Debt & Equity in the (New) Commercial Real Estate World (Article #2)

In the world in which we currently live, information is extremely powerful. During such uncertain times, my colleagues and I are highly focused on making sure that we are constantly up to date with the extremely volatile lending environment in which we find ourselves. We have been updating our clients on a daily basis with news on the different lending programs and the loan terms which one can expect.

We have been working tirelessly with our lending and capital partners to receive the most accurate and up to date news of their programs. Please keep in mind that there are new rules being implemented on a daily basis, so if you have heard something else or something new, we would love for you to share.

Please see below an update on the different lending products:

Fannie Mae, Freddie Mac and FHA/HUD are open for business.

HUD:

There have been no changes to the 80% LTV and 1.176 DSCR parameters in all markets. Coupon rates are in the 2.70-2.95% range exclusive of the Mortgage Insurance Premium(“MIP”).

Agency:

Large Loan ($5M+): All-in coupon rates generally in the 3.15% – 3.75% rate range depending mainly on loan size, leverage, DSCR, and affordability. 7 and 10 years fixed with yield maintenance prepayment penalty. 

Small Loan (UNDER $5M): All-in coupon rates generally in the 3.75% – 4.25% rate range depending mainly on leverage, DSCR, and affordability. There are 5, 7 and 10-year availability with step-down prepay.

 - Cash-out transactions for Fannie and Freddie are generally limited to 70%LTV / 1.30x DSCR including 12-18 month P&I holdbacks.

- Escrows: 6-12 month P&I escrows for both Fannie and Freddie. Also, Fannie Mae is requiring upfront T&I and RR escrows in addition to the monthly escrows. These escrows will be released after 36 months or before if the property achieves 2 quarters of operating at the amortizing minimum programmatic DSCR for the particular loan.

- Interest Only is still available, including Full Term IO, albeit at more conservative guidelines (60-65%LTV / 1.35-1.40xDCR)

- High-risk markets are being scrutinized with lower LTVs and higher DSCRs.

- Commercial Income: Generally commercial income will not be underwritten unless it’s a grocery or pharmacy

- Forbearance: Both agencies are offering a 3 month forbearance period followed by a 12 month repayment period. *Below is a breakdown that explains in much more detail*

- Index Floors: Both agencies have set Index Floors. Fannie is currently at a .90% 10-year treasury floor while Freddie has a .75% 10-year treasury minimum

- Student housing is a tough asset class with Universities operating remotely and supply-side issues in some markets

- Workforce Housing: Both agencies continue to more aggressively pursue these deals with better rates and credit terms.

Banks: Things are changing very rapidly due to COVID-19. We are seeing a pretty immediate response from banks who are willing to work with existing customers to find temporary solutions, such as forbearance periods, etc.. during these challenging times. However, due to the fact that no one really knows at this point how long all of this can last, we do fear that the longer the cloud of Corona lingers, and the longer it takes for the economy to get going again, will depend on how flexible the bank will be on loans that are not meeting debt service over an extended period of time. Rates are still relatively low (3.50%-4.50%). We are seeing much less non-recourse offers, and a lot of banks are starting to stay away from heavy value add and construction projects.

Life Co- Although some are promoting that they are "still active", it is virtually impossible to get any current quote or loan commitment under current market conditions. Many experts hope that, if in fact, Trump reopens the economy on April 30th as advertised, that will allow for Life Co's to be able to start moving again. In the meanwhile, we see LifeCo's telling us that they are going to stay on the sidelines for the time being. Of the lender who is still advertising lending terms, they will only look at loans of $20M+ primarily in Industrial, and Multi-Family right now with Class A sponsors at low LTV's.

CMBS- Since the Corona Crisis began ~3 weeks ago, CMBS loans almost immediately disappeared overnight. All of the investors in secondary markets have temporarily closed doors. At best you can have a CMBS lender tell you he is interested in a deal maybe even socialize some high-level commercial terms but ultimately would make no commitment for at least 60-90 days (and that would still have the contingency that they will have the ability to securitize the loan by that time). So, for now, CMBS is Closed! CMBS specifically is highly problematic when implementing forbearance periods and other types of remedies, due to the nature of the securitization of the loan. This is being worked out as we speak, yet no new information has yet to be given to CMBS borrowers on the loans that may not be able to meet debt service to the Coronavirus.

Bridge Loans - At this point, almost all bridge lenders have changed their guidelines one way or another. With that being said, bridge lenders we work with are still hungry to quote deals. We have seen a pattern of funds putting out offers at higher rates and lower leverage, and are being a little pickier on deals they work on. Transitional/interim bridge loans (assets that need a little bit of seasoning before refinancing to perm) that have an all-in rate of anywhere between 5%-7.5%. Libor floor has gone up and their spreads have widened.

Aggressive bridge/Hard Money Loans - Rates are still being seen in the high single digits to low double digits. This, of course, depends on the strength of the property, sponsor, story, etc. 

Equity - Although a lot of groups are waiting on the sidelines until at least the end of April (when the "stay in place" policies are supposed to let up), there are still many deals being underwritten. We are seeing a lot of groups moving from secondary to primary markets. It has been requested by some of our equity partners for the current stage of this pandemic to only send deals that are under contract.

As you may be seeing on the news, the US government is trying to show tremendous support by creating these unprecedented stimulus packages. However, there are still tons of unknowns - the biggest being how long all of this will last as far as government intervention directly with lenders. We have already seen both federal and state governments pushing lenders, Banks and Life Co's to work with their borrowers and there are some talks of Government intervention that have begun to be socialized.

*Forbearance for Fannie and Freddie*:

• If forbearance is determined necessary, a forbearance agreement may be executed for up to 3 monthly payments beginning with the first missed monthly payment, provided the missed payment did not occur before February 1, 2020. This is effective until the earlier of August 31, 2020, or termination of the national emergency.
• A pre-negotiation letter may be executed before the Borrower and Lender engage in on-going discussions.
• The Borrower is responsible for legal fees related to executing the forbearance agreement and related documentation.
• The Borrower will be required to bring the Mortgage Loan current by the earlier of 12 months after the end of the forbearance period, or the Borrower’s receipt (or Lender receipt on the Borrower’s behalf) of Business Income insurance proceeds (or any other assistance or relief program proceeds), per the forbearance agreement.
• During the forbearance period, Fannie Mae is waiving the late charges they are entitled to under the loan.
• The Borrower must remit all excess cash flow to the Lender after paying operating expenses.
• The Borrower must agree that during the forbearance period it will not evict tenants for nonpayment of rent for any reason for the longer of: 1) The eviction moratorium in the CARES Act (120 days after the enactment of the CARES Act). 2) The months of actual payment forbearance or As otherwise required by applicable law
• Beginning on March 27, 2020 and ending 120 days thereafter, or such later period prescribed by the applicable jurisdiction in which the property is located, landlords are prohibited from 1) initiating legal action against tenants for non-payment of rent, 2) charging any penalties or fees related to non-payment of rent and 3) issuing a notices to vacate. Following the expiration of the 120-day period or the period prescribed by local law, landlords are prohibited from requiring a tenant to vacate the tenant’s unit before the date that is 30 days after the landlord provides the tenant with a notice to vacate.

This is a great time to have some alternative solutions in your back pocket. If you want to discuss more in-depth, I would love to get on a call and see how I can assist you through these strenuous times.