Todd Goulet
The consequences of the credit crisis — massive layoffs and downsizing — are hitting the multifamily market with a one-two punch. Sandwiched between reduced demand and increased supply, many apartment building owners are seeing decreased cash flow in this economy. Even for owners of apartment buildings with sound fundamentals, the quest for capital remains a challenge. Now many apartment building owners who attempt to refinance debt are finding that traditional wells of capital have dried up.
GOOD NEWS FROM FANNIE MAE AND FREDDIE MAC
But there is good news in this sector: agency financing through Fannie Mae and Freddie Mac. Despite the dire headlines and government intervention last year, the agencies continue to provide capital, and banks that have strong relationships with the agencies can continue to lend to apartment and senior housing facility owners of properties with good fundamentals.
While some apartment building owners have been reluctant to deal with Fannie Mae and Freddie Mac, fearing miles of red tape and an impenetrable government bureaucracy, tough times require open minds for new solutions — and the processes at the agencies are a lot simpler than many building owners realize. The concern is understandable, but it is important for borrowers to know that the agencies have taken steps to make sure not only that capital is available, but also that loans can close in a surprisingly rapid timeframe — as little as 60 days. In addition, the cost of capital with Fannie Mae and Freddie Mac in today’s lending environment is significantly lower than terms building owners can get elsewhere. Ten-year fixed-interest rates hover around 6 percent, and with the LIBOR at historically low levels, variable rates can be below 4.0 percent.
DEBUNKING THE MYTH OF RED TAPE
Contrary to the myth of walking through a government labyrinth, it takes only four simple steps from loan application to closing to access agency capital through a licensed lender:
STEP ONE: CONSULTATION
The first step is to consult a financial institution with strong agency relationships. Fannie Mae and Freddie Mac in particular only offer financing through designated underwriting and servicing partners, not directly to borrowers. The financial institution can help the borrower determine if a multifamily project will qualify for an agency loan, and if so, what type. Fannie Mae and Freddie Mac offer various options of fixed- and floating-rate debt for both market-rate and affordable multifamily projects, and an experienced agency loan originator will be able to identify which option best meets the borrower’s financing objectives.
STEP TWO: APPLICATION
After determining the appropriate financing option, the next step is for the borrower to provide the necessary information to obtain a quote and loan application. The required documentation usually includes historical property operating statements, pro forma operating budget, current rent roll, a description of the project and the qualifications and financial strength of the sponsorship.
STEP THREE: LOAN PROCESSING
Once terms are agreed upon and the borrower signs a loan application, the lender will begin to process the loan. The borrower will be introduced to the deal team, which typically includes a loan processor who collects and distributes information, an underwriter and a closer. A new MAI Appraisal, Phase 1 Environmental Report and Property Condition Report will be ordered. Additional information will be required on the property, the borrower organizational structure and on the key individuals who will be borrowing the money. With the exception of standard “bad boy” carve-outs, agency loans are non-recourse to the individuals, which is another benefit that is difficult to receive with non-Agency financing. Processing costs, including lender legal fees, typically run around $25,000 for standard-sized transactions ($3 million and up). Some lenders also have small loan programs ($500,000 to $3 million) that offer a streamlined process and reduced costs. A good lender will set a schedule of periodic conference calls, typically weekly, where all parties involved will discuss progress, timing and any issues that may arise.
STEP FOUR: DOCUMENTATION & CLOSING
The fourth step is closing the loan. The agencies have been closing loans for decades and are adept at closings. The process has been refined and documentation has been standardized over time. There is very little negotiation required. This stage entails the legal documentation process, during which the lender’s counsel drafts loan documentation. Once the commitment letter is signed, documentation is finalized and the loan closes. The entire process can take as little as 2 months from start to finish: 2 weeks from loan application to rate lock, another 4 to 5 weeks for a firm commitment and 1 to 2 weeks from commitment to closing.
WHAT ARE BANKS LOOKING FOR IN A BORROWER IN TODAY’S MARKET?
Many borrowers today are at maximum capacity with their current lenders and are unable to refinance existing debt through other sources. Agencies, however, have capital to lend, and when banks offer agency solutions, the loans do not stay on that institution’s balance sheet. This means they can lend to qualified projects that make sound financial sense regardless of balance sheet concerns.
In today’s economic environment, lenders are being selective about the types of deals they close — even those that will be purchased by the agencies. Many small- to mid-sized apartment owners and developers are attractive borrowers. These types of borrowers are especially vulnerable as their traditional sources of capital have dried up. Many banks that have agency platforms are looking to start relationships with borrowers who will buy other cash management or investment banking products. Multifamily owners who are seeking new sources of capital should consider transferring the company’s operating cash deposits to banks with agency platforms and starting a relationship with the bank’s off-balance sheet products to obtain access to the bank’s precious balance sheet capital.
BACK TO BASICS
With the scope of deals dwindling, one thing remains the same — capital, the increasingly elusive commodity, is needed more than ever and is sought by lenders and borrowers alike. There is, however, a fast, surprisingly simple solution for multifamily owners: Agency financing for borrowers who partner with the right bank. For first-time agency borrowers, the process may seem intimidating, but remember that it is not as complicated as it sounds — and the cost of capital and turnaround time is attractive to all involved.
— Todd Goulet is a senior vice president with KeyBank Real Estate Capital. He is responsible for the management of commercial mortgage loan production in the Northeast U.S.