Evan Voight is planning to lock in his interest rates in the first two quarters of next year.
Voight, director of finance at Indianapolis-based owner and developer Herman & Kittle Properties, doesn’t expect much change in rates over the next eight or nine months, but he feels rates are going to rise by the end of next year, making right now the time to push on getting deals done.
There’s no doubt debt has been readily available this year, especially for affordable housing deals, because the government has made a large push to preserve affordable housing across the nation through executions offered by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (HUD). And, like Voight, many borrowers are looking toward familiar faces to close deals.
As the government-sponsored enterprises (GSEs), HUD, and banks continue to fight tooth and nail to win deals, no one expects competition to plummet next year, either.
Fannie and Freddie remain popular
Freddie Mac has been the execution of choice for Tryko Partners, according to Chad Buchanan, the firm’s chief investment officer. The Brick, N.J.–based company is one of a select group of sponsors with the GSE, making it easier to finance debt deal after deal.
“Freddie Mac has an expedited platform with us,” Buchanan says. “We’ve done a number of deals with Freddie, so they know our balance sheet, our platforms—our management style. There’s a certain comfort level there and an expedited closing process.”
Frank Baldasare, senior vice president at Bethesda, Md.–based Walker & Dunlop, says a lot of the affordable volume with the GSEs is being driven by small loans and affordable debt deals that don’t count toward the cap that’s been placed on Freddie Mac’s and Fannie Mae’s lending expenditures by their conservator, the Federal Housing Finance Agency.
Baldasare feels the Federal Housing Administration (FHA) is a developer’s best bet for debt.
“If you’re looking for max proceeds and the lowest interest rate, and you have time to close, then I would say the HUD 221(d)(4) or the FHA 223(f) Low-Income Housing Tax Credit Pilot Program,” he says.
Likewise, Greg Gillam says he feels the FHA is the most active player in the space. Gillam, a vice president at Uniondale, N.Y.–based Arbor Commercial Mortgage, says rates are the key to the agency’s success.
“The rates are lower than conventional financing for affordable properties,” he says. “FHA … has one of the lowest interest rates in the market, and the term for the loan is longer. It’s a fully amortizing loan at a very low rate, and there just are not a lot of lenders that can provide that.”
But for many of the deals that have come across his desk, Fannie Mae has trumped the FHA due to speed and certainty of execution.
“While FHA is a better overall program in terms of rate and term, Fannie is a little bit better at executing,” Gillam says. “They can execute a little faster, and the time frame is shorter. Fannie Mae can finance a property in 90 days or less. With FHA, it can sometimes take six months.”
And while both GSEs are leveraging their quick deal turnaround times as a selling point, developers are keeping their options open.
“One thing the banks can do that Freddie and Fannie cannot is finance capital expenditures,” Buchanan says.
Banks amp up their activity
Indeed, banks are often fiercely competitive with each other, hungry to satisfy Community Reinvestment Act (CRA) obligations.
Voight says that while most bank deals offer more-competitive rates than any other execution, he’s noticed a difference this year.
In the past, Voight has tapped community banks for deals, but this year he’s found more commercial-bank deals, as larger regional and national banks seek to become a one-stop shop.
“Those guys are very competitive,” he says. “And they’re being very competitive on the equity side, and, typically, they’re tying their debt to the equity products and tax credits.”
One of the main incentives for a bank to invest in both sides of a deal is one deal can then qualify for two parts of the CRA requirement.
And while CRA is important and a priority for KeyBank officials, the bank is also seeking to go beyond the obligation, says Jim Poznick, KeyBank’s senior vice president of community development lending.
“This isn’t just a CRA–mission driven business,” he says. “We’re also going beyond that to provide permanent affordable financing both on and off balance sheets. We really want to grow this business.”
The CRA requires banks to lend a certain amount within their local communities; this year, however, has been different, as KeyBank has been aggressive in “out-of-footprint” areas, as well.
By the beginning of October, the bank expected to close the year with about $200 million in construction financing in the affordable space. Lee Harris tends to be a Fannie Mae borrower, but he says banks have been his secondary source for fixed-rate long-term debt.
Harris, president and CEO of Overland Park, Kan.–based Cohen-Esrey Real Estate Services, says relationships are still the name of the game in the bank environment.
“If you have a relationship with them, then it’s probably worth talking to the bank to see what they’re willing to do—especially on a small-loan basis,” he says. “If we’re doing a 36-unit, second phase of a project, the relationship lender is more likely to do something like that instead of a new project.”
Lindsay Machak is an Associate Editor for Multifamily Executive. Connect with her on Twitter @LMachak.