CREJ

Page 14 — Multifamily Properties Quarterly — February 2022 www.crej.com Community Hospital in Grand Junction retained Gershman Investment Corp and AMS Health Care Mortgage to construct a new 130,000 square foot four-story Medical Office Building and state-of-the-art regional cancer center that is attached to the main hospital building. The $73,884,500 FHA Insured Mortgage was funded with GNMA Securities at 3.65% fixed interest rate for a 25-year fully amortizing loan. Prior to this in March of 2020 GIC and AMS closed a refinance with Community Hospital for an $84,589,800 FHA Insured Mortgage at 2.95% for a total HUD committed debt amount of $169,179,600 and an effective blended rate of 3.27% of fully insured, non-recourse debt. $73,884,500 FHA/GNMA INSURED MORTGAGE LOAN COMMUNITY HOSPITAL NOVEMBER 2021 MICHAEL THOMAS Managing Director 303.810.5170 mthomas@gershman.com SCOTT GRABER Senior Managing Director 206.276.4402 sgraber@gershman.com R esidential rentals traditionally have performed well for com- mercial real estate investors, and these assets continue to show resilience despite the economic hardships of the pandemic. In fact, the pandemic appears to have sparked growth in both multifamily and single-family rental markets. Despite a slight incline in the third quarter, Denver remains on Zumper’s top 20 priciest rental markets.This trend is especially noticeable in single- family rentals, and it’s easy to see why.Temporary business closures and the need to work remotely eliminate concerns over commute times.That, along with the inability to access enter- tainment options in downtown areas, enticed renters to explore cheaper – and larger – housing options in subur- bia, driving rent demand. Rent growth as high as 8% is not uncommon. At the same time, higher rent has not dampened occupancy rates. Along with this sustained profitability comes high investor demand for residential rental properties. Property values are increasing.These factors contribute to increased lender confidence.We are seeing a substantial rise in investors seeking to purchase rental proper- ties, including cash-out refinancing to increase inventory. There are many financing options available to meet an investor’s needs. The most coveted, of course, are low interest, long-term purchase loans, or cash-out refinancing. Despite the attractive interest rate, this type of financing doesn’t work for everyone, and it is not always the most cost- effective option. A low-interest loan typically requires full stabilization – 90% occupancy and cash flow sufficient to service the debt. For experienced bor- rowers with good credit, a perm loan with a cash-out is a great option.The cash then can be used to purchase more properties or for other business purposes. If the commercial real estate owner tapped unsecured business lines, or relied on cash advances during the pandemic to over- come rental losses, increased costs or eviction delays, it may be possible to refinance with a cash-out based on increased value and reduce or elimi- nate those higher-interest payments. An important factor in the decision to cash out equity is how the borrower plans to put that money to use.We encourage borrowers to run a simple return-on-investment analysis to esti- mate howmuch income could be gen- erated through the purchase of addi- tional inventory or otherwise increas- ing business capacity before consider- ing their many financing options. Currently, single-family investors are seeing the highest gains in property value. For these investors, a portfolio loan can be a useful strategy in reach- ing cash sitting idle and reinvesting that money in new purchases. For example, one of our clients recently pulled $500,000 out of roughly three dozen single-family rentals and then used the funds to leverage financing on another $2 million in new inventory. A portfolio loan allows the borrower to wrap all properties into one loan. The larger loan may qualify for a lower interest rate, ultimately cutting financ- ing costs. Closing and legal costs, like- wise, are reduced when compared to refinancing properties individually.This type of financing also avoids pitfalls like having a single property fall below a lender’s minimum limits. However, portfolio loans are complex and slower to fund, and work best for borrowers who plan to hold long term. Unfortunately, not all properties are fully stabilized, and not all borrowers have sufficient credit to apply for a perm loan. With appraised values increasing, borrowers can use bridge financing to complete renovations and increase cash flow before financing into a long- term loan. Although the interest rate is higher on the bridge loan, the term is shorter, so interest rate has less impact on overall profitability.What’s more, bridge loans do not require full stabili- zation. Many investors look to underper- forming rental properties that they can purchase under market and then rehab to increase profitability. Long-term pur- chase financing on unstabilized proper- ties is difficult to obtain. Alternatively, an investor can use bridge financing to purchase a property and beat out com- petitors. One of our borrowers had negotiated to purchase a multifamily property at a great price. Her bank declined her purchase loan application because the property needed upgrades and was not fully occupied.We were able to provide a bridge loan for the purchase. The borrower used her cash for the rehab. Once the property is leased out, she can apply for a perm loan on the increased value. Bridge loans can be used to pay off tax liens that disqualify the borrower from long-term financing. Another example is paying off a construction loan that matures before full occu- pancy. Rehabbing property is not the only reason to choose bridge financing. A bridge loan offers the borrower a chance to repair credit before locking into a long-term loan at an unfavorable rate.We see buyers with maxed-out credit cards or unsecured lines either from the pandemic or in the ordinary course of business. Using a cash-out bridge loan, a borrower can pay off higher cost lines and bump up credit scores often in as little as 90 to 180 days. Once credit is restored, the bor- rowers can look to a low-interest option with more favorable terms if they plan to hold on to the property. Despite the shorter term and flexibil- ity of bridge financing, borrowers con- sidering this option need to devise an exit plan based on sound profitability projections. Lender confidence in multifam- ily and single-family rentals leads to higher loan amounts and high loan to value. However, it still is important not to overestimate property value when applying for financing.Values are increasing, but appraisals remain conservative.The appraised value will impact loan terms – and, ultimately, the decision on which financing strat- egy to pursue. s dan@boulderequitypartners.com Lender confidence spurs uptick in apt. financing Finance Dan Page President, Boulder Equity Partners LLC

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