Multifamily Development Financing: Lenders Jockey for Position

The players in the multifamily development financing space are mostly the same, but how their pros and cons work out in practice continues to change.

As the sources of multifamily development financing—debt and equity—jostle for business, their strategies and products continue to evolve. These shifts have allowed debt funds to become more prominent capital sources and life insurers to strengthen their share of the market. In the meantime, commercial banks remain the primary source of debt for new multifamily projects.

On the equity side, investors are more inclined to seek a preferred debt position in the capital stack than an equity slot. Meanwhile, falling interest rates, the mutable role of CMBS, Opportunity Zones and the London Interbank Offered Rate phaseout are changing the game for developers looking for financing.

HIGH FIDELITY

When it comes to debt, commercial banks are recognized as the biggest source of financing for multifamily construction, according to Jay Maddox, principal with Avison Young in Los Angeles. Banks have returned to the main stage of multifamily development lending after pulling back three years ago due to overbuilding concerns. However, debt funds—such as Colony Capital and Square Mile Capital—are becoming more important as they offer more flexibility on terms and, typically, non-recourse loans, in response to which some banks have loosened their lending criteria.

In permanent financing, banks are also primary, along with Fannie Mae, Freddie Mac and the U.S. Department of Housing and Urban Development. Jeff Fastov, senior managing director at Square Mile Capital in New York, agrees with the hierarchy and outlines the fact that government-sponsored enterprises are not focusing on development currently.

In addition, “life insurance companies have become very aggressive” with respect to pricing and the result is that “a multifamily borrower has an increased selection of options now,” Maddox explained.

Alternative lenders like Square Mile, Fastov explains, focus more on the project itself: “We’re just making investments for funds.” The advantages of private players are the higher loan-to-value ratios and the shorter closing periods as opposed to traditional lenders, which thrive by fostering long-term relationships with borrowers.

Kyle McDonough, principal at Tower Capital in Phoenix, confirms that banks continue to prefer developers they already work with. Multifamily development is booming in metro Phoenix, and there’s lots of bank financing, but those banks “are laser-focused on the sponsor and their track record.”

ALTERNATIVE PARTNERSHIPS

The deal flow is so high that many banks have upped their minimum loan amounts, according to McDonough, who also emphasizes that banks still prefer recourse debt, though this typically burns down as stabilization hurdles—such as debt service coverage ratio thresholds—are met.

Fannie Mae and life insurers both focus on longer-term debt financing. “Fannie Mae’s competition with life insurers is mostly in the low-leverage space. Life insurers tend to focus on multifamily commitments with loan balances of $15 million or higher,” a Fannie Mae spokesperson told Multi-Housing News.  

Unlike banks, some life companies offer a participating mortgage. McDonough cites as an example Principal Real Estate Investors’ participating construction permanent program, under which the company provides up to 85 percent of the capital stack for a multifamily or industrial property. The borrower receives at least 51 percent of the property’s cash flow, while retaining more control than in a typical joint venture structure.

In joint ventures and other preferred equity, the private equity funds are the big players. A typical multifamily development would see a joint venture with 65 percent debt and 35 percent developer and equity investor (about 80 to 90 percent from the latter). In a twist, however, through seeking to reduce their risk, many equity investors are leaning toward preferred debt positions instead, according to Maddox. Family offices and high-net-worth individuals are also active on the equity side.

THE CMBS BOOST

CMBS was a big factor in multifamily loans prior to the recession, but now, their pricing is “not competitive regarding most multifamily projects,” Maddox explained. Moreover, they generally present onerous documentation requirements.

However, CMBS activity in the sector is expected to pick up significantly in the last quarter of 2019 as GSEs have slowed down since August, because they started running out of their annual allocations earlier than expected, McDonough says.

The recent interest rate cuts got some attention from borrowers and lenders. Mike McRoberts, a managing director at PGIM, notes that as interest rates come down, it becomes easier to make a deal work, though overall, the economic situation is not especially sensitive to interest rates right now. As a consequence, banks are starting to use floor rates and executives in the business expect this trend to grow.

