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January 2015 — Multifamily Properties Quarterly —
Page 11
CREJ:
Can you talk about interest
rates for these various loan options?
Bye:
Let’s start with the agencies and
use an example of maximum lever-
age of 75 to 80 percent with a mini-
mum 1.25 debt coverage for a 10-year
term. The spread will be about 175
basis points on top of a current U.S.
Treasury yield of 2 percent, result-
ing in an all-end rate of 3.75 percent.
Applying a 30-year amortization
schedule reflects an annual debt con-
stant of 0.0556. A 65 percent loan to
value would price out at a 3.6 percent
rate.
A life company lender is likely to
be more competitive under a 65 to 70
percent leverage situation. The spread
would be 125 basis points with a rate
of 3.25 percent. For a five-year term at
65 percent LTV, the life company rate
would be about 3 percent compared to
agency pricing of approximately 3.25
percent. As I mentioned earlier, these
examples illustrate a 25 to 30 basis
point differential between agency and
life companies.
CMBS lenders price over the swap
rate, currently around 2.1 percent for a
10-year term, the most efficient dura-
tion. Spreads for the highest leverage
loans are in a range of 190 to 200 basis
points, establishing the all-end rate
spectrum of 4 percent with an annual
debt service constant of 0.0575 with a
30-year amortization schedule.
The FHA 233(f) program would
reflect a rate of about 3.75 percent,
including the mortgage insurance
premium.With the longer 35-year
amortization, the annual constant is
5.14 percent.
CREJ:
Other than fixed rates, what
else is available?
Bye:
A few life companies offer Lon-
don Inter-Bank Offered Rates-based
lending programs and most banks
also use the 30-day or 90-day LIBOR
index. Freddie Mac offers a unique
convertible float-to-fix program.
Again, spreads are based on a risk-
adjusted formula, so all-end pricing
could be anywhere between 2 to 3.5
percent, as LIBOR rates hover near a
quarter of a percent. There are myriad
unregulated, nonrecourse bridge lend-
ers, such as real estate investment
trusts and private funds, offering
LIBOR-based floating rates between
4.5 and 5.5 percent for value-add
opportunities.
CREJ:
If you were a borrower, how
would you approach the financing
puzzle?
Bye:
It obviously depends on whether
you are a long-term holder or an
opportunistic shorter-term owner,
which I’ll define as a trader. A long-
term owner might consider a term
longer than 10 years, given the unique
point in time we are in relative to
the capital markets. A trader will cer-
tainly want an attractive rate, but will
require flexible prepayment options
in a stable or falling interest-rate envi-
ronment. Given a threat of a much
higher interest-rate environment, a
trader might consider a long-term
fixed-rate loan that a buyer could
assume. In any case, an astute owner
should explore all lending options,
especially the agencies, as well as a
long list of insurance companies, or
CMBS if applicable. There are many
variables to consider and the market
should be cleared to evaluate the
optimum loan to best match the bor-
rower’s priorities. This list may also
include banks.
CREJ:
You only briefly mentioned
banks earlier.What trade-offs can
they offer?
Bye:
A few banks can offer a fixed-rate
term as long as 10 years, and some
can offer ultimate prepayment flex-
ibility without a swap contract. Banks
can also offer a lower cost of execu-
tion and require less property docu-
mentation, compared to the other
lenders.
CREJ:
That seems like an excellent
option.Why would someone look
elsewhere?
Bye:
First, banks typically require
personal loan guarantees, unless
the loan is 65 percent loan to value
or less. Some borrowers don’t mind
guarantees, although the agencies,
life companies, CMBS and FHA do not
require repayment guarantees. Sec-
ond, banks normally underwrite the
sponsor’s financial picture more than
the real estate. They have ongoing
debt service, loan to value and spon-
sor financial covenants, a violation of
which may trigger a repayment or a
re-margining of the loan. Borrowers
from the other conventional apart-
ment lenders do not have this risk
after the loan has closed. Third, inter-
est-rate levels for banks are normally
higher than the other lending groups,
especially for terms longer than five
years. Lastly, the banking industry is
more regulated than any other type of
lender sector and new governmental
legislation could result in the imple-
mentation of new standards at any
time.
CREJ:
My last question pertains to
interest rates.What do you see hap-
pening in 2015?
Bye:
As Yogi Berra once said, predic-
tions are hard to make, especially
when you’re talking about the future.
Nonetheless, I’ll take a shot, but
please understand that this is my
opinion only and does represent an
official position from NorthMarq.
It’s hard to imagine the Federal
Reserve raising short-term rates
when the economy is still recovering,
because they don’t want to make the
same mistake that occurred in 1935,
when rate hikes sent the economy
into a deeper depression after a short-
term recovery. The elimination of
quantitative easing has not resulted
in a jump in rates, despite what was
predicted in early 2014. The longer-
dated bonds are being absorbed by a
flight to safety in the U.S., where posi-
tive interest rates are still available.
With a tilt toward a deflation in some
economic sectors, or at least a disin-
flationary trend, this suggests that the
U.S. Treasury rates should remain in
the same range that has existed over
the past six months and possibly fall
even further in late 2015. Volatility will
be continuing, however, as just recent-
ly, we saw an increase of 25 basis
points in the 10-year Treasury yield.
The counter balance to lower Trea-
sury yields is the behavior of credit
risk spreads, which are currently
reflecting a stable environment. I
certainly do not want to convey any
“doomsday” scenario, although “black
swan” events are always in play. For
example, the probability of sovereign
debt defaults and currency devalua-
tions seem higher now and a domino
effect on capital markets, magni-
fied by the derivative industry, could
cause spreads to gap out quickly,
as was the case in 1998. There are
many other concerns, but let’s keep
our fingers crossed that they do not
materialize.
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