Capital Corner: Creativity Drives Life Company Lending

As the fundamentals within the Multifamily market continue to outperform all investing metrics and the agencies continue to be more aggressive on acquisition and refinancing, life companies have followed suit with identifying new opportunities for financing properties across the country.

Those life companies are also evaluating all other property types to ensure that they are able to increase their exposure in commercial real estate, using equity, bridge lending, and traditional debt placement. Since life companies have the benefit of looking for investment in all property types, they are now offering more creative structures, more consideration of different asset classes and submarkets, and placing more importance on longer-term partnerships with the best performing sponsors.

Why they are getting creative
Life companies are flush with capital, and in the big picture, commercial real estate ranks high among the best performing investments. With that track record of capital flow, companies are vying for opportunities to create yield while fending off competition from the GSEs, debt funds, and the like.

In the process, borrowers are benefitting from these new options that offer much more flexibility.

A lot of companies are focused on decreasing the traditional long-term structures and improving flexibility for prepayment. For example, Voya has created a new program in the bridge to take-out space, partnering with NorthMarq to streamline the conversion from the three-to-five year money to a longer-term structure, and easing the burden for borrowers who want to renovate for improved long-term cash flow. However, the market frenzy often leads to a sale after renovation. Our partnership with Voya, in this example, provides flexible options for financing or sale after the bridge loan.

Much of the attention remains on multifamily and industrial, a consistent trend for the last few years. However, with the better-than-expected performance through the pandemic, retail properties, especially those with services and groceries, have become more appealing to life companies trying to diversify. Office properties, presumed to have a significant reduction in leasing as work-from-home opportunities were offered more broadly by corporate America, actually have held firm on occupancy. In most metropolitan areas, office properties, suburban and CBD, are coming back to life with renewed attention on the innovation and collaboration that comes from working in person in one place.

All industrial properties, the winning property type for the continued move toward online retailing, are attractive to life companies. The challenge is, of course, that industrial properties have a much smaller transaction value, requiring lenders to finance industrial at a roughly three-to-one margin over multifamily transactions based upon NorthMarq’s transaction pipeline.

Equity remains a critical part of the capital stack
Equity has always had a home within the life company investment strategy in CRE, but with the competition for debt placement, equity is now a huge differentiator for them. They can offer a one-stop-shop for high leverage loans, structuring the debt with an equity piece that closes at the same time.
Preferred equity and equity investing are accretive to the overall model, allowing them to invest with sponsors who have a proven track record. Most often they target repeat borrowers but more recently, they’ve branched out to find new partnerships across the country to fuel their returns.

Markets and property types
Historically, life companies have leaned toward newer product in larger markets. In this environment, they’ve been willing to look at workforce housing and suburban properties in first- and second-tier cities to help keep all of their capital oars in the water. They understand the strong fundamentals in workforce housing, especially after those assets generally kept strong cash flow during 2020.

To round out their multifamily investments, developers are now finding life companies much more willing to come at the pre-stabilized level of the new development cycle with semi-permanent loans. This happens before the certificate of occupancy, and helps developers get out of more restrictive bank debt and have more control of the capital structure for up to five years. Often, the menu from the lender could include a floating rate or a fixed-rate option within a shorter term, helping the borrower achieve their returns and meet the business plan.

The benefit for borrowers: Being best positioned gets the best structure
Life companies work to develop relationships, getting to know sponsors and investing more as a partner than a lender. The sponsors are able to leverage this partnership by having a consistent program and structure; the lenders receive a more efficient way to deploy capital than through an investment fund.

To be best positioned for the best term and structure, the sponsor’s capital advisor (like NorthMarq) should be able to offer a thorough historical perspective and any previous issues with the asset, along with education about the sponsor’s track record and history of performance with previous assets. This combination of the best team on the field and the broadest slate of capital sources offers borrowers the best execution at the end of the day.

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Jeffrey Erxleben
Patrick S. Minea