HEADWINDS AHEAD

Opportunity Zones have not yet generated much momentum in the multifamily sector. Even though the industry recognizes the concept as necessary, given the shortage of affordable housing, there are still many questions that need to be answered. Underwriting is one aspect that is more problematic for OZ projects. McRoberts predicts that each specific zone will need one or more “stable anchors” in the form of a multifamily, office or retail project to get things rolling.

“We’re indifferent to them,” Fastov said, because Square Mile’s investors (such as pension funds and sovereign wealth funds) don’t pay taxes anyway. Fastov did express some concern that development decisions based on tax benefits tend to drive values up, and from a lender’s perspective, a higher loan per square foot increases volatility. “You’d rather have a lower loan per square foot, all other things being equal,” he cautioned.

Tower is working on an OZ multifamily project. “It’s extremely sponsorship focused,” McDonough added. Given the rules on OZs, “you’re going to be married to that person for 10 years,” he said.

The looming phaseout of the LIBOR index poses another complication for multifamily development financing. Many loans don’t have the language for alternative indexes, McRoberts points out. “The big institutions are taking this very seriously,” but smaller players could have problems because they’re not prepared.

“The goal is to mimic what LIBOR had done,” Fastov said, aiming to avoid basis risk. “The whole world is working to get this right.”

Though most borrowers are aware of the uncertainty around a LIBOR-indexed transition, many lenders and the GSEs continue to offer LIBOR-indexed multifamily lending products. “The recent flattening in the yield curve has appeared to have more of an impact in moving borrowers away from floating-rate executions [than concern about LIBOR has],” a Fannie Mae spokesperson told MHN.

As to the future, Fannie Mae reports that life insurers’ loan volumes are increasing slightly year-over-year. Fastov predicts that going forward, both debt funds and GSEs will be increasing their market shares.

McDonough expects that multifamily financing overall will remain plentiful. “Everybody’s trying to get it out the door.”

Read entire article on MHN

America’s Commercial Real Estate Podcast

Adam Kinkel offers great insight on the “Commercial Real Estate Financing” show.

Finance can be a barometer for future activity in real estate, and lower interest rates and a prolonged cycle are generating interest in the debt market. Michael and his guests discuss the impact of lowered rates, lender sentiment, and tips for commercial real estate and SBA loans.

Click here to view the podcast

11 Tips For Building A Real Estate Brokerage Firm From The Ground Up

If you’ve worked as a real estate broker, you may have considered starting your own brokerage firm. Opening your own firm can lead to increased freedom as well as financial opportunity. However, like any entrepreneurial endeavor, building a company from the ground up can be a daunting task.

Members of Forbes Real Estate Council know about the challenges of establishing a new firm—as well as how to overcome those challenges successfully. Below, members share the most important things to remember when starting your own real estate brokerage. Here is what they advise:

5. Commit To Your Clients

When building a brokerage firm from the ground up, it is important to always maintain a commitment and focus on the client. Building a brand reputation is key in the early stages of any business. By maintaining a client-centric approach and executing beyond expectations, a new brokerage firm is sure to gain market share through repeat business and referrals. – Adam FinkelTower Capital, LLC

Read entire article on Forbes

Phoenix Sees Surge in Capital Placement at Start to 2019

Tower Capital closed $27 million in transactions the first quarter, and have $150 million built up in the pipeline to close in the second quarter.

At the start of the year, there was strong capital activity in the Phoenix market. Tower Capital, for example, closed $27 million in capital transactions and has another $150 million in the pipeline to close in the second quarter. According to the firm, low interest rates, strong population growth and out-of-state investment—thanks to higher yields than in other markets—is driving the increased capital activity in the market.

