Capital Corner: Remaining Flexible With a Long-Term View

Like all of you, we are anticipating some changes to the current “stay at home” environment and the potential for some degree of normalcy when we start working from our office settings again. But like all of you, we are also cautious about making changes too swiftly and compromising potential economic recovery or recovery from this health crisis. We know that lenders are all trying to ensure they remain flexible and open for business, while also thinking through the longer-term investment goals for their business.

As lenders continue to adjust their business plans, we are advising our clients on their best capital solutions for each specific situation. Each week, we provide an update on how different capital sources are viewing the market to ensure that you are aware of new opportunities for financing.

NorthMarq’s FHA pipeline grows each week, with borrowers intrigued by the combination of long-term, higher leverage, and low rates. The total pipeline is skewed toward refinancings but new construction remains a viable execution. In fact, when the three-year rule ended in February, developers were finally able to refinance construction loans into a long-term permanent loan – up to 35 years – bringing many borrowers to FHA for the first time or the first time in many years at just the right time.

Terms with FHA remain attractive, with pricing reflecting 85% LTV, 1.17 DSC and rates around 2.75%. Borrowers are able to maximize leverage while also being able to take cash out at the low, long-term rate. The healthy FHA pipeline also represents a shift from other lenders that may have less attractive terms or have shifted away from some property types. HUD is allowing remote inspections but still requires physical property inspections before closing, which enables NorthMarq’s team to easily manage the process from the remote work setting.

NorthMarq’s FHA team works closely with the debt and equity professionals in local offices to provide hands-on, customer centric coordination of the loan process. While the loan timeline might be longer than other lenders, the benefits during this period of uncertainty remain attractive to an increasing number of clients.

Equity Investors
Institutional and private equity investors continue to pursue opportunities within today’s environment. Multifamily and industrial are the favored asset classes as accretive debt continues to be available from the agencies and insurance companies. Acquisitions, with market-adjusted terms, are in demand along with recap opportunities with high-quality sponsors. Investors seeking to purchase discounted notes are seeing traction within the last several weeks as many groups anticipate increased activity within this strategy.

Life Company Lenders
Life company lenders have continued to expand their programs as they are becoming more comfortable with pricing of their products. Pricing ranges from 3.00 to 4.40 percent depending on a variety of factors such as loan-to value, term, sponsorship and type of real estate. Hospitality and retail are two product types that will be facing the most headwinds over the course of the next few months. Last week, the National Association of Insurance Commissioners (NAIC) issued additional clarifying guidance on the life company risk-based capital treatment of loan modifications during the COVID-19 pandemic. The additional guidance should provide sufficient clarity for life companies making prudent loan modifications due to the effects of COVID-19.

Fannie Mae/Freddie Mac
Spreads from Fannie Mae and Freddie Mac have generally remained stable. Pricing has stabilized over the past several weeks, with borrowers able to lock in at historic lows. Mission-driven lending remains important and will continue to get the best terms for new business. The new underwriting guidelines are limiting some requests, but borrowers are trying to navigate the trade-offs in underwriting to secure great interest rates.

In Closing…
Each of our experienced debt and equity professionals is leveraging the full force of NorthMarq’s network to stay current with each lender, every day. We can find solutions even in today’s fluctuations, given our access to a vast, diverse capital sources, and can identify the best opportunity for transactions in today’s environment.