It’s becoming possible to find loans for troubled apartment properties even in weaker markets.
“It's a lot easier to finance almost any kind of asset than it was two or three years ago,” says Mitchell Kiffe, senior managing director and co-head of national production for the debt & equity finance group at CBRE Capital Markets. “There are plenty of capital sources out there.”
The most difficult properties to finance are still underperforming properties in weaker, rural markets. But as the capital markets heal and the balance of power shifts from borrowers to lenders, it’s increasingly possible to arrange financing even for these deals.
Power to borrowers
Lenders had a “very strong” appetite to make commercial and multifamily mortgages in 2013, while borrowers only had a “strong” appetite to take out loans, according to a survey of the top commercial and multifamily mortgage origination firms by the Mortgage Bankers Association.
Lender will to do even more to chase borrowers in 2014. “Borrowers’ appetites to take out new loans are expected to remain strong, but perhaps drop a bit from 2013 levels,” says Jamie Woodwell, MBA’s vice president for commercial real estate research.
“The resulting competition to lend leads originators to expect loan risk to increase marginally in the face of moderating returns.”
Conduit lending is quickly recovering, though is still not back up to its old levels. Wall Street firms issued roughly $85 billion in CMBS in 2013, less than half of the $230 billion a year issued in the peak year of the boom. Other lenders such as banks, life companies, and especially government-sponsored entities have made up the difference.
But even in these good times for apartment finance, it can still be difficult to find a mortgage in weak property markets where there are fewer capital sources. If your local bank is not interested in or able to finance your apartment property, consider a starting a new banking relationship. Borrowers willing to move their banking business to a regional bank may find the financing they are looking for. “These banks are not interested in one-off transactions. They are looking for longer relationships,” says Charles Krawitz, vice president for Marcus & Millichap Capital Corp.
Government loan programs can also help rural borrowers finance apartment properties. The loan programs of Fannie Mae, Freddie Mac, and Federal Housing Administration are designed to help provide liquidity to properties that need it – rural apartment properties would seem to fit squarely within the mission. Experts also have reason to hope that Mel Watt, the new head of the Federal Housing Finance Agency will not dramatically curtail Fannie Mae and Freddie Mac’s lending activities again in 2014. “The consensus is that he will be less focused on shrinking them by regulation,” says Kiffe. “The agencies will lend at the right leverage level.” For weaker, rural properties, this may be far below their stated maximum loan-to-value ratio or 80 percent.
Also the loan programs of the U.S. Department of Agriculture may be back in action in 2014. These programs suffered from unpredictable government funding levels through “sequester” budget cuts and the government shutdown.
A deal too far?
With so much liquidity available for apartments it can’t be too long before lenders reach too fart begin to make more risky deals. Lenders are already bending their own rules, building structure into their loans that allow them to take on more risk. “We are seeing more structure, faster than I thought,” says Krawitz. “Lenders are finding ways to get to ‘yes.’”
An older apartment property that needs refurbishment to raise its occupancies to the market level might still get a loan if the deal includes a significant capital reserve to pay for the repairs, for example.
But for the most part lenders still resist the urge to underwrite loans based on speculative, pro-forma rents and to offer borrowers very long interest-only periods, in which borrower pay just the interest on their loans and none of the principal.
This article was republished with permission from National Real Estate Investor.