July 8, 2015
Times are good for developers looking to enter the acq–rehab business or seeking to expand their presence in the space. Market-rate multifamily bridge lending is becoming increasingly competitive across the country, as more and more capital and lending platforms target the niche’s attractive, risk-adjusted yields while accommodating resilient demand for value-add project financing. Accordingly, the space’s liquidity bonanza is blessing well-capitalized bridge borrowers with narrowing interest-rate spreads, smaller loan-origination and exit fees, and liberalized recourse requirements.
As market participants are quick to point out, however, lenders are steadfastly holding the senior-debt leverage line at 80% loan-to-cost, despite the intensifying competition, a factor said to bode well for preventing prodigious repayment problems in coming years.
The already-crowded bridge lending fray seems to be attracting optimistic new players persistently, as platforms are able to secure attractively priced capital from a broadening array of sources. Beyond deposits taken by banks and related institutions expanding in the space, some of the upstart bridge lenders are securing warehouse credit lines as well as backing from institutional investors.
Meanwhile, a few sophisticated lenders are once again tapping secondary markets by issuing collateralized debt obligation (CDO) and collateralized loan obligation (CLO) securities. And at least one new vehicle is aiming to raise public equity through a business development company (BDC) corporate structure not previously seen in pure-play commercial real estate lending.
Perhaps a sign of the times, even a few newfangled crowdfunding platforms are looking to leverage newly liberalized investor participation rules into active income-property bridge-lending operations. Hence, it arguably goes without saying that rehab specialists—and other borrowers seeking short-term financing—can expect even tighter pricing quotes in the coming months.
“It does seem like we’re regularly running into some new competitor in the bridge space,” observes veteran commercial property finance specialist Joe Charneski, a vice president in Arbor Commercial Mortgage’s New York City office, who regularly arranges apartment bridge loans from the affiliated Arbor Realty Trust mortgage REIT.
“It’s clear there’s substantially more liquidity in bridge lending today, in the multifamily sector in particular, than was the case two years ago,” adds high-volume mortgage banker Aaron Appel, managing director in JLL Capital Markets’ New York City office. As a result, multifamily specialists can attract the most competitive quotes for value-add and other “transitional” strategies, including acquiring sites for future development/redevelopment and, in some cases, even buying development projects still in lease-up, Appel notes.
The intensified competition continues to crunch multifamily bridge spreads, with quotes today generally coming in anywhere from 350 to 550 basis points over the 30-day LIBOR variable-rate index, depending on multiple risk factors: project sponsorship, property condition, in-place cash flow, market fundamentals, use of proceeds, leverage level, recourse considerations, and lender type.
If even more lender platforms jump into the space in the coming months—as appears inevitable—it stands to reason that quotes would tighten even further, Charneski acknowledges. As he and others stress, however, tighter loan pricing alone doesn’t portend a return to the irresponsible rates and terms that helped spawn massive defaults when the Great Recession hit.
Although the increasingly competitive lending environment has already narrowed bridge-loan spreads by roughly 200 basis points over the past couple of years, quotes still remain far less aggressive than was the case during the two high-flying years before the recession tanked the real estate markets. And while lenders logically worry about more such distress if underwriting becomes overheated once again, experts concur that the marketplace, at least for the time being, is maintaining prudent discipline with respect to leverage levels and borrower scrutiny.
80% LTC Is Key
While Charneski occasionally perceives some bridge lenders quoting spreads that seem tighter than the risks of value-add ventures appear to warrant, the greater concern going forward pertains to potentially liberalized loan proceeds. If competition eventually induces numerous lenders to push first-priority mortgage proceeds beyond the prevailing 80% loan-to-cost maximum, and back to 85% or beyond, it may be time to stop breaking out the bubbly and start worrying about another burgeoning bubble.
But, again, the prevailing consensus is that active lenders, for the most part, are pricing and sizing bridge loans appropriately for corresponding risks. Just ask Norman Radow, the prolific value-add player and bridge-loan borrower who founded and heads the hyperactive, Atlanta-based RADCO apartment renovation operation.
“Back to 2006 and 2007, we could get senior bridge financing covering 90% of project cost priced at 200 [basis points] over LIBOR on a nonrecourse basis,” Radow recalls. “That’s not happening today; no one’s offering more than 80% in first-mortgage proceeds.”
The multiple bridge lenders with which RADCO works these days typically quote senior loans for value-add ventures at 350 to 400 over LIBOR at 75% to 80% LTC (loan to cost). That range factors to approximately 200 basis points narrower than Radow and company were seeing just a couple of years back but remains far wider than during the pre-recession environment.