“There is significant demand from both local investors who can locate the hard to find off-market deals that others may miss, along with significant demand from out of state investors,” Adam Finkel, principal at Tower Capital, tells GlobeSt.com. “We are seeing tremendous activity from investors throughout California, Vancouver, and Toronto, where cap rates are incredibly low. Phoenix has many strong economic drivers as well as warm climate, which keeps activity strong.” Tower’s transactions in the first quarter include acquisition financing, cash-out refinancing and bridge deals. The volume is significantly higher compared to the start of 2018 and higher compared to the company’s historical average. “Our deal volume is up significantly over last year, which was already a stellar year for production,” says Finkel. “This year we have consistently had three to four time more transactions in closing than our historical average, and as soon as one closes another one takes its place. The number of capital advisors we have has grown as well, contributing to the increase in production. But anecdotally all of our capital partners seem to be incredibly busy right now. Last year Tower Capital closed just under $200 million in loan origination volume and this year we anticipate $300-plus million.” Most investors are taking advantage of the low interest rate environment, and Finkel says that most clients are looking to lock in low rates. “Most investors realize we are in an incredibly low interest rate environment,” he says. “On stabilized assets, our clients are mostly seeking to lock in long term, low interest rates, with possibly some interest-only payments on the front end to increase cash flow, which can be applied towards property renovations. In addition, the demand for bridge loans on value-add repositionings is very high.”

This has also fueled the market for redevelopment projects and construction financing. “We are still seeing many older, or partially-renovated properties, being given much higher end capital improvement packages than we have seen people get away with in past years,” says Finkel. “Now that we are in a more mature market cycle, the value-add investors really need to step up their game in order to attract the higher paying tenants over their area competitors. The bridge lending space is extremely competitive right now and we have numerous options for these types of projects.”

Looking ahead to the second half of the year, Finkel expects the activity to remain strong, especially as the economy is expected to remain strong and interest rates low. “Despite political uncertainty, the overall economy is strong and the local Phoenix economy is very strong,” he says. “As long as interest rates remain low I do not foresee the activity subsiding in the second half of 2019.”

By Kelsi Maree Borland | May 14, 2019 at 04:00 AM

View article online: GlobeST.com

Tower Capital Closes More Than $27 Million at the Beginning of Q2

Tower Capital has had a tremendous start and has closed a variety of deals totaling over $27 million. The team also has a pretty robust pipeline for the rest of Q2 and are expected to close over $150 million or more. I’ve included the most recent deals below for your reference.

View article online: Commercial Executive Magazine

Is A Local Market About To Grow? 13 Signs To Watch For

Real estate is often unpredictable. The market ebbs and flows, and it can be difficult to stay on top of everything. However, as a real estate professional or prospective investor, it’s crucial to know your local real estate trends before making any moves.

While it remains an inexact science, there are a number of clues that can help you determine whether a local market is on the verge of heating up. To find out more, members of Forbes Real Estate Council share some factors they look for. Here’s what they said:

12. Population Inflow
Whenever there is net migration into a particular market, that market will generally experience growth. This is because all of these new people need places to sleep, work, shop, eat, etc., which increases the demand for housing and commercial real estate. When supply is constrained, new supply is created, hence encouraging the market cycle to keep moving. – Adam FinkelTower Capital

Read entire article on Forbes

Seven Key Factors To Consider When Planning Annual Real Estate Goals

One major factor when planning yearly goals is gathering, and then making the most of, information in order to make the best possible decisions. The real estate market is constantly shifting, with changes in policies, interest rates and economic trends shaping the months to come. As such, professionals looking to stay ahead of their competitors need to stay up-to-date on current events and market trends in order to make the best real estate decisions.

However, with so many data points to choose from, focusing on the right factors for future success can be difficult. To help you decide which areas to keep in mind when making decisions, we asked members of Forbes Real Estate Council to discuss the key factors and top strategies for planning out yearly goals in real estate.
Here’s what they said:

6. Sensitivity Analysis
Investing in commercial real estate most often involves a multiyear strategy. It is important to have a well-thought-out business plan and to run sensitivity analysis on factors affecting the disposition of the asset, such as exit capitalization rate and the potential interest rate environment. A prudent investor should also be wary of using too much leverage in case the market conditions turn and warrant a longer holding period or other changes in the business plan. Thorough due diligence and an understanding of the local market should negate any short-term issues that may arise. – Adam Finkel, Tower Capital

Read entire article on Forbes

Seasons And Real Estate: 13 Things To Consider When Buying Or Selling

There are a lot of factors that can impact real estate trends, including the time of year. The market’s ebbs and flows are often dictated by the seasons: For instance, summer months might be busier than winter, while the winter holidays can lead to a slump in sales, or the inverse, depending on the type of property or region.

