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Government sponsored entities Fannie Mae and Freddie Mac continue to provide stable, sensible non-recourse permanent financing solutions for today’s multifamily rental borrowers. Loans continue to be arranged upwards of 75% loan-to-value based on capitalization rates (depending on the market) anywhere between 6.5% and 8%. Most loans today are not constrained by LTV but rather debt service coverage ratios. DSCR is defined as the property’s net operating income divided by the property’s annual debt service. The FNMA and Freddie minimum DSCRs today are 1.25 times NOI.

Fannie Mae has recently been more and more focused on collections. As unemployment rises and stress increases on consumers and tenants, Fannie has begun to aggressively hone in on top line income numbers. While trailing 12, six and three-month collections figures have always been central to FNMA’s underwriting analysis, the relationship between these figures–that is, the ‘collections trend’–has become increasingly important. 

If the T3 (trailing three-month collections) shows a significant declining trend vis-à-vis the T6 or T12, FNMA will project income based upon the lowest of the T12, T6, T3, or T1; in instances of more severe declines, FNMA underwriters are required to add a minimum 2% vacancy factor to this figure. This, of course, adds to the sting of declining collections or magnifies the effect of a recent bad collections month. The timing of loan submissions to GSEs thus becomes very important in times of top line income volatility.

The result of these underwriting changes has been a slight drop in proceeds available to borrowers, and on higher LTV loans a restriction on the levels of cash out over the existing loan balance plus defeasance or prepayment penalty costs. With all of the above in play, FNMA and Freddie Mac are still the best-priced permanent loan execution in the market. As of June 1, 2009, lower LTVs (below 55% LTV and 1.55 DSCRs) for 10-year, fixed-rate loans based on a 30-year amortization were priced at 5.5%. Higher LTVs (up to 75% with a minimum of 1.25 DSCRs) were being priced near 5.9%.

Regional banks continue to pick up the slack in terms of ease and certainty of execution in the permanent loan multifamily lending space. For the most part, the regionals remain strong and are active in the permanent five, seven and 10-year, fixed-rate loans. Regional banks cost of funds are slightly higher thus their rates are anywhere from 25 to 40 basis points (100 BPS equals 1%) higher than Fannie or Freddie. Although slightly more expensive, they provide an easy and certain permanent loan facility on loans less than $25 million to $30 million. Although many bank lenders can go higher on multiple loans to one borrower, banks of late have been shunning larger loans above $25 million in any one transaction.

Several regional banks continue to provide multifamily construction funds in well-located, supply-constrained markets. In general, new construction loans are being made with full recourse (completion and payment guarantees) to well-capitalized and experienced developers. These loans are generally two to three years in length to allow for construction and lease-up. They may also allow for a one to 10 year permanent option for the borrower.

Regional banks are also providing needed liquidity and permanent loans to office, retail and industrial owners on a selective basis. Underwriting is more conservative with loan to values in the 55% to 65% range based on an 8% or higher capitalization rate. Loans granted to borrowers on office, retail and industrial typically are supported with some type of credit enhancement in the form of personal sponsor guarantees, cash collateral, or other credit support.

The state of the finance market remains ever-changing and will challenge all market participants in the near term. That said, there are lenders actively engaged in the real estate capital markets supplying needed liquidity in a mercurial market. It benefits borrowers to be diligent in their search for capital, yet adjust their expectations for pricing and proceeds to the new reality of 2009.

Mark Scott is senior vice president and co-managing director of NorthMarq New Jersey’s production office. He has focused on multifamily finance over his 25 year real estate investment banking career. He can be reached at [email protected] The views expressed here are the author’s own.

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