The RADCO CEO also points out that bridge-loan origination fees have typically come down by half over that period, often to one-half point. And Radow bases his observations on considerable experience of late, as company affiliates have secured some $800 million in bridge borrowing in recent years.
Among numerous acquisition–renovation financings closed during this year’s first half, a RADCO entity in the spring paid roughly $31.16 million for the 424-unit Warwick West Apartments in Oklahoma City. RADCO tapped $30 million in senior bridge debt (factoring to a 0.795 LTC) from NXT Capital, a specialty finance firm with which RADCO has an extensive relationship. The new owners plan to invest $6.6 million into expanded amenities as well as interior and exterior improvements while rebranding the community under RADCO’s Ashford moniker.
And as JLL’s Appel emphasizes, bridge lenders today are offering only the maximum 80% senior-debt LTC ratio for value-add ventures to proven operators such as RADCO. Most are quite deliberately bifurcating borrowers into “haves” and “have nots” categories—with the latter set “unable to attract high leverage.”
That’s a dramatic adjustment from practices seen before capital markets melted down in 2008, Appel continues. “I’d say bridge loans are being priced appropriately relative to where interest rates are generally today, and leverage is being constrained prudently as well.”
Indeed, during those bubble years, Arbor’s Charneski likewise witnessed no shortage of financings featuring senior bridge debt equating to 90% of cost, with lenders and borrowers alike focusing insufficiently on ultimate exit strategies. “Not all of those deals worked out,” he understates.
These days, the Arbor REIT’s brain trust underwrites bridge loans with the exit in mind while limiting senior debt tranches to no more than 80% of a venture’s expected costs, Charneski stresses. Any additional mezzanine or subordinate debt taking overall leverage beyond that level is priced commensurate with the risk—typically at rates in the low teens, he explains.
Yields Draw Lenders
So what’s attracting so many new Arbor competitors to the multifamily bridge-lending space? Given the exceptionally low cap rates seen these days with equity investments in apartments, many capital decision makers perceive this point of the cycle as an opportune time to optimize risk-adjusted returns by shifting from equity toward bridge lending, Appel relates.
And, as longtime property-finance pro Steven Orchard points out in his latest Structured Finance blog, many newcomers to the space (and established players, as well) can leverage lending activities through credit lines at quite attractive rates amid today’s low-interest borrowing atmosphere.
Meanwhile, some sophisticated lenders boasting particular capital-markets expertise and relationships—the Arbor REIT and NXT among them—have once again begun leveraging lending activities by pooling bridge loans and other floating-rate credits into CLOs and CDOs, continues Orchard, a Los Angeles–based senior vice president in real estate services firm Transwestern’s Capital Markets Group.
“The re-emergence of CLOs and CDOs has significantly increased the supply of bridge debt financing and, thereby, reduced its cost,” Orchard reports. He adds that quotes on senior bridge loans from a growing roster of these “securitized” lenders are typically coming in at 400 to 500 basis points over LIBOR.
The upshot is that value-add and other short-term borrowers have the benefit of more and more institutional capital in the bridge arena, supplementing various other seasoned sources. “We meet new debt sources weekly,” Orchard observes.
Below are just a few of the latest bridge-lending platforms and related investment vehicles. Some of them also provide and/or arrange mezzanine and related secondary debt and preferred equity allowing sponsors to lever projects to 85% or 90% or more:
- Terra Capital Partners is looking to raise $1 billion in public equity for its proposed income-property BDC.
- Pearlmark Real Estate Partners is seeking $500 million for its latest debt-investment fund.
- Edgewood Capital Advisors is set to launch its latest fund, targeting $100 million.
- DoubleLine Capital’s Opportunistic CRE Debt Strategy will infuse hundreds of millions of dollars into Thorofare Capital’s bridge-lending platform.
- Columbia Pacific Advisors has secured a new, $50 million financing facility from a foreign bank with which to leverage its bridge-lending activities.
Orchard also notes that well-known institutional real estate advisors, including Heitman LLC, Walton Street Capital, and Madison Realty Capital, are thought to be collectively targeting billions in fresh capital for their respective in-formation debt funds.
Meanwhile, in June, liberalized SEC rules went into effect permitting more nonaccredited individuals to invest in crowdfunded assets. The expected greater capital flows will presumably prompt more interest from value-add specialists and other short-term borrowers in crowdfunding platforms offering income-property bridge debt, such as Realty Mogul and Money 360.
Nor should borrowers worry that the Federal Reserve’s seemingly inevitable boost to short-term interest rates will put a damper on the bridge-lending party. Given the long-prevailing low-rate environment, along with the short-term duration of apartment bridge loans, Arbor’s Charneski doubts a gradual boost in the Fed overnight rate would have much, if any, impact on activity in the multifamily bridge space.