When it comes to obtaining multi-family construction loans across the country, this is a market of lenders. Similar to the ramifications of the Great Financial Crisis, finance companies have become extremely strict about which projects they green light to fund, amid uncertainty over the fallout from COVID-19. For the most part, they have to respond to large and careful investment committees, and while a builder may have a solid business plan in a strong market, it doesn’t always come down to the project level. There can be a myriad of reasons why a project does not get a construction loan.
Due to the challenges of securing debt from traditional lenders, private lenders are seeing escalation in funding requests from multi-family developers. Private finance companies, for the most part, are able to make decisions based on the actual basis of the project and can offer more flexibility and creativity, which provides an attractive situation for both the builder and the contractor. creditor. Since March, our origination team has seen an increase in applications for construction loans from borrowers pursuing business plans that were easily fundable before COVID-19 but are now challenged by traditional lenders and left without. funding.
That said, here are a few key things multi-family developers should keep in mind when it comes to seeking funding for a project:
Know the source of capital
The lender’s source of capital will always determine which loans are actually approved. A lender with discretionary capital who holds the loan in their portfolio after issuing it will be able to guarantee execution.
Don’t expect a historically low interest rate
Most capital is not tied to Treasury rate yields. Multi-family loan rates are directly related to market uncertainty and risk, and unfortunately there are a lot of them right now. This not only includes the COVID-19 crisis, but it is also an election year, and so on.
Preferred markets are changing
If you are growing in a central business district, it may be difficult for some lenders to return your pencil loan. What was an obvious construction loan nine months ago is now hanging on a loan committee, as questions arise around this sharp period of lower rental rates we’ve seen in many CBDs. Lender underwriting standards for the pandemic are difficult to predict, as views on how infill urban areas will recover vary widely. A frank conversation with your lender about rental rate trends over the next 18-24 months would be a good idea. The majority of lenders actually consider that many American CBDs are too risky in today’s environment.
However, when it comes to multi-family, our team at Parkview Financial doesn’t share all the pessimism others may expect. We have strong convictions on the performance of asset classes over the long term and we discuss them freely with our borrowers.
Multifamily is an age-old winner. Historically, it has remained a stable asset class nationwide, and although there are headwinds, many people want to work close to where they live – in urban centers rich in amenities – even if that means they work from home a certain percentage of the time. In addition, suburban multi-family living will also continue to attract a growing population. Secondary and tertiary markets were in demand before this year’s crisis. For example, last year we provided a loan for a large luxury apartment project in the suburb of Boise, Idaho. While it might seem high risk five years ago, there is a high demand for tenants due to a shortage of products there.
Ultimately, if a project makes sense, a lender who effectively understands the underlying value of the asset will be there to fund it.
Andrew Benton is Managing Director of Parkview Financial.