Will the best offense or defense win the Superbowl on Sunday? Your Multifamily investing Playbook is about playing defense while preparing for offense.
Trepp reports that $450 billion in multifamily loans will mature in the United States in 2023. My Trepp search shows Colorado has over $2 billion in maturing loans that account for over 6,000 apartments.
Interest rates have increased, and now loans are maturing. When your asset was purchased, the loan may have been 2.99%, now a refinance may be 5.15-5.75%. This requires a complex pro forma to make the best decisions, for sellers to accept new price discovery, and for lenders to believe in the new valuations.
CRED iQ states, “Outstanding debt figures comprise all securitized mortgages in CRED iQ’s $2 trillion commercial real estate database, including CMBS, Freddie Mac, Fannie, Mae, and Ginnie Mae loans. Looking ahead, the multifamily maturity wave picks up in 2024 with $49 billion in scheduled maturities.”
Most of my commercial real estate investment clients’ focus on yields when acquiring properties and returns when selling. Investors are savvy about the cyclical nature of real estate values and know when to sell and when to refinance. So, which one is best for you?
SELL
There are many aspects that may make selling the best option.
Your low-interest loan is maturing, and the return does not support refinancing.
The DSCR is too low, and the bank will require additional cash to support a refinance or extension.
Net sale proceeds provide higher returns with a new acquisition.
We have tools to work with you on a pro forma and provide a comparison of selling vs. refinance. We utilize the criteria that is most important to you, such as; NOI, IRR, Return on Equity, Yield, Cash on Cash, or maybe just passive income after debt.
Contact: Cheryle Powell, 720-330-4333, Cheryle.powell@SperryCGA.com, www.SperryCGA.com
REFINANCE
Your DSCR is favorable, and your lender is willing to extend
The expected return can be reached before the new loan matures.
There are no pre-payment penalties, and it makes sense to hold and refinance when the rates drop.
If you are interested in looking at other sources of capital, my friends at PlattPointe Capital are customer service-driven and provide many options for capital. Last week Creighton Bildstein wrote, “The Fed has made getting deals done substantially harder. That said, there's still money in the system, and we have options to help you get them done.”
His information provided tools to get deals done and stated the demand for capital would be enormous. Creighton dives into more detail on loan options, what they are, how to use them, and details on loan terms.
BRIDGE LOAN
What it is - A 3-to-24-month interest-only loan (may also be non-recourse).
What it’s for -
You have a property under contract to purchase with a hard money deposit that expires soon, and the bank can’t provide a loan quickly enough, they need higher leverage, and/or they want non-recourse.
Their current capital source is no longer doing real estate lending.
They have a partner they want to buy out but don’t want to refinance with a permanent loan with a floating interest rate and prepayment penalty.
Specifics -
Loan Amount: $5MM - $100MM
Time to Close: in as short as 3 weeks
Term: 3 months to 2 years
Interest only, no prepayment penalty, and non-recourse options
PREFERRED EQUITY
What it is- An injection of capital that's an investment in the ownership interest of the property’s equity, for which the investor receives special privileges in exchange for their investment, including a priority return of their capital. No waiting for the bank/lender, which can take months.
What it’s for-
Their bank or lender is telling them that the value of the property they want to acquire no longer meets the cap rate expectations of the seller, and they need to provide more equity to get a loan to buy it,
Specifics-
Capital Injection: $3MM - $50MM
Time to Close: 30 - 60 days
Term: 1 to 3 years
WORKOUT/RESTRUCTURING/RESCUE CAPITAL/ACQUISITION
What it is - When you have a client with dire issues with their real estate that only a significant capital injection will cure, rescue capital is the last resort. This can come in the form of a workout/restructuring, capital injection, or acquisition by one of our well-heeled third parties that may allow them to retain a small piece of ownership.
What it’s for
They have a property that must be sold, but more is owed on it than the property is worth.
The rate of their existing floating rate loan has increased and/or their net operating income has decreased due to higher operating costs, so their DSCR has decreased and they need more equity to meet the bank's covenant requirement.
They have a partially completed or failed project.
The senior lender is about to take back their property, and the only option is a workout/restructuring of the loan or selling the property/project.
Their LP investors want out of their investment in the property.
Other distress situations
Specifics
Time to Close: 3 weeks to 45 days
Contact: Creighton Bildstein, 303.589.4258, creighton@plattpointe.com, www.plattpointe.com