COVER STORY, JULY 2010

LENDING MARKET EASES UP
Navigating the thawing multifamily lending landscape.
By Chris Pollard, LMI Capital

The multifamily lending market has regained some of its vibrancy, with both the number of lenders and available loan dollars increasing significantly from the depths of 2009.  Lending has not returned to peak levels, but debt is available for the right deal and the right sponsor.

Hudson Realty Capital arranged a $9.17 million loan for a 370-unit, garden-style apartment in Austin. Turn to page 8 to read about more recently completed loans.

Lenders remain cautious and the CMBS market is still constrained, but we continue to see new lending sources. Existing banks and insurance companies are re-entering the market with new capital and the capacity for new commercial real estate loans. Today’s debt is far more conservative than debt during pre-crash levels, with lenders requiring more equity, higher debt service coverage ratios and shorter amortizations. However, debt is available, which is a positive step from 2008 to 2009, when the credit crunch had choked off many lending sources, and lenders and borrowers alike were trying to figure out which direction the market was heading. 

Of all the food groups, multifamily seems to be gaining the most traction in the current market. Not coincidentally, multifamily is the only product type that has a defined and underwritable exit strategy stabilized via Fannie Mae, Freddie Mac and FHA. We are seeing banks return to the market offering floating and fixed rate bridge loans at leverage levels between 65 to 75 percent of cost for transactions with fresh equity. For stabilized deals, the life insurance companies, CMBS shops and agency lenders are all viable options and are offering highly competitive rates for non-recourse permanent fixed rate debt.  Although we are not seeing the same hyper leverage that was prevalent in the market just a few years ago, lenders are getting more comfortable with today’s values and fundamentals and are closing deals at 70 to 80 percent leverage on quality assets.

After pulling back in 2009, Fannie Mae is starting to open up again in pre-review markets like Houston, and for those properties that qualify, the terms can be highly competitive.  In markets that do not require pre-review, Fannie Mae remains an extremely viable option. Likewise, Freddie Mac is an appealing option for stabilized assets.

Although credit is loosening, leverage remains an obstacle for refinance transactions.  Loans maturing in this environment are typically higher-leveraged loans; obtaining the necessary proceeds to pay off the existing loan at today’s lower values remains a challenge. Some lenders are more accommodating than others, and savvy borrowers need to align themselves with knowledgeable professionals to work on their behalf to structure a solution.

A departure from past attitudes, the quality of the borrower is more crucial than ever, as lenders are underwriting borrowers as closely as they are assets. Loans are more readily available for experienced sponsors with a track record of success, a strong balance sheet and high levels of liquidity. Obviously not every borrower meets these standards. The emphasis on these factors varies by lender. Non-recourse lenders are typically more concerned with the owner’s operating history and strong property performance, while recourse lenders place a greater emphasis on the borrower’s balance sheet and contingent liabilities.

For loans that fall outside the traditional categories, such as note purchases, alternative lending sources are increasingly available. These lenders charge a premium for the risk — often in the mid teens, overall — but they can be a valuable tool in putting together a deal for a distressed asset or other unique opportunities.

While the lending market remains challenged, challenged is a huge step up from dormant.  Loans are getting done. The secret to securing a loan today is taking a hands-on approach, possessing a problem-solving mentality, and employing a creative approach to the capital stack. With a keen understanding of the deal and of market dynamics, most properties are financeable for quality borrowers. 

Viable lending sources are constantly changing, with new lenders entering the market and others pulling back or reevaluating their parameters based on their individual portfolios.  It is imperative to monitor the market. Intermediaries ensure that you are able to find an appropriate fit, as the right lender for a property last month may not still be a viable option today.

The lending environment should continue to improve over the coming year, but challenges remain. Many lenders are still constrained by legacy loans. As lenders move these off their books, more liquidity will enter the market, but this is not a problem that will be fully resolved for several years. So while lending is not expected to return to the voracious levels of 5 years ago for some time, the upside is that the loans made today are much more likely to succeed.

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