase.

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.