For borrowers whose long-term business plan relies on the various benefits of agency financing, a reasonably priced bridge loan that offers a flexible exit strategy is an excellent short-term alternative. To bring the most value to their multifamily-investment clients, brokers need to be able to navigate difficult scenarios and understand the
constraints of a situation.
According to a December 2015 report from the Congressional Budget Office (CBO), about
one-third of the more than 100 million renters in the U.S. live in a multifamily property. Multi-family assets comprise more than 14 percent of all housing in the country and serve as homes
for many low- and moderate-income families.
For this reason, the U.S. government has an interest in making sure there is sufficient liquidity for the acquisition, refinancing and renovation of multifamily properties. Guarantees made
by the federal government through a variety of agencies — including government agencies
like FHA and indirectly through government-sponsored enterprises Fannie Mae and Freddie
Mac — have bolstered the multifamily market.
Agency-based loans provide an attractive nonrecourse option for multifamily investors. With
loan-to-value (LTV) ratios as high as 85 percent, fixed interest rates as low as 3 percent and
terms as long as 35 years, there are many reasons why agency loans are so popular. In addition,
the introduction of the Freddie Mac small-balance loan program in 2014 expanded some of
these benefits to loans as small as $1 million.
Many nonagency permanent loans place market restrictions on properties that agency
loans do not. An FHA loan, for instance, comes with no population or geographic restrictions.
This expands the inventory of apartment buildings that a borrower can consider purchasing. In
addition, the age of an asset is not as important to an agency lender as it is to other permanent
lenders, who have an appetite for newer or recently renovated properties.
A borrower might be attracted to an agency loan because it benefits their long-term plans.
Agency loans offer higher-leverage financing, for example. A different permanent loan might
have a much lower LTV ratio than the borrower needs, and coming up with extra cash for a
downpayment can be a deal breaker.
Agency loans also are nonrecourse, a huge benefit to investors who do not want or are unable
to provide a personal guarantee. Rate-sensitive borrowers also like agency loans because the
government guarantees the mortgage risk on the secondary market, allowing for more
competitive pricing. Finally, after a loan has seasoned and improvements are made to increase
a property’s value, an agency lender might offer a second-position loan, allowing the borrower
to take cash out.
The borrower’s timeline
Every mortgage broker knows there are a lot of moving parts in a deal and one small detail can
hold up closing. Agency loans are not perfect for every situation and, for all their benefits, they
do come with a few downsides.
Time is of the essence in almost every deal. Unfortunately, agency loans are not known for
sprinting hare-like toward closing. If a borrower wants to take advantage of the 35-year fixed
rate on an FHA loan, for example, approval can take 6 to 12 months.
When a borrower has funds in an account for a Section 1031 like-kind exchange, they will
need to use them to purchase a new investment property quickly. This puts a hard deadline on
closing the transaction — 180 days from selling one property to acquiring another. Alternately,
there might be a competitive bid situation where the seller has other options. In both cases,
agency financing will probably not meet the needs of the borrower because agency loans take
more time to underwrite and close.
The property itself might also pose a stumbling block. A problem might come up in the
closing process, such as title, structural or environmental issues, that delays the loan approval.
In these cases, a borrower can capitalize on an income-producing property by closing with a
bridge loan while these issues are worked out, which could take weeks or months to resolve.
Finally, a property might be desirable for the borrower but just isn’t performing to the underwriting standards of a specific agency. Fannie Mae and Freddie Mac require a property to be
90 percent occupied for at least 90 days to be eligible. Given enough time, a borrower might
demonstrate the required occupancy needed to satisfy an agency’s requirements, and a bridge
loan offers breathing room to stabilize the property.
Alex Cohen is the CEO of Liberty SBF, a commercial real estate financing company
that provides directly funded loans to owners and investors of commercial properties.
The company lends nationwide on a variety of asset types and specializes in U.S.
Small Business Administration 504 loans for business owners, as well as bridge loans
and commercial mortgage-backed securities for property investors.
Reach Cohen at (610) 816-0200 or firstname.lastname@example.org.
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