REQUIRED READING: Know Your GSE Multifamily Processes And Products

Written by Todd Goulet
on June 26, 2009 No Comments
Categories : Required Reading

sequences of the credit crisis are hitting the multifamily market[/b] in spite of its strength compared to the other commercial property sectors. Caught between reduced demand and increased supply, many apartment building owners are seeing decreased cashflow in this economy. But even for owners of apartment buildings with sound fundamentals, the quest for capital remains a challenge. Brokers are seeing fewer deals, and bankers have less capital to lend. Historically, everyone benefited from a good mix of deal activity. Now, however, many apartment building owners who attempt to refinance debt are finding that traditional wells of capital have dried up. Finding capital for multifamily transactions still tends to be easier than finding capital for other commercial property types, thanks to 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 owners and owners of seniors housing facilities with good fundamentals. Even as they recognize the agencies may be the only game in town, though, many borrowers still have concerns. Some apartment building owners and developers have been reluctant to deal with Fannie Mae and Freddie Mac, fearing miles of red tape and an impenetrable government bureaucracy. However, tough times require open minds for new solutions, and the specific deal processes at the agencies are a great deal simpler than many borrowers recognize. The concern is understandable, but it is important for both lenders and 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 from Fannie Mae and Freddie Mac in today's lending environment is significantly lower than what is available elsewhere. Ten-year fixed interest rates are below 6%, and with the LIBOR at historically low levels, variable rates can be below 4%. [i][b]No labyrinths here[/b][/i] Contrary to the myth of walking through a government labyrinth, it takes only four basic steps to travel from loan application to closing when accessing agency capital through a licensed lender: consult, apply, process and, finally, document and close. The first step is to consult a financial institution with strong agency relationships. Fannie Mae and Freddie Mac, of course, only offer financing through designated underwriting and servicing partners, not directly to borrowers. The selected 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. An experienced agency loan originator will be able to identify which option best meets the borrower's financing objectives. 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, a pro forma operating budget, current rent rolls, a description of the project, and a list of the qualifications and financial strength of the sponsorship. 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. Then, a new appraisal (prepared by a member of the Appraisal Institute), a Phase 1 Environmental Report and a Property Condition Report will be ordered. Additional information will be required on the property, the borrower organizational structure and the key individuals who will be borrowing the money. With the exception of standard bad-boy carve-outs, agency loans are nonrecourse to the individuals – another benefit that is difficult to find 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. An attentive lender will typically set a schedule of periodic conference calls, usually weekly, where all parties involved will discuss progress, timing and any issues that may arise. The fourth step is closing the loan. Fortunately, 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. Moreover, there is very little negotiation required. This stage involves 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 two months from start to finish: two weeks from loan application to rate lock, another four to five weeks for a firm commitment, and then one to two weeks from commitment to closing. [i][b]Banks' standards[/b][/i] The most undervalued aspect of choosing a lender in this space is experience. During the boom from 2002 to 2007, the chief criterion for choosing financing options was the attractiveness of the loan terms. Today, of course, there are fewer options available, and finding financing is a challenge – regardless of terms. A bank's experience working with agency partners becomes critically important in such an environment to ensure the borrower receives the needed capital. It is important to determine whether your lender has the necessary experience to quickly and efficiently secure agency financing. Does the bank's relationship with Fannie and Freddie pre-date the credit crunch or did the firm back into agency lending as a last resort? 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. As a result, banks can lend to qualified projects that make sound financial sense regardless of balance-sheet concerns. What this means to a borrower is that even if a bank's on-balance sheet lending division cannot help, its agency group may be able to do the deal. That being said, 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 can be vulnerable if 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. For first-time agency borrowers and the brokers guiding them, the process may seem intimidating. Remember that it is not as complicated as it sounds, and the cost of capital and turnaround time is attractive to all involved. [i]Todd Goulet is a senior vice president with KeyBank Real Estate Capital, where he is responsible for the management of commercial mortgage loan production in the Northeast U.S. Goulet can be contacted at (617) 385-62

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