Bridging the Gap with a Bridge-to-Agency Loan For Multi-family Properties

Agency-based loans through the Federal Housing Administration (FHA), also known as HUD, Fannie Mae, and Freddie Mac have plenty of advantages, making them the preferred long-term financing option for many investors in the multi-family market.

However, the lengthy timeline and requirements of an agency approval impede the timing of a transaction, forcing a borrower to consider less-attractive permanent financing in the form of a conventional bank loan or commercial mortgage-backed securities (CMBS) loan. When this happens, having a strong bridge lender on speed dial can make a commercial mortgage broker look like a hero to a borrower.

In this article, we discuss situations when bridge-to-agency loans for multi-family property make sense as an alternative to agency loans.

The Solution: Bridge Loans

For a borrower whose long-term business plan relies on the various benefits of agency financing, a reasonably priced bridge loan for multi-family buildings that offers a flexible exit strategy is an excellent short-term alternative. The right bridge loan will provide time for the sponsor to execute a business plan and maximize proceeds on a refinance from bridge into their permanent Agency financing.

According to a December 2015 report from the Congressional Budget Office (CBO), about one-third of the more than 100 million renters in the U.S. live in a multi-family property. Multi-family assets such as apartments and condo buildings comprise more than 14 percent of all housing in the country and serve as homes for many low- and moderate-income families.

For this reason, the U.S. government has an interest in making sure there is sufficient liquidity for the acquisition, refinancing, and renovation of multi-family properties. Guarantees made by the federal government through a variety of agencies — including government agencies like FHA and indirectly through government-sponsored enterprises Fannie Mae and Freddie Mac — have bolstered the multi-family market.

Agency Lending

Agency-based loans provide an attractive non-recourse option for multi-family investors. With loan-to-value (LTV) ratios as high as 85 percent, fixed interest rates as low as 3 percent, and terms as long as 35 years, there are many reasons why agency loans are so popular. In addition, the introduction of the Freddie Mac small-balance loan program in 2014 expanded some of these benefits to loans as small as $1 million.

Agency Market Levels - March 2021

Many non-agency permanent loans place market restrictions on properties that agency loans do not. An FHA loan, for instance, comes with no population or geographic restrictions. This expands the inventory of apartment buildings that a borrower can consider purchasing. In addition, the age of an asset is not as important to an agency lender as it is to other permanent lenders, who have an appetite for newer or recently renovated properties.

A borrower might be attracted to an agency loan because it benefits their long-term plans. Agency loans for multi-family properties offer higher-leverage financing, for example. A different permanent loan might have a much lower LTV ratio than the borrower needs and coming up with extra cash for a down payment can be a deal breaker. Agency loans also are non-recourse, a huge benefit to investors who do not want or are unable to provide a personal guarantee. Rate-sensitive borrowers also like agency loans because the government guarantees the mortgage risk on the secondary market, allowing for more competitive pricing. Finally, after a loan has seasoned and improvements are made to increase a property’s value, an agency lender might offer a second-position loan, allowing the borrower to take cash out.

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The Borrower’s Timeline

Every mortgage broker knows there are a lot of moving parts in a deal and one small detail can hold up closing. Agency loans are not perfect for every situation and, for all their benefits, they do come with a few downsides. 

Time is of the essence in almost every deal. Unfortunately, agency loans are not known for sprinting hare-like toward closing. If a borrower wants to take advantage of the 35-year fixed rate on an FHA loan, for example, approval can take 6 to 12 months. When a borrower has funds in an account for a Section 1031 like-kind exchange, they will need to use them to purchase a new investment property quickly. This puts a hard deadline on closing the transaction — 180 days from selling one property to acquiring another. Alternately, there might be a competitive bid situation where the seller has other options. In both cases, agency financing will probably not meet the needs of the borrower because agency loans take more time to underwrite and close.

The property itself might also pose a stumbling block. A problem might come up in the closing process, such as title, structural, or environmental issues, that delays the loan approval. In these cases, a borrower can capitalize on an income-producing property by closing with a bridge loan while these issues are worked out, which could take weeks or months to resolve.

Finally, a property might be desirable for the borrower but just isn’t performing to the underwriting standards of a specific agency. Fannie Mae and Freddie Mac require a property to be 90 percent occupied for at least 90 days to be eligible. Given enough time, a borrower might demonstrate the required occupancy needed to satisfy an agency’s requirements, and a bridge loan offers breathing room to stabilize the property.

Oftentimes, borrowers in these situations go with permanent loans that have less attractive terms than agency loans. In these scenarios, a bridge loan converted into permanent financing through an agency is often a better long-term economic decision for the borrower.

Bridge Loan Features

A bridge loan for multi-family properties can give the borrower the ability to accomplish everything they need. They can close under a tight timeline while securing agency financing to replace the bridge loan at a later date. The right lender can help a broker save the day. It’s important to look for a lender that has capital market experience, knows agency financing and can execute in a short time frame. While no short-term financing program is a universal fit for every borrower, there are certain situations that make a bridge-to-agency loan a good solution. Your lender should know which products are the right fit and offer a solution at a reasonable cost to the borrower.

Bridge Loan Features

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Flexibility

Flexibility is key when choosing the right bridge loan. A borrower should be allowed to prepay at any time with no more than six months of yield maintenance on the loan. The bridge loan should also close very quickly, preferably in less than a month. The whole idea is to give the borrower control over the situation as quickly as possible, whether it’s by stabilizing a property or utilizing 1031 funds that have negative tax implications if not dispersed by a specific date. A bridge loan that takes too long to close doesn’t solve any of these problems.

Comparable Leverage

A bridge loan also must have comparable leverage to an agency’s permanent loan so the borrower doesn’t have to come up with too much additional out-of-pocket cash. For stabilized or close-to-stabilized properties, the bridge loan should have a single-digit interest rate. In the end, a borrower should expect some additional costs, but to help mitigate sticker shock, a commercial mortgage broker should look for origination fees from a bridge lender to be in the 1-2% range.

In Closing

For a broker with a client purchasing a multi-family property, having a good bridge lender in your back pocket can salvage a deal that looks like it might go off the rails. The broker becomes a hero and they can potentially earn an extra commission while still offering the borrower the best deal possible. If your client must close on a multi-family property but an agency loan is causing a roadblock, a bridge-to-agency loan scenario is a great alternative to less desirable permanent financing.