Freddie Mac’s Plan to Help Cap Rents

Freddie Mac is launching new lower-cost financing to apartment owners who agree to cap rent increases for the life of the loans. From an article in the Wall Street Journal:

The program, announced Tuesday, will begin immediately and be available all over the country. Mr. Brickman said he hopes hundreds of properties will take advantage of it.

The initiative comes at a potentially appealing time for real-estate investors who are facing a slowing rental market. Freddie Mac will provide mezzanine debt—which is more risky but pays a higher interest rate than senior debt—at below market cost.

While rent increases have naturally slowed over the past year or so, the initiative protects tenants from steep hikes when the market accelerates again. Operators who receive the low-cost loans must have at least 50% of the units affordable to households making the local median income or below. Borrowers must then agree to limit rent growth on 80% of units.

Freddie to Offer Cheap Loans for ‘Middle Class’ Rental Housing

Freddie Mac is rolling out a plan to incentivize landlords to keep rents affordable on the properties for years to come. From an article in the Wall Street Journal:

Freddie Mac , the country’s largest backer of apartment loans, will offer low-cost loans to real-estate owners willing to keep their buildings affordable to middle-class families for years to come.

The move could open up a new approach to creating and preserving middle-class housing. It uses market incentives rather than government subsidies to persuade real-estate companies to preserve units for the middle of the rental market, an area of concern for policy makers in recent years…

The initiative will offer lower interest rates to landlords who agree to rent the majority of units in a building at levels affordable to tenants making 80% or less of the area’s median income, a range that typically includes nurses, teachers and police officers. The units must remain affordable for the term of the loan, typically about a decade.

To start, Freddie will back up to $500 million of loans to Bridge Investment Group, a Salt Lake City-based landlord with roughly 30,000 apartments around the country. Bridge has identified 38 metropolitan areas for investment.

It will be interesting to see if this moves the needle on the issue of housing affordability. It is nice to see a market-based ‘carrot’ offered as opposed to the regulatory ‘sticks’ that are being considered in many municipalities around the country.

Fannie Mae Offers Incentives Tied to Well Being of Tenants

Fannie Mae is offering incentives for borrowers that are tied to providing services that improve the health and well being of residents. From an article in Multifamily Executive:

The incentive, in the form of a lower borrowing rate, is called Enhanced Resident Services and aims to foster services that address the needs of renters and support health and wellness programs, day care, food access, youth and education programming, and job training, according to Fannie Mae. The new offering became available to borrowers on Jan. 15.

“We believe the strength of an affordable rental housing property is directly linked to the health and stability of the people and families who live there,” said Bob Simpson, vice president of affordable and green financing at Fannie Mae, in a statement. “Affordable borrowers have recognized the value of providing enhanced resident services at their properties for years but have been constrained by the inability to ensure a long-term source of financial support. By participating in our Healthy Housing Rewards program, borrowers will save between $15,000 and $75,000 per year. The amounts saved can be used to offset resident-services costs at [the borrowers’] property for the life of the loan, thus ensuring that the low-income residents who live there have access to health care, education, and other community services.”

Fannie will implement Enhanced Resident Services with the assistance of Stewards for Affordable Housing for the Future (SAHF), a nonprofit, multistate group of affordable housing providers that offers initial and ongoing compliance certifications for both the borrower and the multifamily affordable housing property providing the special services. To qualify, at least 60% of the units in the properties seeking the pricing incentive must serve residents earning 60% or less of the area median income.

 

Banks Not Feeling the Love for Apartments

More apartments are expected to be completed nationwide in 2017 than any other year since 1987, which is contributing to a situation in which supply will exceed demand for the first time in years and rents appear ready to stall or decline. That has banks nervous and they’re beginning to keep the industry at arms length. From the Wall Street Journal:

Now banks are in retreat, forcing developers to look to nontraditional lenders and seek more expensive types of financing to complete projects, said apartment executives, industry analysts, mortgage brokers and bankers.

 “We had fairly robust growth in our construction, real estate construction book, and that’s slowing now,” said P.W. Parker, chief risk officer of Minneapolis-based U.S. Bancorp, during an earnings call last month. “Multifamily is an area that, if you look at the forecasts, there are forecasts pretty broad-based of potential rent declines in a lot of the major cities. So we’re being more cautious there.”

Executives at North Carolina-based BB&T Corp. and Pittsburgh-based PNC Financial Services Group Inc. in December said they, too, are being more conservative about apartment loans…

Even builders with proven track records are getting smaller loans than they used to, said Peter Donovan, executive managing director of multifamily capital markets at real-estate brokerage CBRE. While a couple of years ago most could get loans for about 65% of the cost to build a project, today they are getting closer to 55%, said Mr. Donovan.

