February 14, 2020
Multifamily developers and investors enjoy favored status from high-leverage financiers, according to Zachary Streit of George Smith Partners.
By Zachary Streit
(published in MHN MULTI-HOUSING NEWS February 12, 2020 https://www.multihousingnews.com/post/how-quality-sponsors-can-access-high-leverage-loans)
A healthy economy and a growing roster of capital providers looking for returns means high-leverage non-recourse financing is not only available, it’s a thriving subsector within the capital markets.
After nearly vanishing during the recession and the early years of the recovery, demand from high-leverage finance providers for multifamily projects that include either ground-up development or transitional, value-added business plans is strong.
Of late, deals we have solicited and closed have seen loan-to-cost ratios regularly hit or exceed 80 percent and have received multiple bids. These deals include both traditional multifamily and non-traditional deals, such as ground-up co-living requests and also single-family build-to-rent requests.
For example, recent closings include an 80 percent loan-to-cost, non-recourse, cash-out bridge financing on a 200-unit multifamily property, and an 80 percent loan-to-cost, non-recourse, ground-up construction loan for a 270-unit student housing development with nearly 900 beds. Notably, both closings were in secondary, non-core markets.
FAVORED CLASS STATUS
Multifamily developers and investors enjoy favored class status from high leverage financiers due to the resiliency the asset class demonstrated throughout the past economic cycle and housing shortages in many markets nationwide.
Typically, the multifamily deals attracting high leverage non-recourse financing are from entrepreneurial sponsors doing institutional-level deals. These are often mid-rise projects with equity partners that are either family offices or syndications, as opposed to institutional limited partners who will usually cap leverage at approximately 65 percent loan to cost.
While high leverage loans carry more risk, they also offer more reward. Less equity is required, and the return on equity can be substantially higher as a result.
The trade-off can also be seen through the prism of loan pricing. For full leverage requests of 80 percent or more, pricing ranges from 400 to 600 basis points over the one-month LIBOR rate, which is significantly cheaper than the cost of equity capital. For bridge loan deals at the same leverage ratio, spreads range from 250 to 350 basis points over the one-month LIBOR rate. While there is still a gap on non-recourse construction spreads vs. traditional recourse bank financing, the spreads on non-recourse bridge loans have compressed considerably and are often competitive with bank financings that could include some level of recourse.
Variables that will affect pricing include leverage level, debt yield, the location and strength of the sponsor and the associated business plan.
As with lower-leveraged loans, high-leveraged financing are secured by the property itself and the standard non-recourse guarantees (completion, carve-out and carry) generally apply. Sponsors should have an expert on their team who can verify there are no surprises in the loan terms. That expert can be a capital market advisor, who can also craft a marketing strategy that is likely to get the attention of multiple high leverage capital providers to ensure a competitive bidding process and also ensure a smooth and successful execution.
DUE DILIGENCE REQUIREMENTS
To best position a loan request, advisors will often recommend and facilitate a market study or appraisal, a clear description of the location and its demand drivers, a high-quality Excel model, a detailed representation of the sales and rent comparables and will need to provide information about the non-recourse guarantors’ track record and experience.
When hiring a capital market advisor, make sure to ask about their experience with all of these details, the depth of their contacts and about their success rate.
With the economy expected to remain strong and interest rates low for the foreseeable future, the outlook for securing high-leverage loans is good for quality sponsors. Assembling the right team to design and present the loan request is still essential, though.
Also, ensure that your team keeps an eye on market threats that could affect consumer confidence and, therefore, capital markets. Currently, those threats could include the Coronavirus as well as trade tariffs and tensions.
October 31, 2019
David Pascale is mentioned in the National Real Estate Investor story, “Another Interest Rate Cut Will Help Hold Up CRE Values, But Was It Needed?”
CRE cap rates are expected to remain unchanged, but investors looking for financing should benefit from lower rates.
The Fed signaled that no further cuts would be coming this year unless the U.S. economy experiences a significant slowdown. At the same time, the Fed is “not going to raise rates unless they see signs of heavy inflation, so the chance of another Fed rate increase is very minimal,” according to David Pascale, senior vice president with George Smith Partners, a Los Angeles-based commercial real estate capital markets advisory firm.
