April 13, 2021

Capital Corner: Bridge lending fuels borrowers and lenders in multifamily market

The increase in bridge lending transactions, along with the increase in the number of lenders operating in the bridge space, accelerated throughout 2020 and continued its trajectory into 2021. Across the country, we’re seeing this financial tool become a critical piece of most business plans, providing accretive leverage while allowing the borrower maximum flexibility to make improvements and then transition into permanent financing or sell to move onto the next asset.

When considering bridge loans, borrowers should consider these questions before landing on the right lender:

Will the bridge lender be cooperative and conducive to your business plan? Will they allow flexibility to adapt in a changing market? Do they have the relevant experience to handle future fundings accurately and on time?
Will it be easy to convert the bridge financing into either permanent financing or help sell the asset, depending on your business plan?
Does the bridge structure offer the best fit for your business plan? Not all bridge lenders are created equal – including leverage and pricing and flexible prepayment terms. Banks typically will only offer 60% LTV while some bridge lenders are offering up to 85% LTV with non-recourse. Future funding will support the value-add strategy, although the processing of the future funding component is critical and not offered by all lenders or loan servicers.
Do you have the most flexible exit? What fees are added at different stages of the loan? Rates and proceeds are often major factors when selecting a lender but the fine print matters.

We’ve seen an increase in competition from lenders offering bridge programs, with more and more life companies entering the space each month. All lenders – just like all borrowers – are fighting for as much multifamily product as their portfolios can hold, and bridge lending gives lenders a new way to gain market share.

With that competition comes more choices for borrowers, especially in high-growth markets. Bridge lenders are pursuing transactions with increased leverage, minimized pre-pay and lock-out costs; most are non-recourse.

While the majority of bridge lending goes toward assets in the renovation value-add category, the product is also applicable in new development when a project is in lease-up, some borrowers will take extra time to get the underwritten rents or burn-off concessions prior to entering into a fixed-rate loan. A bridge loan allows them to exit the bank loan and have time to execute the business plan if needed with minimal recourse and maximum flexibility.

If the business plan calls for long-term holds, then life company lenders will offer the most flexibility to convert into permanent financing or offer a structured one-closing loan. If the business plan relies on the value-add/lease-up and sell strategy, it’s important that the lender leverages their loan servicing partner to manage construction draws, due diligence, and insurance.

NorthMarq’s advantage is access to marketing-leading capital, the best transaction professionals, paired with the best loan servicing team. Our combined team carries deep relationships with more than 50 life companies along with white-glove service on construction draws, insurance coverage, and personal onsite inspections from our 40 local offices.

A busy month for GSEs

Freddie Mac update

Freddie Mac has seen a lot of competition from bridge lenders and debt funds, and has reacted by lowering spreads by over 30 bps in the past several weeks.
Freddie is still focused on collections and aged receivables, particularly with the extension of the eviction moratorium.
As a reminder. Freddie allows borrowers to lock in your Index Rate during due diligence.

Fannie Mae update

Fannie Mae has recently started lowering rates, with most loans seeing spreads reduced by as much as 20 bps from this time last month, which has provided some welcome relief as US Treasury rates continue their slow climb.
Additionally, COVID reserves have been eliminated on most Tier 3 debt, and significantly reduced on some Tier 2 debt (generally acquisitions and/or repeat sponsors), which results in more loan proceeds for our clients at the closing table.
Fannie Mae has released a new loan product: Sponsor Initiated Affordability (SIA) allows borrowers to voluntarily enter into a regulatory agreement that restricts at least 20 percent of units to tenants making no more than 80 percent of AMI. Doing so provides significant benefits to loan pricing and may allow some flexibility in loan sizing. The regulatory agreement will be administered by Fannie Mae and will remain in place for the life of the Fannie debt. The pricing benefits for utilizing this loan product could be as much as 45 bps off conventional spreads, with additional reductions possible for more restrictive regulatory agreements (ie. greater than 20 percent set aside).

FHA/HUD

The 2020 FHA MAP Guide became fully implemented on March 18, 2021. As expected, FHA experienced a wave of loan applications as lenders scrambled to submit transactions prior to March 18 in order to benefit from the more favorable “green” requirements that were in place under the previous version of the MAP Guide. This surge in activity has further impacted the queue that was initiated by FHA earlier this year to assist in managing a record flow of application submissions. While the implementation of the queue has lengthened the processing time of FHA transactions, it does allow lenders the ability to track their submissions and have a timeline for when a transaction will be assigned to a FHA underwriter.
Overall, activity continues to be robust. Borrowers continue to be attracted FHA’s high leverage option (max. 85% LTV/LTC) with the ability to potentially finance 100 percent of cost on newly completed properties. Interest rates have remained steady over the past 30 days and the 35-year amortization for a refinance/acquisition loan (40 year for new construction projects) continue to be the most attractive in the market.