8A — August 20 - September 16, 2021 — Investment/Multifamily Financing — Financial Digest — M id A tlantic Real Estate Journal
www.marej.com
I nvestment /M ultifamily F inancing By Brenner Green, Real Property Capital, Inc. Let’s talk leverage, everyone’s favorite topic in multifamily
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verybody wants lever- age. Ninety percent of our clients are interest-
cap rates that have pushed investor and developer ex- pectations of value higher and higher. The easiest way to move the goal post is to continually achieve the lofty value estimates in developer proformas year in and year out. Naturally, at today’s rates, much like the US gov - ernment, most people would like to borrow as much as possible. Unlike other asset classes, which generally see higher cap rates, multifamily more
recently is not necessarily purely about loan-to-value. Currently, with few excep- tions, most lenders require at least a 1.3 times debt service coverage ratio (multifamily debt service coverage is cal- culated as net income, less reserves for replacements di- vided by debt service). Quick math will show you that at a rate of between 3% and 3.25% using a 30-year amortization, you will run up against the 1.3X pretty quickly at a cap rate of as high as 5%. What
this means is that it can be difficult to get to full (75%) loan proceeds, especially on smaller sub $10 million loans that don’t command premium pricing from the Fannie Mae and Freddie Mac lenders. In pre-COVID times when rates were higher, closer to 3.75% to 4%, the best solution was often a 10-year interest-only loan from a CMBS lender at 65% as this would in many cases result in a higher loan than an amortizing loan due to debt service coverage. Currently,
with lenders of all types of- fering incredibly low rates on multifamily, the best execu- tion to achieve the highest loan could come from a bank on a portfolio or a swap deal or from an agency lender, any of which could be as low as in the 2’s for the right deal. What this means for you as a bor- rower is that it is best to shop around in order to get the best deal, as a lower rate will also potentially mean higher loan amount, and right now there is no clear winner on what is the best way to go. On the construction side, if you have the time and if you can deal with the prevailing wage requirement, it’s very hard to beat a HUD-221d4 loan. We just closed one of these loans at about 87% loan-to-cost, completely non- recourse. The biggest advan- tage of the “d4” may be the fact that you can use the ap- praised value of land as your equity in most cases thereby avoiding normal bank re- quirements. Be prepared to deal with a lot of paperwork and to spend 10 months, give or take, to get to closing. Outside of this option there is not a deep market for what was once known as a “stretch senior” construction loan, although a couple programs exist targeting larger deals. The vast majority of the many non-recourse bridge lenders out there are not doing con- struction, and that’s probably a good thing to keep everyone honest in a market awash in capital. Banks have been sticking to their guns, and on loans of any kind of size ($5 million and up) expect to cap out at 75% max loan to cost, and maybe less depending on the numbers. It should be somewhat com- forting to know that in an envi- ronment where things can feel a little “pushed” there are still a number of ways to achieve very aggressive loan amounts. As long as these stars continue to align, expect to see values to continue to rise. R. Brenner Green is a 20-year veteran in com- mercial real estate finance and president of Real Property Capital, Inc., a full-service commercial mortgage banking firm based in the Philadelphia suburbs. MAREJ
ed in achiev- i n g ma x i - mum l o an proceeds as their prima- ry or second- ary objective in a given f i n a n c i n g assignment,
Brenner Green
this is acutely the case in multifamily following a de- cade of continually plunging
Recently Closed Loans
$44,995,000 108-Unit Multifamily HUD-221d4 Loan
Philadelphia, PA 3.10%, 40-Years 87% LTV, Non - Recourse
Real Property Capital is a Philadelphia based full service commercial mortgage banking firm with a regional focus and national capabilities. Our business model emphasizes client satisfaction through a high-touch, analytical approach that distinguishes us from the competition. Learn more about our distinct approach and proven track record of success at www.realpropertycapital.com. FOR MORE INFORMATION: R. Brenner Green, President 303 Harry Street • Conshohocken, PA 19428 • 610 - 456 - 9644 • bgreen@realpropertycapital.com
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