Click here for the full article: https://www.nreionline.com/finance-investment/another-interest-rate-cut-will-help-hold-cre-values-was-it-needed
October 28, 2019
October 28, 2019
Multifamily development continues to be a darling of the commercial real estate world as limited new supply throughout the cycle has driven higher rental rates and pushed vacancies to all-time lows. Multifamily real estate offers developers a unique value proposition with low retenanting costs, cheap debt, and limited cash flow volatility relative to other property types. As the top target for investors ‑ one that often offers the best risk-adjusted returns – multifamily construction has experienced significant investment over the past decade. Yet more recently, even with investors seeing multifamily housing as a safe choice, the outsized returns previously associated with ground-up development have fallen. At George Smith Partners, we have noticed that investors and lenders have reacted by shifting from construction to reposition strategies. This is the result of the narrowing gap between the return on cost (developers profit) and today’s cap rates for stabilized properties.
While cap rates for existing product have remained constant, construction projects have realized steady cost growth. Part of the cost increases were caused by oil and energy prices increasing in near lockstep with transportation expenses. Construction has been further hindered by unemployment reaching a record low, increasing the asking wages of skilled labor[i]. Furthermore, while ongoing trade tensions may be leading to lower global interest rates, the corresponding tariffs are making it more expensive to source building materials.
Investors are also facing changes in land values. Land which previously presented excellent return opportunities for developers with entitlement expertise now forward price to maximize entitlement value. This results in a lower degree of pricing differential between by-right, entitled, and permit ready projects. These price differences are disproportional to the degree of difficulty required for completion.
One consideration is that real estate cycles tend to have lengthy periods of supply and demand imbalances. Ground up developments characteristically require a time frame of several years, often misaligned with initial market conditions by lease-up. Buy side funds may be looking to hedge against a possible market downturn and are increasingly concerned about the risks associated with weaker future rents. This speculative activity, along with declining interest rates, appears like a leading indicator of a directional change in business cycle activity.
With the aggregation of increased physical good prices, shortage of labor, and high land prices, the return on cost (ROC) metric for apartments based on un-trended rents is often sitting within 50-100 basis points of today’s cap rates. Previously these same projects would mandate a spread of 150 – 200 bps between return on cost and cap rates. This has a major impact on markets that are in need of ground-up development projects. Los Angeles, for example, is currently experiencing a void of institutionally equity partners. In 2019’s California Department of Housing (HCD) review, California “should be building about 180,000 units per year to keep up with demand,” however according to Public Policy Institute of California, “construction permits for only about 93,000 residential units were issued over the last 12 months.”[ii] As the discrepancy widens, public policy may play a role. More affordable housing will flip to market rate and force the housing department to find ways to preserve the covenants protecting affordable multifamily rentals. Landlords are required to notify tenants three years before policy changes go into effect, but push back could challenge the timeline. If repositioning products become limited in their ability to displace or evict below-market-rate tenants, the risk for developers might galvanize ground-up again.
For now, favorable socioeconomics continue to drive needs for multifamily rentals. As costs for construction remain high, investors will continue to reach for the most easily achieved gains by seeking lucrative reposition products instead of risky ground up projects.
September 27, 2019
Agency Lending Caps Revive CMBS Market
“The federal government puts out allocation every year with Fannie and Freddie, and once they hit that cap, they go into bunker mode and only do deals that fit their mandates, which are typically affordable deals,” Jonathan Lee, principal and managing director at George Smith Partners, tells GlobeSt.com. “So, in order to save their allocation for the year, they are being a lot more conservative on the deals that they do. That is driving a lot of business to CMBS right now.”
Click here to read the full article.
January 7, 2019
Upgrades on deck for North City industrial park as competition heightens
Dec 21, 2018
“Clayton-based Green Street has closed on a $25.5 million bridge loan for its 55-acre St. Louis Business Center industrial park in north St. Louis. The loan was used to refinance two existing loans, cover closing costs and fund future costs associated with the park’s reposition,the advisory firm, Kyle Howerton of Los Angeles-based George Smith Partners, said.”