 

 

Bell Partners Involved With German Firm’s $1 Billion Real Estate Fund

From the press release:

HANSAINVEST Hanseatische Investment-GmbH is creating a new real estate special fund designed to invest in residential real estate in the United States. The fund − known as HANSA US Residential − is geared towards institutional investors who want to be involved with core residential properties in the US. The target fund volume is USD 1 billion, and plans call for equity of some USD 500 million. The distribution yield for investors is forecast at 4.5 per cent p.a. The fund will be traded under the legal form of a German real estate special fund in accordance with the German Capital Investment Code (KAGB).

HANSAINVEST, the Fund Manager, will partner with Bell Partners (Bell) − an apartment investment and management company focused on high-quality multifamily communities throughout the US. At the moment, Bell has over 60,000 units under management. Bell offers an extensive and full service operating platform containing expertise in acquisitions and dispositions, property operations, construction, accounting, risk management, market research and all other related support functions. Since 2002, Bell has completed over USD 10 billion of apartment transactions, including almost USD 1.5 billion of activity in 2015 alone. Bell is also one of the largest apartment renovators in the US.

“Bell Partners is an excellent partner for HANSA US Residential,” said Nicholas Brinckmann, managing director of HANSAINVEST. “Bell provides great market access and the necessary all-round expertise in the multi-family houses segment,” Brinckmann noted, adding that a Bell investment entity will also invest in the fund as a co-investor. “This will enable us to be aligned and have common interests shared by the investors and our local partners,” he said.

“The positive development of the overall economic and demographic data provides a clear argument in the long term for investments in the US residential real estate market. This was what ultimately prompted us to decide to create a US fund,” the managing director of HANSAINVEST said, explaining the strategy further. “What’s more, the legal framework makes it possible to increase rent for residential real estate in the US at much more regular intervals than here in Germany. From the perspective of investors, this is a great benefit,” Brinckmann said.

Geographically, the fund will invest in metropolitan areas with positive demographic and economic fundamentals. The plans call for the properties to be located in strong areas in major cities. The focus will be on residential properties with a volume of between USD 50 million and USD 100 million, including high-rise residential buildings, blocks of flats and apartment complexes with between 150 and 550 units each.

HANSAINVEST pursues a buy-and-sell strategy and intends to hold the properties after their purchase for at least five to seven years. The first properties are scheduled to be purchased this year. Plans do not provide for a limit on the term of the fund. DONNER & REUSCHEL Aktiengesellschaft will serve as custodian.

FHA Initiative Intended to Boost Development of Affordable Housing

From Housing Wire (via NAA Industry Insider):

The Federal Housing Administration announced a new plan to reduce multifamily insurance rates in order to encourage capital financing of affordable and energy-efficient apartments…

The rate reductions will take effect on April 1, 2016, and will directly impact FHA’s Multifamily Housing Programs and properties housing low- and moderate-income families and/or developments installing energy-efficient systems or building within federal energy guidelines.

As a result, the FHA said it expects the multifamily insurance rate reductions to cause the rehabilitation of an additional 12,000 units of affordable housing per year nationally…

The FHA also announced that it is reducing upfront premiums to support its affordable housing and energy efficiency goals. Upfront insurance rates will be set at 25 basis points for Broadly Affordable and Energy-Efficient properties and 35 basis points for Mixed-Income properties. 

Miami Using EB-5 Visa Program to Finance Affordable Housing Development

The city of Miam, FL is taking a creative approach to addressing its shortage of affordable housing. They are tapping the EB-5 visa program to attract foreign development dollars:

The city will arrange for selected developments to be partially funded by a federal visa program known as EB-5, which grants green cards to foreigners who invest at least $500,000 in businesses or construction projects that create American jobs. The overwhelming majority of EB-5 investors are individuals from China eager to obtain U.S. residency…

Businesses seeking EB-5 funds typically contact middlemen—often lawyers—who run what are known as regional centers, which work with brokers in China and other countries to recruit investors, pool their investing dollars and funnel the money, often in the form of low-cost financing, to the businesses. The regional centers are paid a fee based on the amount of money they raise.