As a real estate professional, you need a firm grasp on how the changing seasons impact your local market. Here’s how the experts of Forbes Real Estate Council recommend taking advantage of the current time of year when handling clients and investments.

11. Financially Prepare For Seasonal Downturns

Being prepared ahead of time for changes in market conditions is important for prudent investors. Utilizing moderate leverage is the best way for an investor to protect themselves if a downturn occurs, enabling them to refinance or divest of the asset without incurring a loss. In addition, high cash reserves allow investors to swoop in for discounted properties while others are running away. – Adam FinkelTower Capital

Read entire article on Forbes

On the move at Tower Capital, VMI, M&G, Barrow, Berkshire Hathaway

Principal at Tower Capital joins Forbes Real Estate Council

Adam Finkel, Principal at Tower Capital, a leading commercial real estate structured finance company, has been accepted into Forbes Real Estate Council, an invitation-only community for executives in the real estate industry.

Mr. Finkel was vetted and selected by a review committee based on the depth and diversity of his experience. Criteria for acceptance include a track record of successfully impacting business growth metrics, as well as personal and professional achievements and honors.

“We are honored to welcome Adam into the community,” said Scott Gerber, founder of Forbes Councils, the collective that includes Forbes Real Estate Business Council. “Our mission with Forbes Councils is to bring together proven leaders from every industry, creating a curated, social capital-driven network that helps every member grow professionally and make an even greater impact on the business world.”

As an accepted member of the Council, Adam has access to a variety of exclusive opportunities designed to help him reach peak professional influence. He will connect and collaborate with other respected local leaders in a private forum. Adam will also be invited to work with a professional editorial team to share his expert insights in original business articles on Forbes.com, and to contribute to published Q&A panels alongside other experts.

View entire article on AZbigmedia >

Adam Finkel accepted into Invitation-Only Forbes Real Estate Council

Adam Finkel, Principal at Tower Capital, a leading commercial real estate structured finance company, has been accepted into Forbes Real Estate Council, an invitation-only community for executives in the real estate industry.

Mr. Finkel was vetted and selected by a review committee based on the depth and diversity of his experience. Criteria for acceptance include a track record of successfully impacting business growth metrics, as well as personal and professional achievements and honors.

“We are honored to welcome Adam into the community,” said Scott Gerber, founder of Forbes Councils, the collective that includes Forbes Real Estate Business Council. “Our mission with Forbes Councils is to bring together proven leaders from every industry, creating a curated, social capital-driven network that helps every member grow professionally and make an even greater impact on the business world.”

As an accepted member of the Council, Adam has access to a variety of exclusive opportunities designed to help him reach peak professional influence. He will connect and collaborate with other respected local leaders in a private forum. Adam will also be invited to work with a professional editorial team to share his expert insights in original business articles on Forbes.com, and to contribute to published Q&A panels alongside other experts.

Finally, Adam will benefit from exclusive access to vetted business service partners, membership-branded marketing collateral, and the high-touch support of the Forbes Councils member concierge team.

“I’m incredibly excited to be joining the Forbes Real Estate Business Council. This opportunity allows me to reach more people with my ideas and opinions, and provides additional exposure for Tower Capital as we further cement a leadership role in the community.”

ABOUT FORBES COUNCILS

Forbes Councils is a collective of invitation-only communities created in partnership with Forbes and the expert community builders who founded Young Entrepreneur Council (YEC). In Forbes Councils, exceptional business owners and leaders come together with the people and resources that can help them thrive.

For more information about Forbes Real Estate Business Council, visit forbesrealestatecouncil.com. To learn more about Forbes Councils, visit forbescouncils.com.

View article In Business Phoenix