CAPITAL MARKETS: REFINANCING

APARTMENT FINANCE TODAY • APRIL 2008

Refi Market Heats Up

Sellers waiting out a down market find low rates, high leverage with GSEs.

By Jerry Ascierto

Low interest rates combined with an uncertain marketplace are spurring more multifamily owners to refinance their properties. The ability to borrow at sub-6 percent rates is attracting more owners to refinancing opportunities. This is especially true of sellers who are waiting for the apartment market to stabilize and capitalization rates to rise further before putting their properties on the block.

"A lot of sellers believe it's not the right time to sell, so they'll do a fiveyear or seven-year execution and let the market come back to them," said Phil Melton, a senior vice president at Grandidge Real Estate Capital. "They can refinance the deal, pull some of the equity out, and sit on it until things come back."

While long-term interest-only periods are no longer readily available, borrowers can still get 80 percent loan-to-value (LTV) and a 1.20x debtservice coverage ratio through government- sponsored enterprises (GSEs) Fannie Mae and Freddie Mac.

The GSEs are offering the most favorable rates in the market for a standard refinancing deal, developers report. "Their all-in rate is still below 6 percent, and historically that's a great rate," said Mark Gerteis, a senior vice president with developer Forest City Enterprises, which manages a portfolio of about 30,000 units. "If we have something to lock in, we would definitely lock it in and close now."

The GSEs are quoting a spread over the five-year Treasury rate of around 270 basis points, leading to an all-in rate of 5.2 percent. Seven-year loans are going for 250 basis points over the Treasury, and 10-year loans for around 230 basis points over, totaling all-in rates of about 5.5 percent and 5.87 percent, respectively, in early March.

Streamlined refinance

Like many capital providers, both GSEs offer refinancing incentives for properties that they already hold in their portfolios.

Because they are familiar with the property, market, and borrower in these cases, the GSEs offer a streamlined refinancing process. The streamlining cuts origination fees in half, reduces application fees, and speeds up deal cycle times, allowing borrowers to lock interest rates earlier in the process than they could for a new loan. The GSEs also will waive some yield maintenance or prepayment fees to entice borrowers and retain the project in their portfolio.

Forest City mines its portfolio quarterly to seek refinancing opportunities. The company typically takes out 10-year loans but will "push it up a year or two if we think that rates are too good to pass up," Gerteis said. "We like to be below 6 percent, that's kind of a rule of thumb for us." In Feuary, the company refinanced the 162-unit Village at Pine Ridge in Willoughby Hills, Ohio, at a sub-6 percent rate on a $12.5 million Fannie Mae 10-year loan.

Green Park Financial, a Fannie Mae lender, has seen more refinancing activity of late. Of the deals it has closed in 2008, roughly half have been refinancing deals; this time last year, most of the loans the firm made were acquisition deals.

"We've been locking in most of our deals [at] sub-6 percent [rates], whether that be five-, seven- or 10- year deals," said Andrew Tapley, a senior vice president with Green Park. "We've even locked some fiveyear deals at sub-5 percent within the last couple of months."

For example, Green Park Financial originated a more than $7.1 million Fannie Mae refinancing loan at a sub- 6 percent rate for Chapel Oaks Apartments in Dallas in Feuary. Since the loan was made to a repeat borrower, Green Park was able to turn around the deal in 32 days. The typical cycle time is two to four weeks more than that.

Shop around

While the best way to keep refinancing costs down is to go through the same lender that originated the initial loan, that doesn't mean borrowers shouldn't shop around.

Developer ZOM, Inc., routinely solicits quotes from both the GSEs and life insurance companies. But life insurance companies, which have taken up much slack from the dormant commercial mortgage-backed securities market, are being more selective on deals and more conservative on pricing. Life insurance companies were pricing deals at around 250 to 290 basis points over the benchmarks in early March, but at much lower LTVs than a GSE deal offers.

"The life companies are going to underwrite more conservatively; there's going to be less proceeds," said Doug Weiner, vice president of finance and dispositions at Orlando, Fla.-based developer ZOM, Inc. "They are cherry- picking right now. They don't want short-term investments, they just want to put their money to bed."

Borrowers shouldn't shop around for too long. It's always best to strike while the iron is hot, rather than gambling on the possibility that interest rates will fall even lower, industry watchers advise. "It's very difficult to bet on interest rates," said Forest City's Gerteis. "Try to have a consistent plan and follow it. If you like to lock in interest rates, be disciplined about it and try not to guess the market."