In the past year, Miami and a few other governments decided to create their own EB-5 regional centers, which allows them to select projects to help finance what would benefit the local community, charge a lower fee to the businesses and, in some cases, use the fees to supplement services such as police and firefighters…

Miami officials said they decided to start a regional center mainly to tackle its lack of affordable housing. According to an analysis prepared for The Wall Street Journal by the University of Florida’s Shimberg Center for Housing Studies, Miami-Dade County lost nearly 21,000 affordable apartments—or those that low- or medium-income people can rent without spending more than 40% of their income each month—from 2000 to 2012. In most cases, the buildings were torn down or converted to attract residents with higher incomes.

The city’s first development is actually an 83-story luxury tower, but they stated that it helped finance the creation of the regional center and that they expect many future projects to target affordable housing. In fact after getting wind of the program a veterans group and some members of the business community came out with a plan to build mixed use facility for veterans near the University of Miami hospital.

Greystone Provides $30.5 Million in Loans for Varden’s 941-Unit Triad Portfolio Buy

From Greystone’s press release:

Greystone, a leading national provider of multifamily and healthcare mortgage loans, today announced it provided $30,500,000 in loans for the acquisition of four multifamily properties in the Piedmont Triad region of North Carolina. The four separate loans were originated by Vincent Langan of Greystone and delivered to Fannie Mae under its Delegated Underwriting and Servicing (DUS®) program.

The loan terms for all four properties include 10-year financing with 30-year amortization, one year interest-only and 80% LTV. Acquired by Varden Capital Properties (VCP), the apartment communities comprise a total 941 units and all offer a range of attractive amenities such as swimming pool, fitness center, clubhouse and tennis courts. The properties in this portfolio include:

  • Ashland Apartments in Greensboro, NC
  • The Lakes on Meadowood in Greensboro, NC
  • Ambercrest Apartments in Winston-Salem, NC
  • The Hunt Club Apartments in Winston-Salem, NC

 

CMBS Back at the Party

At the height of the recession pretty much the only financing available to apartment developers were government-sponsored enterprises Fannie Mae and Freddie Mac. Since then commercial lending has made a comeback, but just recently commercial mortgage backed securities (CMBS) have started to really heat up. From the Wall Street Journal:

In all, lenders made $94 billion in loans bundled together and sold off as bonds to investors in 2014, the most since 2007 for the product known as commercial mortgage-backed securities, according to trade publication Commercial Mortgage Alert.

Real-estate executives and bankers are predicting that figure will rise in 2015.

That’s good news for some developers.

Growing demand from investors, in turn, has had a magnetic pull on lenders, causing them to pile into the sector. In 2014 there were about 35 active lenders that contributed to CMBS deals, according to Commercial Mortgage Alert. By contrast, there were just 18 in 2011.

As more companies have been jousting to lend, borrowers have been benefiting. Developer Eric Blumenfeld last month secured a $25 million loan for a 205-unit Philadelphia apartment building from an affiliate of Cantor Fitzgerald LP, which then sold it off in a package of commercial mortgage-backed securities. Mr. Blumenfeld said there was more competition among lenders for the loan than he expected and there “was a little bit of a bidding war” before he ultimately went with Cantor, which he had used before.

“Money is more readily available, and for performing assets that have cash flow, there’s a lot of different options,” he said.

Why Mortgages Are Still Hard to Get

If you’re wondering why people are still renting instead of buying the Wall Street Journal has an item that helps explain what’s going on. In short, the banks are covering their butts and doing whatever they can to not repeat the mistakes they made during the housing bubble. After having to buy back toxic mortgages and pay billions of dollars in fines they’re playing things extremely close to the vest:

One way to reduce the risk of having to buy back mortgages is to make sure than any loans sold to Fannie or Freddie or submitted for a Federal Housing Administration guarantee not only meet official standards but surpass them. That way, if a loan falls short of the bank’s standards for some reason, it still will likely meet official ones.

Federal housing officials refer to the higher standards as “overlays” and want to eliminate them. To that end, officials have tried to clarify what triggers a buyback and strengthening procedures that allow banks to resist repurchase demands.

So far, however, these have had little effect. Banks have made it clear that it isn’t just repurchase risk that is triggering the overlays. They are the result of internal rules prohibiting banks from making loans their analysis predicts will have a high rate of default.

That is, banks are second-guessing Fannie, Freddie and the FHA. Even if the agencies approve a certain type of loan and promise not to ask the bank to repurchase it, the banks refuse to make the loan if they view it as too risky. Their aim: avoid a situation similar to the one that just cost them billions.

Those of us of a certain age can remember when bankers were seen as stodgy and boring, then deregulation happened and all the sudden they were running with the wolves on Wall Street. Looks like it’s time to say, “Welcome back, stodgy.”