Click here to read the full article.
November 26, 2018
Antonio Hachem gives his insight to Connect Media regarding capital markets and the availability of cash-out financing in the current environment.
What qualities are necessary in an asset for a borrower to realize cash-out proceeds?
Lenders are more likely to be open to cash-out refinancing when the borrower is substantially invested into an asset. A borrower’s original basis in the property no longer matters. For example, in our recent Sacramento financing, the borrower had invested in extensive capital improvements and value-add renovations to keep the property competitive alongside market rate multifamily assets in the region. The lender sees this as substantial “skin in the game,” and is more apt to reward that investment with cash-out financing.
Click here for the full article, “How to Realize Cash-Out Opportunities in Today’s Economy”: https://www.connect.media/how-to-realize-cash-out-opportunities-in-todays-economy/
October 9, 2018
“Based on the market’s stable long-term growth fundamentals, we were able to identify a lender with a strong appetite for multifamily, and successfully secured a better solution for the Sponsor’s current financing needs, says Hachem. “As lender interest in this product type increases, borrowers are presented with a unique opportunity to redeploy capital. We continue to identify many opportunities for borrowers to realize substantial cash-out proceeds while still locking in a very attractive fixed rate.”
Click here to read the full article from Multihousing Pro, “George Smith Partners secures $17 million in non-recourse financing for 120-unit multifamily community in Sacramento”.
October 5, 2018
Shahin Yazdi, Principal/Managing Director of George Smith Partners, explains how Bridge loans may be the right financing strategy for value-add investors with a clear plan to increase property income.
“Value-add product is becoming harder and harder for investors to find in the current market. Our nation’s continued economic health has driven fundamentals forward, while high investment transaction volume, an influx of hungry capital and a healthy dose of foreign investment have driven up property prices in major metros throughout the United States. While the overall result is net positive for the nation, the challenge for commercial real estate professionals is that projects are becoming increasingly difficult to pencil”…
Click here to read the full article.
October 1, 2018
“There’s been considerable slowdown in the EB-5 market over the past two years. What was once a fertile and cheap source of financing for multifamily and hotel developers is now largely absent”. Great article on EB-5 written by Zachary Streit, J.D. M.S. Click here to read the full story from the September 2018 issue of Real Estate Forum.
October 1, 2018
What Advice Would You Offer Your Former Self About Navigating The World Of CRE Finance?
“First — build as many strong mentor relationships (male and female) as possible. Second — find the icebreaker. My young self HATED networking, mostly because I was inexperienced and just starting to build my track record. By chance I got over this when I started talking golf with some “old boys.” I wasn’t into golf at all but it was always on television at home and somehow I picked up knowledge of the game through osmosis. The conversation about golf was the icebreaker…
Click here to read the full article that was published in Bisnow.
September 17, 2018
When Southern California native Jonathan Lee, joined George Smith Partners (GSP), a leading real estate capital advisement firm in Los Angeles, in 2005, he was a relative newbie to the world of construction financing. Originally, he had set his sights on a job at the U.S. State Department. After graduating from the University of California, Los Angeles in 2001 with a degree in political science, he headed to D.C. where he worked as a foreign service officer at the Foreign Service Institute in Arlington, Va. for two years before tiring of the bureaucracy. He decided to return to the West Coast where he worked for the now-defunct MWH Development from 2003 to 2005 before landing at GSP, where he currently serves as a principal and managing director specializing in construction financing. Click here to read the full article.
August 20, 2018
Zack Streit, Vice President at George Smith Partners explains solutions for when your EB-5 raise has come up short.
There has been a considerable slowdown in the EB-5 market over the last two years. What was once a fertile and cheap source of financing for multifamily and hotel developers is largely absent. The two primary reasons for the slowdown are retrogression (over-allocation of visas to Chinese investors) and Chinese government capital controls. The wait time for EB-5 investors to obtain visas in the U.S. has doubled from a 3-5 year timeframe to 7-10 years…
Click here to read the full article as seen in the August 17, 2018 GlobeSt publication.
- About Us
- Our Team
- GSP Insights
- Contact Us