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Bridging the Gap with a Bridge-to-Agency Loan For Multifamily 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 multifamily 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 multifamily 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 multifamily 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 multifamily property. Multifamily 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 multifamily 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 multifamily market.

Agency Lending

Agency-based loans provide an attractive non-recourse option for multifamily 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 multifamily 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.

Get a quote on a bridge loan from Liberty SBF »

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 multifamily 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

Get a quote on a bridge loan from Liberty SBF »

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 multifamily 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 multifamily property but an agency loan is causing a roadblock, a bridge-to-agency loan scenario is a great alternative to less desirable permanent financing.

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Multifamily Property Loan Closed: $1.7MM Bridge Acquisition Loan

Liberty SBF provided a $1,700,000 in Bridge financing to acquire a multi-family property located in Greensboro, NC.

Read Liberty’s White Paper on Bridge-to-Agency Loans for Multifamily Sponsors, Mortgage Bankers, & Agency Lenders.

Liberty SBF offers personal service for SBA 504Conventional & Bridge loans for owner-user properties across the US. We’d love to help you.

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10 Articles About CRE From Liberty SBF

Liberty SBF has become a thought leader in commercial real estate finance with articles published online and in major industry media outlets. Below are 10 articles published by Liberty SBF or in influential publications with the company’s input.

1) Non-Bank Lending Is the Solution for Small Business CRE Loans

Strong demand for capital in the commercial real estate sector is expected to continue for the foreseeable future. Historically low interest rates, a robust economy, and strong employment numbers are boosting a surge in CRE demand across the country. People might assume that all commercial real estate lenders are alike, but there are many types of financial institutions that work with CRE borrowers.

What is a non-bank lender and how is it different?

2) Think Retail is Dead? Think Again!

Despite what you might be hearing in the news, in today’s strong economy, retail trade continues to grow. April 2019 saw a year-over-year 3.1 percent increase in US retail sales

Find out how business owners can thrive in the new retail ecosystem especially with an SBA 504 loan.

3) Green Office Properties & the SBA 504 Loan

When you acquire a green office property you can help protect the natural environment, have a healthier workplace, and take advantage of the special SBA 504 Green loan program, when the office property you are purchasing meets certain environmental standards.

Find out advantage of SBA 504 financing for office properties here.

Man in suit with graph showing loan interest rates

4) Loan Interest Rates for Dummies (and the Rest of Us)

We spend a lot of time talking about interest rates because they affect so much of our lives. On a personal level, they govern the cost of our mortgage, our credit card bill and our car payment. In business, they affect our ability to grow and expand, to invest in new equipment, and to purchase commercial real estate.

But how well do we really understand interest rates? Where do they come from? What do they mean, and how can we make smart financial decisions based on our expectations for future interest rates?

Click here to find out more about interest rates.

5) Characteristics of an Industrial Real Estate Hot Spot

Over the past few years there has been a revitalization of the industrial sector, driven primarily by e-commerce retailers looking for warehouse space that meets their specific needs.

On paper, that looks like decreased industrial vacancy and increased rents. What really makes an industrial hot spot in different regions?

Click here to see what makes an industrial hot spot.

6) The Interim Second – a Critical Element of Every SBA 504 Loan

If you’re familiar with SBA 504 loans, you’re likely at least familiar with the term “interim second.” But there’s also a good chance that you may not fully understand what an interim second is, and how critical it is to SBA 504 financing.

Click here to learn more about Interim Seconds for SBA 504 loans.

Flexible open office space

7) What a 25-Year Term on SBA 504 Loans Means for Business Owners

Last year, the SBA made the first major change to its 504 loan program in over 30 years: It added a 25-year term. Now, businesses owners applying for a SBA 504 loan can choose from a 10-, 20- or 25-year debenture. What’s different about a 25-Year SBA 504 loan?

Click here to find out.

8) Scale the Multifamily Mountain with a Bridge Loan

When your multifamily property deal needs to close before your agency loan is approved. When this happens, having a strong bridge lender on speed dial can make a commercial mortgage broker look like a hero to their client.

Find out more about bridge lending for multifamily here.

9) Spotlight on Self-Storage: What’s all the Buzz About?

This asset class may not exude the glamour of a shiny downtown office tower, but self-storage assets have for a long time been the unsung heroes of commercial real estate investments. People are talking more and more about self-storage.

Read why here.

10) Hotel Financing With the SBA 504 Loan Program

The US hotel industry saw another record year in 2018, reaching absolute values that were the highest ever benchmarked. A 10th consecutive year of growth is predicted for 2019, according to CBRE Hotels Americas Research. As experienced lenders, we are convinced that the best, most cost-effective solution is to finance your hotel is with an SBA 504 loan.

In this article, we will walk you through today’s peak hotel market, as well as recent changes that affect SBA 504 loans.

Get Your Deal Quoted!

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Liberty SBF Closes Memphis, TN Multifamily Bridge Loan For Local Sponsor

Tennessee multifamily

Liberty SBF funded this multifamily loan in time sensitive deal. Bridge loan allowed the sponsor time to season property up to 90% occupancy as required by perm agency loan with no prepayment penalty.

Liberty SBF recently closed a $1.7MM bridge loan for the acquisition of a 58-unit multifamily property in Memphis, Tennessee. Liberty SBF’s bridge loan will allow the sponsor to acquire the property and season the location at 90%+ occupancy for 90 days before exiting into permanent agency financing.

The property underwent a $1.38MM renovation in 2017 by the seller to improve the building allowing the sponsor to purchase the property in turn-key condition. The management company is located in downtown Memphis with 10-years experience managing multifamily properties in the city. At acquisition the property was 84.5% occupied. The sponsor and management company both have extensive experience in the Memphis multifamily market.

The low-rise multifamily property was built in 1972, located in a primarily residential area at 2879 Beverly Hills Rd, nine miles northeast of downtown Memphis, and is currently running at market level. The property is located near various living amenities that will continue to support the asset in both performance and value.

Read Liberty’s White Paper on Bridge-to-Agency Loans for Multifamily Sponsors, Mortgage Bankers, & Agency Lenders: Click Here.

Liberty SBF offers personal service for SBA 504 and Conventional & Bridge loans for owner-user properties across the US. We’d love to help you.